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Difficult to find the silver lining in this quarter


“We already are realizing tangible benefits from our recent restructuring and realignment actions, which we expect will lead to a resumption of quarterly sequential financial growth in the December 2011 quarter and through the remainder of fiscal 2012.”


Brian R. Gamache, Chairman and Chief Executive Officer




  • Increased the BBxD margin by 27% YoY. Anticipate a stronger product sales margin in 2H12 vs. 1H12.
  • 45% complete with capex initiative to transition their participation base to BB2 from BB1 
  • Expect that most of their gaming operations placements will be replacement units and that growth will not resume to gaming operations until 2H12
  • Enhancement from performance on portal units continues to be very encouraging
  • Continue to see growth opportunities in international markets


  • Product approvals have been slower than they expected which is why the quarter is worse than they expected
  • They will not cut R&D
  • Going forward, you'll see their margins get back to 53-55%
  • Mexico receivables write-down
    • At the end of August there was a fire in Monterrey which spurred the government to look into shutting down casinos that were not completely on the up, given safety issues. So they decided to take some writedowns. Most of their customers are international customers with good credit. They're not giving up on getting their machines back but thought it was prudent to take reserves
  • Gaming operations - games have been out there for a long time which have led to a big drop off in performance and the lack of new product has really hurt them and caused a drop off in performance of average revenue per day.  Won't look for any improvements in Q2 but should see an increase in win per day and install base.
  • Balance buybacks with growth opportunities (M&A included)
  • They are very excited about the backlog of their participation games
  • Shipped games to Penn's Kansas Speedway, Kansas Star, and Miami Jai-Lai.  Also shipped into a lot of expansions. Think that their ship share was 20% at Penn and the other 2 were just below that.
  • 2011 operating margin improvement off of clean margins - backing out impairments. 
  • 18-20% ship-share this quarter - which is about where they thought they would be
  • They are taking a very conservative approach to their guidance.  Think that they have marked their inflection point 
  • How much did the elevated sale of conversion kit sales help their game sales margins?
    • 50% came from higher conversion revenue and 50% from lower costs on BBxD
    • There were no price increases in the quarter but they did have some special promotions on conversion kits in the quarter
  • Declines in gaming operations? 
    • Q2 is always a challenge. Would look for some stabilization in Q2 
  • Revenue from portal applications is still very small, despite doubling the number of units out there from Q4 to Q1. 
  • Gaming operations is still more competitive than it used to be
  • The increase that they are expecting in gaming operations install base is sequential not necessarily YoY.  They would be disappointed if they didn't make some YoY progress.



  • WMS's $0.07 EPS number includes $0.17 of one-time items - so $0.24 is the "clean" number
    • "Pre-tax impairment and restructuring charges of $9.7 million, or $0.12 per diluted share, primarily for separation-related costs and charges related to the decision to close two facilities"
    • "Non-cash, pre-tax charges of $4.3 million, or $0.05 per diluted share, to write down receivables following government enforcement actions at certain casinos in Mexico"
  • “First quarter results reflect initial cost savings from these actions and we believe we are firmly on track to reduce annual operating costs by an expected $20 million." 
  • "We’ve now received at least one jurisdictional approval for all of the participation products that were originally expected to be commercialized in fiscal 2011. During the next several months, we expect additional approvals for these innovative products, and we expect a return to a more consistent pace of approvals for other new products beginning in calendar 2012."
  • "With our focus on capturing near-term revenue opportunities and an expanding flow of new products being commercialized, we anticipate building on the expected quarterly sequential improvement in December 2011 quarter’s operating results with further quarterly sequential revenue and margin improvement in the second half of this fiscal year that will also reflect a resumption of year-over-year revenue and margin growth in the March 2012 and June 2012 quarters"
  • Recent Operational and Strategic Achievements:

    • "Initial jurisdiction approvals received for five participation games: THE WIZARD OF OZ, Journey to Oz, BATTLESHIP, Leprechaun’s Gold, Pirate Battle and MONOPOLY Party Train games."
    • "Initial jurisdiction approvals received on more than 30 new for-sale games... including new G+ Deluxe and Innovation series of games – Colossal Reels, Invaders! 5X4 and Reel Boost themes."
    • "First three Portal application themes – Jackpot Explosion, Piggy Bankin and Peng Wins themes – now installed on a total of more than 480 gaming machines at 27 North American casino properties including trials, and a total of 700 gaming machines networked with WAGE-NET Remote Configuration and Download functionality, along with two recently completed installations of the WAGE-NET system with Remote Configuration and Download functionality at two international casinos."
    • "Extended the distribution agreement with our Australian distributor, eBet Limited, on a new five-year rolling basis and added the potential to expand into new territories including Queensland and Victoria, in addition to New South Wales."
    • "Selected by Alberta...  to participate in their VLT replacement initiative for the province."
    • Partners with Caesar’s ... for introduction of...  participation game expected to launch in mid-calendar 2012."
    • "Amended and expanded our revolving credit facility to $400 million, with a $100 million accordion feature, for a five-year term with lower spreads on interest rates and commitment fees and more flexible financial and non-financial covenants"
  • New unit sales: 3,918; ASP: $16,574; 51% GM
    • US & Canada: 2,530 (1,600 replacement)
    • International" 1,388 (35% of total shipments)
    • "Reflecting in part the previously anticipated impact from customers’ delayed capital spend in the September quarter pending their opportunity to see WMS’ newest products at the G2E industry trade show, as the show’s timing changed from the middle of November to early October this year"
    • BBxD: 32% of global new shipments; mechanical spinning reel: 16% of new units sales
  • "Other product sales revenues declined to $22.2 million...reflecting lower revenue of used gaming machines, mostly offset by higher conversion kit revenues. Approximately 2,500 used gaming machines were sold in the September 2011 quarter at lower average prices, including a higher number of used competitor units.. while we recorded revenue on approximately 5,500 conversion kits in the September 2011"

  • Gaming operations install base: 9,562 and Average revenue per day: $71.70
    • "The declines in the average and period-end installed base and average revenue per day primarily reflect the previously discussed lack of new participation products." 
  • "The product sales gross margin increase relates to progress with continuous improvement efforts to reduce costs on the Bluebird2 and Bluebird xD cabinets and higher revenues from higher-margin conversion kit sales partially offset by the impact from a lower volume of new unit sales and the lower margin achieved on sales of used gaming machines."
  • "Gaming operations gross margin was 79.1% in the September 2011 quarter compared with 81.0% in the year-ago quarter primarily reflecting higher licensing royalty expense and costs related to the start-up of our new operations launched in fiscal 2011"
  • "Notwithstanding the expectation for second-half growth assumptions...WMS now expects fiscal 2012 annual revenue to be modestly below the fiscal 2011 level, while operating margin is expected to improve year over year. WMS continues to expect that growth in the second-half of fiscal year will be driven by its improvement initiatives, modest growth in WMS’ gaming operations business and the expected improvement in new unit demand related to new casino openings and expansions in calendar 2012."
    • No incremental revenue from IL, Ohio or Italy
    • Assumes limited, if any, improvement in the industry replacement cycle in calendar 2012. 
    • R&D spending: approximate 13% of total annual revenues. 
    • "Quarterly revenues and operating margin are anticipated to be lowest in the September 2011 quarter and increase in each subsequent quarter with the highest revenue levels and operating margin in the June 2012 quarter." 

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In preparation for IGT's FQ4 2011 earnings release Tuesday afternoon, we’ve put together the recent pertinent forward looking company commentary.




  • U.S. Court of Appeals for the Federal Circuit affirmed a district court's judgment against Bally for infringement of two of IGT's patents.
    • IGT's patents (U.S. Patent Nos. RE37,885 and RE38,812) claim certain methods of paying bonuses at gaming machines.  Two of Bally's products, Power Rewards and ACSC Power Winners, were found to infringe.


  •  IGT and Aristocrat have cross-licensed each other to their patents and they will have the right to offer all the products which were the subject matter of the litigations subject to certain royalty obligations. This settlement ends all present patent litigation between IGT and Aristocrat and their subsidiaries.



  • "We believe the improvements we are driving across the organization have the potential to generate steady,
    attractive returns."
  • "We will continue to remain focused on efficiently deploying capital to drive positive returns for our shareholders."
  • "Strong performance of our domestic wide area progressive games positively contributed to the increase in yield. Consistent with last quarter, our coin in machine per day was up 13% in our wide area progressive units. Average revenue per day decreased sequentially due to a higher mix of lower yielding international units."
  • "The games that support Center Stage are performing extremely well. We expect to leverage this platform by introducing new content and themes to extend the life of the hardware."
  • "Our international organization continues to break records. Driven by strong replacement demand for our premium products in Europe and Australia, we achieved an average selling price of $16,600 in international product sales, our highest ever. While our ASPs are setting new benchmarks, our product gross margin is also healthy at 57%, a 400 basis point improvement over last year."
  • "Early returns on our six new Asian-themed games are encouraging and a testament to the demand for localized content. We will continue to deliver games in greater volume that are specifically designed for our international markets"
  • "Our interactive business grew revenue over 20% and increased gross profit nearly 30%."
  • "We also demonstrated several new applications for our sbX system. We expect to be delivering a steady flow of new bonus, community, and game-play applications in the coming quarters."
  • “We are raising our 2011 earnings guidance to $0.89 to $0.93 per share on an adjusted basis.”
  • “Our strategy in our purchase of Entraction and the work we’re doing to integrate Entraction into IGT is a 100% ex-U.S. strategy...So what you’ll see us doing is expanding from casino into poker, bingo, and sports betting on a B2B basis in legalized markets likely outside the U.S., in the short term, moving to the U.S. when and if those markets open."
  • [Product sales margins] "I think if you look at the 59% gross margins that we enjoyed this quarter... it’s a combination of mix... And the mix can be the variable component between whether or not you can get to 60% or not"
  • [Size of the online business as a percentage of total] "I’d like to think it never gets to 10%... because it’s shaking our core business revenue as it grows. So that’s going to be one of the challenges, as the market gets healthier in the core business, then it has to chase that up. But I don’t think it’s unrealistic to think in 2013-2014 we could see this playing a significant enough role that you all start getting all visibility into it" 
  • "We’re very focused on outside the U.S. on our Casino Link product"
  • [New opportunities market share] “We set our sights on kind of a north of 50% number on a new opening.”
  • “A stabilization in the wide area progressive component – that’s where we had suffered previously a fair amount of degradation over the last three years.  And then slightly you’re starting to see a shift in favor of wide area progressive in lieu of standalone.”
  • "Internationally, average selling price was up 16% year over year, primarily due to favorable shifts in product mix and foreign exchange rates...A number of things contributed to the lift. It was regional mix, it was product line mix, and it was foreign exchange. So foreign exchange was less than half of the impact on lift, and the other two were the balance.”
  • [seasonality of slot play] “We’ll watch it as we go into FQ1, because that’s generally the quarter where you see slot play decline somewhat sequentially.”
  • “You should expect to see units continue to grow in the international marketplace. They tend to be lower yielding, so you’ll see yields on a per-unit basis a bit lower. And I think that’s kind of the trend that we have seen in the international marketplace. But the profit per unit, which is what we probably focus more on here in the company, continue to see that expand as well.”
  • “I would say South America, Latin America, Caribbean, and Asia, which is generally where we’re focused.  More so than Australia and Europe. You see the game ops side of our business expanding in those two regions.”


In preparation for IHG's Q3 2011 earnings release Tuesday morning, we’ve put together the recent pertinent forward looking company commentary.



IHG Shares GLobal Repositioning Strategy for Crowne Plaza Hotels & Resorts (10/25/11) 

  • "Crowne Plaza is a top priority for IHG, and the time is now to differentiate the brand from its competitors in a meaningful and relevant way."
  • 3 phases repositioning strategy:
    • Phase 1 (Freshen Up) Now - 2012:  "Focus on raising product quality and consistency, primarily in the Americas, driving revenue and performance across the portfolio, refreshing the Sleep Advantage program in the Americas and launching a new brand identity with a modern look and feel."
    • Phase 2 (Move Up) 2012-2013: "New global branded service training program, development and distribution in major gateway cities and resort markets, increasing trial and brand awareness, and delivering on key drivers of guest satisfaction."
    • Phase 3 (Shine) 2013-2015: Testing of new brand hallmarks



  • "Our reported EBIT margins are already significantly ahead of our peers, 27% last year compared to 23% for Marriott and 20% for Starwood."
  • “We are committed to maintain an investment grade credit rating through the cycle, which we consider to be 2.0 to 2.5 times net debt to EBITDA. We currently stand at a trailing last 12 months ratio of 1.4 times, giving ample headroom.”
  • "July RevPAR was up almost 6% with a further improvement in rate growth to 2.7%. U.S. RevPAR was up almost 7% with more than half of the growth driven by rate. On a total basis, our U.S. RevPAR grew over 8% once again outperforming the Smith Travel industry data."
  • "In terms of system size, we still expect modest growth this year even after the expected exit in the second-half of the almost 7,000 rooms relating to the HPT management contract. In future years, the level of removables should revert to historic norms and this in turn should mean annual net systems growth of between 3% and 5% over the medium-term."
  • "Visibility hasn’t really changed… visibility remains quite short.”
  • "We’re seeing quite good performance in the UK, particularly in London actually."
  • “We’ve now got about a quarter of our business on to dynamic pricing, which we think is much more beneficial to the hotels and to customers and, in fact, one of the key focuses there is rather than talking absolutely about rates, people tend to talk about rate and rate growth – what we are actually seeing is big market share gains.”
  • “I do think clearly with the share price down if you were to do buybacks, it’s a lot better at £10 than it was at £14. But I also think just given the uncertainty out there right now, it’s sensible just to wait and see what happens. So, that’s what we’ll do.”
  • [Pipeline reduction impact] “We're more skewed to midscale, and we’re more skewed to non-U.S. where there has been much less of an impact.”
  • “Overall our pipeline is about 40% under construction. In U.S. it’s below 25% under construction.”
  • “Our pipeline still remains at around 16% of the world’s global branded pipeline, which is still significantly ahead of any of our competitors.”
  • “The total demand for room nights in July... it’s going to be well over 100 million room nights for the industry, which will be a record ever for room nights sold in the U.S.  So it is important to put that in context and also obviously think about emerging markets where we’re seeing very strong growth, but the point is, we’re seeing it both across leisure and business travel.”
  • "60% of the pipeline is financed." 
  • "Supply growth is very low, but there is growth in midscale."
  • "Cash flow in the second half –  there will be some reversal of the outflow that we saw in the first half clearly as business ramps-up – if it continues to ramp-up, observe some working capital with effectively receivables growing. Days sales outstanding hasn’t been growing but the quantum has been growing as the business ramps up. But overall, we expect cash to be broadly neutral for the full year, barring any major disposals."
  • [Depreciation charge] “Three (million) in the second half.”

Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt

Conclusion: Recent moves throughout Latin American FX markets are supportive of our expectation for broader monetary easing across the region. Additionally, they are making the region’s most active government react rather squirrely.



Latin American equity markets broadly declined last week, falling -2.4% wk/wk on a median basis.  Declines were led by Argentina, which closed down -8.4% wk/wk. Latin American currencies also broadly declined, closing down -1.8% wk/wk (vs. the USD) on median basis. The -3.6% declines in both the Brazilian real and Mexican peso led the way to the downside.


Latin American sovereign debt markets continue to price in expectations of slower growth and looser monetary policy – particularly in Brazil, where the central bank has already cut rates by -100bps in the current policy cycle. This regional slower-growth scenario is contributing to heightening expectations of credit risk, as evidenced by the region-wide widening of 5yr CDS (+5.6% wk/wk on a median basis). Latin American interest rate swaps markets are also pricing this outlook via easing speculation. 1yrs swaps tightened -19bps and -25bps wk/wk in Brazil and Colombia, respectively.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Global Growth Slowing:

  • Mexican consumer confidence ticked down in October to 90.6 vs. 92.4 prior.
  • Brazilian vehicle production and domestic sales growth tanked in October, falling -3.4% YoY (vs. +7.2% prior) and -7.5% YoY (vs. 1.5% prior), respectively.

King Dollar:

  • In the minutes of the Banco de Mexico’s October 14thmeeting, policymakers signaled that they would “react opportunely” to lower interest rates if an economic slowdown became a headwind for inflation.
  • In a mere 10 days after President Fernandez ordered Argentinean energy companies to repatriate export revenue (on a go-forward basis in a bid to prop up the Argentine peso amid heightened capital flight) Cnooc’s bid for BP Plc’s $7.1 billion stake in Argentine crude producer Pan American Energy LLC fell apart due to “legal reasons”. We’ve been vocal about the prospect of Fernandez’s recent spate of Big Government Intervention having a negative impact on Argentine trade and investment and this canceled transaction is in confirmation of that view.

Sticky Stagflation:

  • Colombian CPI accelerated in October (alongside global crude oil prices) to +4% YoY vs. +3.7% prior.


  • Mexican PMIs (both manufacturing and non-manufacturing) ticked up in October. The former advanced to 51.4 from 50.3 prior and the latter advanced to 53 from 49.5 prior. The country’s equity markets liked these extremely positive deltas, closing down only -10bps wk/wk (outperforming). Its currency market saw them as a head fake, however, falling -3.6% wk/wk vs. the USD.


  • Argentine benchmark dollar bonds yields fell on Friday by the largest amount on record (-113bps) after the President Kirchner surprise decision to cut utility subsidies for all commercial users. This is a definite positive for the Argentine government on the fiscal front, but a disaster for Argentine corporations who suddenly and abruptly have to remodel their cash flows and adjust their operations to comply with this new, higher-cost environment. No surprise to see the Merval index underperform the region substantially last week, as mentioned at the onset of this note.

Darius Dale



Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 8


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 9


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 10


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 11


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 12


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 13