BYI: THE CONTENT KING

Takeaway: We expect BYI to provide a bullish outlook to investors and back it up with strong content at next week’s G2E

As many of you know, Todd has been in Vegas the last 2 days getting a preview into the week ahead.  After a half day of meetings in Las Vegas, a clear cut highlight was a very positive meeting with BYI.  Management was very bullish about their content for G2E and also about the outlook for all segments of their business.  We think this optimism will show through when half of the investment community attends G2E next week.

 

We’re usually sober regarding the pre-G2E commentary and glowing press releases regarding each company’s upcoming G2E exhibits.  What’s different for BYI is that this historically reel spinning slot supplier is going to display mostly video content that has apparently been getting great feedback from customers.  Remember that approximately 80% of units shipped are video and unbeknownst to most investors, BYI’s recent slot shipments have also been around 80% of total.  So their video content is already driving higher share recently and with what they are going to show at G2E, will likely increase their high teens overall share.  This is not your father’s Bally Gaming.

 

The stock has done well, certainly relative to its competitors.  However, the valuation is not excessive and forward estimates look like they may need to go higher.  We are not making a call on the September quarter – we’re essentially in-line – but G2E should be a big near-term catalyst along with the announcement of a big award from Western Canada. 

 

Consensus for the BYI’s FY2013 is $3.17 and company guidance is $2.95 to $3.30.  We think that consensus is achievable and beatable depending on the timing of the IL rollout and Western Canadian Lottery unit shipments.  We already know that the award for Manitoba and Saskatchewan has been awarded but given the politically sensitive topic of spending money on slots when the economy is in a funk, the government has been “sitting” on the announcement.  At least one of the suppliers that has been awarded part of the contract for 10,000 slots has told us that they expect the units to ship by September 2013.   We estimate that BYI’s allocation of the award was between 1,000-2,000 units, which could boost earnings by $0.09-$0.18/share.  

 

On September 25th, BYI announced contracts for 4,000 VLT shipments to IL which they expect to be deployed over the next 24 months.  In additional, 3,000 VLTs will be connected to Bally Multi-connect, an enterprise wide centralized accounting and management system.  Our understanding is that roughly 50% of the 4,000 units will be sold and the balance will be on lease arrangements.  Every 1,000 units that BYI sells into IL should contribute 8 cents to earnings. The Multi-Connect link will add to BYI’s already material base of recurring revenue from its central system products.

 

 

Notes from our meeting with management:

  

Content

  • They are very bullish about their video content.  After 15 G2Es, we can say their bullishness was significantly more than normal.
  • Grease was their best WAP launch ever; then Michael Jackson exceeded that.  NASCAR coming out in Q4 2013.

VLTs

  • IL 50/50 units between leased and for sale
  • 1,600 VLTs over 3 or 4 quarters to Atlantic Lottery starting in September Q
  • Won’t disclose how much of a RFP from Western Canada (Manitoba and Saskatchewan) they got but our sources indicate that the award of 10k machines will be announced soon and BYI got a very healthy share

Systems

  • Excited about their systems business as well
  • Ontario is big systems contract – not signed but going to happen
  • BC is 25k units
  • Systems maintenance growth rate 15%
  • Systems services provides 4-8 million per quarter in revs
  • Balance sheets restricting service revenues as casinos want to convert but can’t – good news is that is changing
  • 30% penetrated world-wide on systems

Wide Area Progressives

  • No policy to cap WAP outside of a few small deals where they got something else in return – they are adamant that they are not materially capping their upside on WAPs despite what the investment community and competitors say
  • 600 games on Cash Connection include MJ and Grease at 6/30/12 but 1,500 is their goal.  We think they are well on their way to exceeding that goal.

General

  • Columbus won’t be recognized until FQ2
  • Slot hold increase industry wide might be due to lowering player odds and then giving it back in rewards
  • CZR starting to buy a little more slot product
  • Margins:  48-49% by the end of the fiscal year for product margin – conversions will be the next leg up

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