BYI F3Q12 CONF CALL NOTES

04/26/12 05:33PM EDT

BYI delivers another beat with a bright outlook


“Our third quarter financial and operating results are showing the payoffs from multiple investments as we execute on our growth initiatives. Bally continues to have a bright future as we partner with our customers to innovate the gaming experience.”

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

CONF CALL NOTES

  • In June, they will begin placing Michael Jackson
  • 22% share of new openings this quarter
  • 21% ship share in Ohio, which they will recognize in the June Q
  • Have 7,500 iVIEW DMs deployed with 9 applications
  • Game sales: 2936 units were sold in NA, 635 of which were opening and expansion units and 2,301 replacement units
  • Had higher conversion kit revenues in the quarter which also helped margins
  • Anticipate game sales gross margin will decline slightly in the 4Q given the number of new openings.  However, they still maintain that margins will reach 48-49% in the next few quarters.
  • Strong recent success with cash connection products (WAP) helped game operations revenues. 
  • Systems revenue: Maintenance was $19.6MM. Anticipate that 4Q systems margin will return to the higher end of their historical margin of 70-75%.
  • March 31: $35.7MM of cash
  • Expect to increase their buyback authorization in the next few months if needed
  • Made good progress in Italy - they had finished their trials before going live.  However, the delays in approvals have lead some customers to seek other suppliers for their VLTs.
  • Progress in Australia has been slower than expected but they did ship more units sequentially
  • Continue to make good progress in Illinois.  Had good discussions with customers there, have signed several contracts and feel their products are well positioned for the market.  They expect to begin initial VLT shipments in Illinois 2H CY2012.
  • Developing iVIEW DM account wagering applications
  • Sees great systems growth ahead for the next few years
  • General industry trends seem to be improving
  • Still pursuing acquisitions in the area of technology where they can leverage their expertise

Q&A

  • Canadian systems update: moving along exactly as planned.  They are already generating service revenues and will begin recognizing go-lives at the end of calender 2012.
  • Expects systems margins, depending on mix, to trend in the 70-75% range
  • Expect to reduce cost of game cabinets over the next 6-9 months which is why they think that they can get to that 48-49% margin without taking ASP increases into account.  Conversion kits also helped.
  • Cannibalization is really hard to measure, but they assume it will be relatively low given that they don't have a lot of WAP games out there
  • Game performance on Grease is very strong and exceeding their expectations. Expectation of success, based on prior experience, is getting 750 of each title out. They still think that those expectations are reasonable.
  • ASP delta on international vs. domestic games is about $1k - depending on how many Mexican units they ship
  • September is usually the weakest replacement quarter; the others are harder to predict.  They do not think that March was a pull-forward quarter.
  • The vast majority of their WAP units this Q were Grease
  • There is no change to the Michael Jackson schedule based on Grease.  It's expected to be out about 30 days ahead of schedule.  They just want to get it out in the field as soon as possible.
  • This quarter was their largest DM installation quarter.  They expect that trend to continue. 
  • Their core games are doing well.  They have shifted a little more of their R&D to WAP than their core premium game segment.  Overall premium segment yield hasn't really changed QoQ.  They are always releasing conversions for their premium cabinets.
  • Hope to have one or more poker partners announced within 60-90 days or sooner.  Partners are important to enhance liquidity.
  • As they get more video content, and as most international markets are video based, it will help them grow internationally
  • See their operating margin getting into the 25% range over the next 3-4 quarters.  
  • The impairment was 2-2.5 cents  - so adjusted EPS would have been 69 cents
  • Conversion revenue was up slightly YoY but more so QoQ.  Conversion revenue is still relatively small for them, so this is an opportunity for slow and steady growth for them.
  • The Eldorado computation ran for 3 weeks from the beginning of April 
  • The write-off of $1.75MM was included in their SG&A line
  • I-gaming strategy:
    • They are converting BYI content to be internet ready
    • Growing their mobile content
    • Platform to link the information from their I-gaming customer to their land-based systems
  • Games like Michael Jackson and Grease should produce ample revenue to offset the cost of the IP.  Look for them to do a few IP titles per year.

HIGHLIGHTS FROM THE RELEASE

  • Raised the low end of the range for FY12 EPS guidance by 12 cents to a range of $2.37 to $2.45 compared to the Street at $2.42
  • “This quarter’s operating results are a testament to our continuing progress in all major business areas. Our ALPHA 2 Pro Series titles are performing well..., our gaming operations installed base is expanding driven by products like GREASE, and our Systems business continues to move forward at a healthy pace both in terms of product improvement and the number of new customers joining the Bally Systems family every month."
  • “We continue to thoughtfully allocate capital to invest in our growth, as well as to enhance shareholder value.  This quarter represents the 18th quarter in a row that we have repurchased stock. Since December 31, 2011, we purchased approximately 1.2 million shares of common stock for $54 million at $45.69 per share, of which $41 million was in our third quarter, all while remaining under two turns of leverage.”
  • "As of today, the Company has approximately $57 million available under its Board-authorized share repurchase plan."
  • Product sales:
    • New devices: 4,147 (international: 29%)
    • ASP: $17,073
    • "ASP... increased... primarily as a result of product mix and an increase in ASP from international sales"
    • "Gross margin increased... primarily due to mix and cost reductions on certain models of the Pro Series line of cabinets. Additionally, the prior year included certain write-downs related to older technology platforms."
  • Gaming operations:
    • "GREASE, our latest wide-area progressive, reached an install base of 127 units, with better-than-expected initial performance. Overall wide-area progressive revenues set a quarterly record, and overall wide-area progressive revenue-per-day exceeded $100 per unit during the quarter.”
    • "Revenues increased...to a quarterly record... driven by growth in the installed base of premium and wide-area progressive games, as well as placement of games at the recently opened Resorts World Casino New York"
  • Systems:
    • Maintenance revenues increased to a record $20MM
    • Gross margin decreased...YoY "primarily as a result of the change in mix of products. Specifically, hardware sales were 36% of systems revenues, and software and service sales were 30%, as compared to 34% for hardware and 31% for software and services in the same period last year."
  • "SG&A increased $6 million primarily due to an increase in payroll to support key new markets and includes a
    $1.8 million impairment on notes receivable related to development financing"
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