Even the areas we thought IGT would deliver fell short.



We had concerns going into the quarter but we’re still baffled by IGT’s FQ3 performance.  We thought international would be a bright spot and we were wrong.  Possibly even more confusing was management’s almost complete denial that there are any issues.  Maybe that denial explains why they would buy back a whopping 21 million shares ahead of a major punt.  While some for-sale units may have slipped out of this quarter and into the next, management must have known that this was not going to be a “good” quarter.  Maybe they felt they needed the 2c quarterly accretion to maintain their guidance and it was worth overpaying for the stock to get it.


Either way, the unchanged guidance – even with the additional 2c – means that the pressure is on for FQ4.  At this point, the mid-point of their guidance looks like a big stretch.  Our 31c implies the low end of the range and even on that we feel like there is limited visibility.



The Details:


There was so much that was wrong with the quarter, that we’ll start with the only 2 things that weren’t bad


The Good:

  • North American Unit sales were 1,000 better than we expected
    • 900 of the beat was due to shipments of Canadian replacement units that we didn’t expect until the September quarter
    • There were also some used units in there so it’s unclear what “new” units shipped were.  We suspect that the used unit sales may have been participation or lease units converting to sale rather than true “used” unit sales.
    • Interactive revenues were $3MM ahead of our expectations
      • We estimate that Double Down revenues were $32MM this quarter, just slightly better than the quarterized result of $24MM in F2Q for 72 days of consolidation
      • Other interactive revenue of $11MM

The Bad (and The Ugly):

  • Core gaming operations business (excluding interactive):
    • Despite growing their install base by 3,600 units YoY, core gaming operations revenue declined 2% YoY and we estimate that gross margin declined 3% YoY
    • Yields on participation declined 7% YoY and 4% QoQ (June is usually seasonally stronger for yields)
    • Margins on the core business were down about 70bps YoY
  • International game shipments grew 3% YoY and box sales declined by $15MM YoY
    • So much for double digit growth in international and growing market share.
    • We were wrong here as we thought this would be a quarter of progress. 
  • Mix/schmix… Product ASPs were terrible 
    • NA ASPs declined 8.5% YoY
    • International ASPs were down 9% YoY
  • Non-box sales in NA were down 20% YoY
    • What happened to the Revel system deal?
  • SG&A came in at the high end of guidance despite revenues coming in at the low end 
  • Double Down
    • Memories of Server Based gaming?
    • Despite IGT telling us about how accretive this acquisition has been and how well it’s performing, the math says otherwise. 


Big Mac

This note was originally published at 8am on July 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I am the literary equivalent of a Big Mac and fries.”

-Stephen King


I’m not going to admit this because my brother is a McDonald’s franchisee. I am going to put it out there because this is really the key to what you really need to know this morning – I love the Big Mac!


As are all things here in the Haven, that’s a multi-factor, risk managed, statement. Not only do I eat Big Macs (weekly), but I wear the Big Macro jersey for Hedgeye with pride.


I am right fired up for our Big Macro Quarterly Themes Call this morning. We’ll be hosting it (49 slides in 40 mins) with the customary anonymous client Q&A at 11AM EST.


As a reminder, last quarter my team nailed the #GrowthSlowing and #BernankeBubbles popping (Gold, Oil, etc.) calls. I’d be lying to you if I said we weren’t looking to land a few fat TAIL risked whales this morning too.


Our Top 3 Themes are going to be as follows:

  1. Growth Slowing’s Slope – what our GDP models see in Q3 for USA, China, and Germany vs consensus.
  2. The Cliff – as in the 112th Congress kind; will #GrowthSlowing pull forward the Debt Ceiling Debate?
  3. Obama vs Romney – pickles or no pickles? You do need a risk management plan under either scenario.

Back to the Global Macro Grind


After 4 consecutive down days (another 33 point draw-down), the SP500 storytellers who have been telling you to buy stocks “because they are cheap” at VIX 15-16 are going to get one of the many opportunities to buy’em cheaper again this week.


Growth Slowing matters. Most people get that by now. But the narrative of #EarningsExpectations becoming a big market liability has finally perforated the almighty media’s top headlines.


We’ve been saying short pro-cyclical Sectors (Industrials, Basic Materials, Energy) since we made our #GrowthSlowing call in March. That’s not a victory lap – that’s just the score. These S&P Sectors are getting pounded on #EarningsExpectations in July.


Only 10 days in, here’s the S&P Sector scoreboard for Q3 to-date:

  1. Industrials (XLI) = down -2.94%
  2. Basic Materials (XLB) = down -2.49%
  3. Energy (XLE) = down -2.12%

But, but, the Dow is “up for the YTD.” So everything is just fine, right?


Right. Right.


There’s a reason why Canadian McDonald’s franchisees refuse to launch anything that resembles eating a yellow snow cone too. Whether you think the average human being on this earth is “smart” or not, there are some things people just get.


The world’s economic growth is not fine. Neither is the perma contention of the Q1 bulls that “people are too bearish.” Maybe at 27 VIX in May (when the II Bull/Bear Spread pancaked to flat) consensus was bearish enough. Not here.


If you bought stocks at 1374 SPX and VIX 16 last week, you certainly didn’t get that call from us. Anything in the area code of 14-16 VIX has been the closest sell signal you can find to a layup as there has been in US Equities since 2008.


Back to the II Bull/Bear Survey, check this thing out (reported this morning):

  1. Bulls rise from 42.5% to 44.7%
  2. Bears are unchanged at 24.5%
  3. Bull/Bear Spread = 2020 basis points wide!

Away from what I am watching and eating, that’s the super little secret of my risk management morning. The general population of investors who are telling themselves consensus is Bearish Enough are simply lying to themselves inasmuch as I would be if I told you I don’t also love the Filet O’ Fish.


If you’d like access to this morning’s Q3 Big Macro Themes call, please email


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1550-1587, $97.56-103.01, 82.61-83.81, $1.21-1.24, 6267-6687, and 1331-1353, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer




Big Mac - Virtual Portfolio


The Macau Metro Monitor, July 25, 2012




According to a revised land concession contract in today's Official Gazette, MPEL's Macau Studio City will not include a casino.  The plot, with an area of 130,789 square metres, is earmarked for the development of a five-star hotel, plus movie industry-related facilities, the contract states.


Melco Crown’s chief executive Lawrence Ho Yau Lung accepted the contract terms in a written statement presented to the government on June 13, it is said.
It's possible the government could give the green-light on a casino later, but the uncertainty could complicate the company's efforts to finance the project.



Junket operator Neptune Group Ltd “is currently in the discussion of possible investment in gaming promotion business in casinos in Macau which may require to be disclosed under the requirements of the listing rules” in Hong Kong’s stock exchange.  Last week, Neptune’s share price and trading volume posted an unusual increase, leading the VIP room promoter to issue a filing saying there were no negotiations or agreements relating to intended acquisitions that were of compulsive disclosure under Hong Kong Stock Exchange’s rules.


Over 200 workers of Sands Cotai Central called the police for help early yesterday morning in a dispute with management over the overtime working arrangements during the typhoon conditions.  In a press release last night, Sands said “early this morning, there was a misunderstanding among a group of gaming team members at Sands Cotai Central, regarding the company’s overtime compensation policies during typhoons. After representatives from the Labor Affairs Bureau arrived on site to assist in answering the concerns of the involved team members, all concerned team members returned home.”

Early Look

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It’s difficult to reconcile McDonald’s recent commentary with a recent survey on British eating habits.


A Horizons consumer survey has indicated that frequency of eating out in Britain is at its highest for two years.  While Brits are eating out more often, according to the survey, spend for those who had eaten out in the two weeks prior to the survey had declined to £12.30 versus £12.69 a year ago.


Horizons’ director of services Paul Backman said: “It is surprising, given the difficult economy and the fact that retail spending remains low, that the respondents to our survey are still eating out on a regular basis, and in fact more regularly. Pub restaurants and takeaways are the most popular choices, perhaps as diners downgrade from more expensive establishments. “We expect the quick service and takeaway sector to receive a significant boost over the next few weeks with the start of the London Olympics”. 



Why does this matter for McDonald’s?


CFO Peter Bensen noted that McDonald’s is seeing “constrained consumer behavior” in global markets, but particularly in Europe where the downturn has persisted for so long.  While Bensen did not single out the U.K., he did say that in “several of the markets” in Europe, “the eating out market is simply declining.  People are staying at home.”  It can be a red flag when companies blame macroeconomic factors for sluggish performance and don’t offer any other company-specific factors as possible reasons. 


We continue to struggle with what is behind the recent results from McDonald’s.  A company of this size should have better intelligence than what was offered on the conference call on Monday.  If frequency of consumers in the U.K. eating out is up, but McDonald’s is not seeing a proportionate boost in its traffic, then perhaps there is a value perception issue for McDonald’s to address in the U.K.  We don’t know for sure, but we would appreciate more color from management.



Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP – July 25, 2012

As we look at today’s set up for the S&P 500, the range is 20 points or -0.70% downside to 1329 and 0.80% upside to 1349. 











  • ADVANCE/DECLINE LINE: on 07/24 NYSE -1477
    • Up versus the prior day’s trading of -1601
  • VOLUME: on 07/24 NYSE 808.38
    • Increase versus prior day’s trading of 8.81%
  • VIX:  as of 07/24 was at 20.47
    • Increase versus most recent day’s trading of 9.94%
    • Year-to-date decrease of -12.52%
  • SPX PUT/CALL RATIO: as of 07/24 closed at 2.08
    • Up from the day prior at 1.23 


  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.43%
  • Increase from prior day’s trading at 1.39%
  • YIELD CURVE: as of this morning 1.22
    • Up from prior day’s trading at 1.17 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 20 (prior 16.9%)
  • 10am: New Home Sales, June, est. 372k (prior 369k)
  • 10am: New Home Sales M/m, June, est. 0.8% (prior 7.6%)
  • 10:30am: DOE inventories
  • 11am: Fed to purchase $4.5b-$5.5b notes due 8/15/20-5/15/22
  • 11am: U.S. to sell $35b 5-yr notes 


    • House, Senate in session
    • Senate Finance holds hearing on education tax Incentives, 10am
    • Senate Commerce holds hearing on short-supply prescription drugs, 2:30pm
    • House Education and Workforce Committee holds hearing on proposals to strengthen National Labor Relations Act, 10am
    • Senate Appropriations hears from Education Secretary Arne Duncan on effects of budget cuts on education, 10am
    • Senate Foreign Relations holds hearing on increasing trade with Africa, 3pm
    • House Armed Services panel holds hearing on military capabilities for cyber operations, 3:30pm
    • Treasury Secretary Tim Geithner presents annual report of FSOB at House Financial Services hearing, 9:30am
    • Peregrine Financial’s collapse amid shortfall in customer funds will be examined at House Agriculture hearing on oversight of swaps,, with CFTC Chairman Gary Gensler, 10am
    • Sen. Richard Shelby, R-Ala., speaks at U.S. Chamber of Commerce event on financial regulatory reform, 1pm 


  • Apple shrs tumble as earnings, forecasts miss analyst ests.
  • Netflix plunges on guarded outlook for new 2012 subscribers
  • said to discuss buyout with Providence
  • New U.S. home purchases may have risen to 371k annual rate in June, most since April 2010
  • C.R. Bard told by jury to pay $5.5m over vaginal-mesh implant
  • Food inflation may rise 4.5% in 2013 on worst drought since ’50s
  • Wells Fargo ranks No. 1 in hardest-to-value securities: S&P
  • Perella said to be hired in Morgan Stanley, Citigroup price rift
  • U.K. GDP falls most in 3+ yrs; 2Q GDP falls 0.7%, median forecast 0.2% decline
  • German business confidence fell 3rd straight month in July to lowest since March 2010
  • Spanish, Italian notes rise on bets ECB may boost rescue fund
  • IMF says China downside risks significant as growth slows
  • Japan June exports fall 2.3% Y/y vs. est. 3% drop
  • Nintendo 1Q net loss 17.23b yen, analyst est. 16.4b yen loss
  • ECB’s Nowotny sees arguments for giving ESM banking license 


    • TE Connectivity (TEL) 6am, $0.78
    • WellPoint (WLP) 6am, $2.08; Preview
    • Encana (ECA CN) 6am, $0.19; Preview
    • Thermo Fisher Scientific (TMO) 6am, $1.16
    • Cenovus Energy (CVE CN) 6am, C$0.53
    • Praxair (PX) 6:02am, $1.42
    • Regeneron Pharmaceuticals (REGN) 6:30am, $0.50
    • Wyndham Worldwide (WYN) 6:30am, $0.84
    • Eli Lilly & Co (LLY) 6:30am, $0.77
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.36
    • Tupperware Brands (TUP) 7am, $1.27
    • General Dynamics (GD) 7am, $1.74
    • Motorola Solutions (MSI) 7am, $0.69
    • US Airways Group (LCC) 7am, $1.55; Preview
    • AOL (AOL) 7am, $0.23
    • PepsiCo (PEP) 7am, $1.10
    • Northrop Grumman (NOC) 7am, $1.61
    • Rockwell Automation (ROK) 7am, $1.31
    • Lorillard (LO) 7am, $2.32
    • Nasdaq OMX Group (NDAQ) 7am, $0.60
    • Ford Motor Co (F) 7am, $0.29; Preview
    • Corning (GLW) 7am, $0.31
    • Nielsen Holdings NV (NLSN) 7am, $0.41
    • RadioShack (RSH) 7am, $0.04
    • MeadWestvaco (MWV) 7:05am, $0.39
    • Canadian Pacific Railway Ltd (CP CN) 7:30am, C$0.85
    • Caterpillar (CAT) 7:30am, $2.29
    • Hess (HES) 7:30am, $1.38
    • IAC/InterActiveCorp (IACI) 7:30am, $0.71
    • Bristol-Myers Squibb Co (BMY) 7:30am, $0.48; Preview
    • Southern Co (SO) 7:30am, $0.68
    • JetBlue Airways (JBLU) 7:30am, $0.16
    • Airgas (ARG) 7:30am, $1.15
    • T Rowe Price Group (TROW) 7:30am, $0.81
    • Delta Air Lines (DAL) 7:30am, $0.68
    • Boeing Co (BA) 7:30am, $1.13; Preview
    • Omnicare (OCR) N , 7:31am, $0.79
    • ConocoPhillips (COP) 8am, $1.19; Preview
    • Level 3 Communications (LVLT) 8am, $(0.23)
    • Cooper Industries PLC (CBE) 8am, $1.12
    • Loblaw Ltd (L CN) 8am, $0.60
    • Canadian National Railway Co (CNR CN) 8am, C$1.47
    • Akamai Technologies (AKAM) 4pm, $0.37
    • Las Vegas Sands (LVS) 4pm, $0.60
    • Torchmark (TMK) 4pm, $1.30
    • LSI (LSI) 4:01pm, $0.17
    • Varian Medical Systems (VAR) 4:01pm, $0.93
    • AvalonBay Communities (AVB) 4:01pm, $1.34
    • Owens-Illinois (OI) 4:02pm, $0.76
    • Stericycle (SRCL) 4:02pm, $0.80
    • Whole Foods Market (WFM) 4:03pm, $0.61
    • Symantec (SYMC) 4:04pm, $0.38
    • Everest Re Group Ltd (RE) 4:05pm, $3.83
    • Zynga (ZNGA) 4:05pm, $0.06
    • Citrix Systems (CTXS) 4:05pm, $0.60
    • Angie’s List (ANGI) 4:05pm, $(0.39)
    • Lam Research (LRCX) 4:05pm, $0.65
    • Visa (V) 4:05pm, $1.45
    • Ameriprise Financial (AMP) 4:05pm, $1.34
    • Tesla Motors (TSLA), 4:06pm, $(0.94)
    • Western Digital (WDC) 4:15pm, $2.45
    • Cheesecake Factory (CAKE) 4:15pm, $0.49
    • Assurant (AIZ) 4:15pm, $1.41
    • Equity Residential (EQR) 4:25pm, $0.68
    • Community Health Systems (CYH), 4:30pm, $0.89 


  • China to Flood Steel Market Hurting ArcelorMittal: Commodities
  • Exxon Seen Leading Drop in Oil Earnings on Lower Prices: Energy
  • Oil Near Lowest in a Week on U.S. Stockpile Gain, China Concern
  • LME Shareholders Approve HKEx’s $2.2 Billion Takeover Offer
  • Midwest Drought Impact Reaches Indonesia as Soybean Levy Ends
  • Corn Rises, Erasing Drop, as Rains May Fail to Reverse Losses
  • Gold Advances for Second Day on European Debt Crisis Concerns
  • Germany Lowers Gold Holdings for First Time in Eight Months
  • Copper Seen Falling as IMF Warns of Risks to China’s Economy
  • East Iowa Corn, Soy Yields Plunge From 2011, Doane Tour Shows
  • South Korea Considering Stockpiling Corn, Wheat, Soybeans
  • Oil Import Peak in China Set to Curb Brent Rally: Energy Markets
  • Fertilizer Maker Seeks Canadian Potash Mines: Corporate India
  • Chinese Steel Exports Rise to Two-Year High
  • Sugar Rises on Speculation of a Surplus Cut; Coffee Declines
  • Food Inflation Seen Rising 4.5% in 2013 as Drought Sears Crops
  • North Dakota Spring Wheat Yields Seen Climbing on Early Planting 

























The Hedgeye Macro Team


In preparation for RCL's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.






  • "We continue to experience a slow but steady recovery in our booking patterns."
  • "On the other hand, not surprisingly, the second and third quarters are suffering the most. They book a great deal during the wave period and the summer is our most valuable season, especially in Europe, with less of a cushion than the first quarter, they are therefore and not surprisingly the most vulnerable. On the other hand, as we enter the fall, we appear to be turning a corner. Sailings in the fourth quarter and for all of 2013 show promise. Both remained stronger than comparables from the same time last year and I think that further validates our belief that this is a shorter-term issue."
  • "Another point of encouragement is the strength of our developmental itineraries this year. Brazil performed nicely in the first quarter. Asia appears to be rebounding from last year's tsunami and then some and Australia is nicely absorbing some meaningful growth in capacity this year."
  • "We expect that half of our guests will be coming from outside the United States this year." 
  • "The pace of new bookings and the price points in the market have been very consistent with the midpoint of our previous guidance. Demand is still somewhat volatile and as many of you have witnessed there are many mixed signals in the pricing surveys being done. Uncertainty still remains, especially for European itineraries this summer, but so far the performance has been consistent with our earlier expectations."
  • "Over the past four weeks though, we have seen better demand especially from the United States where year-over-year bookings have been exceeding last year's levels."
  • "As of today, our total booked load factors are slightly behind the same time last year for the second and third quarters, but ahead for the fourth quarter and for 2013. Our booked APD's are higher than the same time last year in all quarters. Overall, our current pricing remains in line or higher than the same time last year for all major itinerary groups except Europe. At this time last year, the Arab Spring was in progress but it wasn't until May that we felt the full impact on bookings in the Eastern Med and we took our most aggressive pricing actions. This year, the challenge is more widespread than the Eastern Med, but the level of discounting is more contained."
  • "The net effect of all this, we expect some yield improvement in the Eastern Med, but overall European yields will likely be down slightly versus last year. On the other hand, all of our other major itinerary groups, including the Caribbean, Alaska and our developmental products are expected to have solid yield performance, with both exceeding 2008 levels."
  • "We expect to have overall yield improvement in the second and fourth quarters, but we expect the weighting of Europe to put pressure on our third quarter performance. Most importantly though, the full year still looks to be on pace with our original projections."
  • "Royal Caribbean International's year-round Caribbean programs are doing nicely, spearheaded of course by Oasis of the Seas and Allure of the Seas, which continued to maintain their impressive performance throughout the year. We expect our Caribbean yields to be higher in 2012 than they were in 2008."
  • "We are at the beginning of our summer seasonal programs, many Royal Caribbean seasonal ships will be in Europe where we are still a few months away from the peak holiday period. Although our capacity in the Mediterranean is down by double-digits from 2011, we remain focused on our sales and marketing effort in the region, both to fill this year's capacity and to continue to build awareness of and preference for our brand."
  • "The bigger story of Royal Caribbean seasonal deployment, however, is the move of Voyager of the Seas to Singapore and then China, while the ship will not arrive in Singapore until May 26, it is clear the perspective presence of Voyager in Asia has galvanized interest in Royal Caribbean in the region. Asia is in general a late booking market, so we still have limited visibility into the performance of specific sailing, but at this stage of the selling effort, we are pleased at the market's response to Voyager."
  • "Royal Caribbean continues to revitalize its older ships under the Royal Advantage umbrella at a brisk pace. Rhapsody of the Seas has recently undergone a complete makeover in Singapore and Grandeur of the Seas is about to have very similar work performed in the Bahamas."
  • "For the summer season, our Alaska product, where we are once again operating three ships, is performing well. Bookings for our seven-night Bermuda sailings out of Cape Liberty this summer are also doing well and we are on pace to achieve healthy yield improvements over last year on both of these products."
  • "We will have Solstice in Australia and New Zealand this coming winter and as a result the Solstice-class ship for the first time sail the West Coast of the United States during the summer of 2013."
  • "One of the characteristics of Europe as a cruise market is that the peak holiday season is more, let's say, July-August whereas in North America it's become in recent years more June-July. So there is a little bit more time. We are beginning to see this now in April, but I would say April, May, June into July, that is the key booking period for really understanding the visibility of how the peak European cruise season will perform."
  • "We've tried a number of different promotional efforts, from prepaid gratuities, onboard credits, buy one get half off for the companion, things like that as well as reduced air. And they respond – the different markets respond differently to all those promotions. I think we're getting better at it, and I think that's helped us gain some traction in Europe, but the rest of our categories, we really haven't had to be very aggressive with the promotions. It's really all been focused on Europe."
  • "We've seen it across the board, we've seen it – very strong beverage revenue, we've seen strong shore ex. revenue. Casino has not rebounded yet, but we've put programs as a whole, but we've put programs together with high rollers to help casino improve."
  • "We are seeing a lot more hesitancy from the first time cruiser."
  • "We kind of look at a 3.75 ratio of net debt-to-EBITDA as kind of the benchmark that we're looking for."

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