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Some detailed notes from meetings with WMS at G2E


  • The new product is performing at a better level than their old product.  Have more new products.  Over 100 new titles.  80 of them are on the new platform.
  • When will they produce cash?  They took the time to invest in their business.  This year, they are investing in interactive.  Have an opportunity to provide more transparency and milestones on how much they will invest in interactive on the call.
  • Five cabinet configurations now and launching five new ones on their new operating systems.  5th cabinet is their poker platform launching at STN's and CZR's.
  • How do they fill the gap between now and when the new cabinet comes out?  Pricing discounts - G2E specials targeted at bridging the gap.  Took four quarters after BB2's launch to reach 50% of sales.  In theory, ASPs will go up after the launch of the new cabinet.
  • No product sales guidance for FY13': "could be lumpy" because of IL and Canada which have lower price points
  • Where is WMS in IL?  Gaming control board going through beta test phase.  Once that's over, operators can place games at approved locations.  Have an agreement with Betsson and going direct with others.  Betsson units will be for sale.  Others will be operating leases.  Thinks that they can get upper teens/ low 20s share when it's all said and done.  
  • Canada:  Alberta - ordered 2000 units - WMS got 500 of those - will be in the September Q
  • Manitoba and BCLC (got an award) 
  • Oregon state lottery - will be at the proposal stage soon
  • Class II:  teamed up with Blueberry technologies initially to service class 2.  They now have integrated that system with their CPU Next system. 
  • Consolidation?  Unidesa is selling their slot ops to Novamatica.  Doesn't think that there is anything imminent among the Big 5.
  • Blade I - March 2013 release initially - will have 15 titles
  • Aladdin is doing well for them.  Super Team hasn't done as well.  New Lord of the Rings is doing well.  New Wizard of Oz is doing well.  
  • The Kiss games get approved this Q 
  • Spiderman in March and Willy Wonka in June Q. 
  • Thinks that participation yields have stabilized 
  • Wizard of Oz was performing very well, though not where it was 
  • Macro view on WAP/Participation market:  % of their install base that's remained WAP is still 36-38%.  Have turned the tide on the declining install base.  Have more participation titles in their booth than IGT at this year.  They are making some headway.  Doesn't think that they have hired anyone from IGT.  At this show, IGT did more internal vs external development.
  • CPU 2 strategy:  will still create content for the next 3 years.  If you buy a BB2 now, then you get a free upgrade to the CPU3 in a year.  They stripped down their games to bring them back to the basics that worked before.  Stripped out the noise from the games.  Took out the "bank" strategy with a new look so every game has a new look.  These games are targeted towards the gamer.  The WAP games are for the more casual player that wants to enjoy time on device.
  • Have double money burst (similar to IGT's DUO).  Very volatile experience. 
  • Colossal Reels did well out of the gate.  Now when they have a hit, they "fast track" new content for those boxes.
  • Spiderman is a follow up to Aladdin.  Hoping to capture a younger player with Spiderman
  • Willy Wonka - hope that this will be the next Wizard of Oz 
  • Monopoly refresh on the the xD.  Not too many original Reel 'Em Ins! on the floor - relaunching the brand.
  • Wheel on the Cheers game and Monopoly money.  Game of Life is doing really well - Craps-like features.
  • BBxD for their poker game.
  • How big will the poker launch be at CZR and STN?  Licensed names from Double Double Poker (IGT) and Deuces Wild.  Launching in September with Stations.  Stations is committed to keeping them on the floor for a year.
  • The new game field cabinet.  Looks like a pinball machine.  First games are progressives.  No buttons.  Available in FY4- May 2013 and Wizard will come out on this platform in February.
  • Blade:  looks like the Veridian cabinet.  Addressed some customer complaints:  wager saver (when customers are down to small change- they can get one last spin- win or lose or just cash in).  When there is petty cash left on a ticket, it's a pain for customers.
  • Bonus Guarantee:  guaranteed to give players a 10x on their win.  Giving players a small win even if they lose.
  • The participation stuff looks good but are very back end loaded (Q4)
  • Everything on the floor is ready to go this fiscal year
  • Have a 25% increase in mathematical product that is unique.  Only a handful of clones for the fast track games that are hot (can get out in 4-6 months).
  • Gamefield xD (pinball game):  can do more with the game because there is more within the players' line of vision
  • Sensory immersion 2.0 cabinet/chair:  Willy Wonka and Spiderman
  • MyPoker:  working on it for 3 years.  Comfort of the game is really unique.  Players can also save their configuration.  When the player puts their card in, they are automatically logged into Player's Life.
  • Blade:  aside from a new look; the fluidity of play is second to none.  Had multiple repeat visits from their customers to see the product again, which is a good sign.

WMS Product Details from the G2E Booth

  • All of the Blade stuff is CPU NXD 3 system
  • KISS game:  can change songs while playing.  They are trying to do more music themes in general since Michael Jackson is such a hit. 
  • Yahtzee: Q1 2014
  • New Lord of the Rings:  42" top screen.  Very successful license for them.  These are entertainment products - i.e. more time on device.
  • Gamefield xD: everything on the machine in players peripheral view.  32". Thinks that this is the key differentiator for WMS. Also really comfortable. First games come out March time frame. Wheel bonus feature
  • Cheers: new franchise for them. Also a wheel topper. 80/20 pricing.
  • Monopoly Legends:  integrated 4 themes of Zeus, Reel 'em In!, Jackpot Party, and Goldfish for the bonus round.  Also has a wheel.  Q4 release.
  • Willy Wonka:  thinks that this is the best game they've made in a long time.  Should appeal to the Wizard of Oz crowd.  Lots of motion on the chair.  Graphics were really great.  WAP game.  Q4 release.
  • Spiderman:  brand new license for them.  For any spin, you can get up to 8 wheel arrays.  Q3 release.  WAP game.
  • Price is Right:  they learned that they put too much into the first 2 versions.  Just focus on the singular game in Price is Right.  In each bonus, you are guaranteed to win one of the progressive bonuses.  Plinko is doing well - out the last few months.  This is the follow up to Plinko.  Q4 release.
  • Godfather:  second product in this line.  3 reel mechanical:  can also go as a video.  Clone of Lord of the Rings-The Fellowship.  Lord of the Rings that is out on the floor is one of their better participation WAP titles.  Original didn't do well.
  • MyPoker:  multi-game video product.  One of the reasons that IGT players stop playing is because they get tired of sitting - games not comfortable. 
  • For sale:  Colossal Reels:  this one has been a big hit.  Have five more versions out.  The math is just good.  High volume game.  8 total titles.
  • Portal applications:  still supporting it.  Not doing well.
  • Networked gaming: 
    • Remote configuration and download /portal app
    • They have 60 installs in NA and some international ones too
    • Sent companies a DVD with all the titles.  Allows customers to pay a subscription plan to their library.
  • Williams Interactive:
    • Partouche, Jadestone, Phantom EFX, and 888/Dragonfish alliance
    • Phanton has the #3rd best monetization and 5th largest Facebook play for fun game


Takeaway: $JACK is one of our better long-term TAIL ideas. The stock corrected, but held its TREND line, and our thesis is still intact.

We just added Jack in the Box (JACK) to our Real-Time Positions as the share price is at the low end of Keith’s immediate term TRADE risk range.  We like the stock from a fundamental perspective and stand by our Sum of the Parts analysis which suggests long term upside of 50%. For our most recent note on JACK, click here.


Fundamental View


Jack in the Box has been a strong performer within QSR over the past year, outperforming the S&P 500 by over 10%.  We believe that there is more to come from this stock.

  • Jack in the Box continues to perform well.  Management raised guidance on the last earnings release and we expect the refranchised and remodeled concept to continue to generate strong cash flows for the company. 
  • Qdoba is taking time to win over the naysayers.  It is difficult to know, but our take is that recent softness in the stock is likely related, at least in part, to David Einhorn of Greenlight Capital making comments on the new Taco Bell “Cantina Bell” menu and how the initiative is set to take share from Chipotle.  Clearly, the implication is that this new menu at Taco Bell will have a similarly negative impact on Qdoba.  Given the AUV’s and restaurant-operating margins Qdoba stores have achieved during Chipotle’s incredible same-restaurant sales growth over the last couple of years, we are confident that Qdoba still represents a compelling growth play for investors, even with Taco Bell becoming more competitive.
  • The stock is valued at 7.2x EV/EBITDA, lower than WEN and SONC and higher only than GMCR.  Given the growth prospects, future cash flow generation, and asset base behind company, we believe that JACK should be valued more richly.  At 7.2x EV/EBITDA, with EBITDA growth accelerating ahead of expectations, we believe that JACK could see two-to-three turns of multiple expansion.  On this basis alone, Jack in the Box has $10-15 in upside from the current stock price.

Quantitative View


Keith added JACK to our Real-Time Positions at $27.33.  The immediate-term TRADE range is $27.31-$28.33.


IDEA ALERT: LONG JACK - jack levels




IDEA ALERT: LONG JACK - qsr ev to ebitda


Howard Penney

Managing Director


Rory Green




ALL management excited about the product at the Show and what's in the pipeline. 


  • 4 years ago, they had virtually no recurring revenue.  Not a big focus on NA.  Systems customers unsatisfied.
  • During the last year, they grew their participation base by 10-11% vs the market growing 6%
  • Depth of their for sale offering increased their productivity.  Australia:  ship share from mid-20s to mid-30s.  Have some work to do in NA for the for sale product where they hold a constant 12% ship share. 
  • ALL is good at penny, high volume games (aka gambling games) and repeat customers.  Their brands have 6-7 years of staying power.
  • They are starting to think about participating more in markets where they don't participate today e.g. the casual/entertainment gamer.  Repacking their old brands works well for them too - "legends strategy".  Feedback from operators is good.  Evolving strategy in the US.
  • Historically never used 3rd party developers.  By next year, they will have at least three major 3rd parties.  Will announce some deals soon.
  • Rich Schneider just joined them from IGT
  • IL isn't a core market for them - low margin jurisdiction.  Plan on being a low cost provider.  They will be selling games in that market with financing.
  • Seeing good growth in their replacement business in Macau
  • NA:  not seeing any change in the market
  • BYI and WMS have not made much traction in Australia - it's a gambling market.  Market grew 15% in the first half.  Ainsworth is #2 in Australia, IGT/SHFL #3, Konami/Aruze #4.
  • Just delivered 250 games to Alberta
  • I-gaming:  ALL has been more cautious on getting to the market.  Their systems customers are interested in getting into the online space.  Want to provide content for that space.  Their strategy will be around an operating partnership.  Launched two of their clients online already to help them market.  An opportunity to gather more data, market their product and their customer.  Pricing like a system now.  IGT giving away their I-gaming stuff to get floor share.  Have their content on European sites.
  • They have 285 casinos on their system.  They are the largest provider by number of casinos.
  • They had a record year in gaming operations this year.  Record install base and record revenue.
  • They have a very balanced portfolio.  They have an arsenal of proprietary database of games. Don't need to do all licensed titles.
  • WAP strategy:  their jackpots hit frequently.  Tarzan on Verve base.  Tarzan had 1300 games originally.  They brought Tarzan and Jane out three weeks ago and it's doing great.  Wheels round- their players always win. 
  • Superman:  positioned as a VIP game/high limit.  Getting approved in December.
  • Cash Express - flat fee or 80/20.  Jackpot driven off coin-in.  Still have 1,200 original Cashman on the floor.
  • Jaws and Mummy are both performing great 
  • For sale games:
    • Wonder4 is the #1 performing game in NA right now.  Sold over 1000 games.  Doing 2-5x house average.  4 Multi-games.  Have a bunch of follow up games as well.
    • Legends:  redeploying the oldie goodies.  Original game and the new game in the same cabinet.  90% of the play came from the new versions.  Launched in Australia and launching in the US - just approved first 2 games this past week.  Still have MAV 500 games out on the floor creating a good replacement cycle for them.
    • Moved Cashman onto the Stepper.  It's their best brand.  Biggest mistake is that when they failed, they had video game designers make steppers. They then hired stepper guys.  Superman is also a participation game on Stepper.  Original Cashman has sold 8,000 units since 2002.  Hired their stepper guys from WMS 2-3 years ago.
    • MAV 500 was released 12 years ago.  
  • Customers telling them this is the best show in 5 years
  • IGT gives away their systems to get recurring revenue and floor share and get master agreements


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Obamanomics: The US Dollar

It should come as no surprise that while the S&P 500, Crude Oil and Gold all have stellar performance records under Obama's first term as President of the United States of America, the US dollar doesn't quite make the cut. The US Dollar Index has dropped -7.3% since January of 2009, due in part to the Fed's insistance on devaluing the currency in support of quantitative easing. We think that Romney should focus more on removing Bernanke as Chairman of the Fed and strengthening the dollar, but to do that, he has to win the election in November. Tonight's the night for him to prove he can do it.


In honor of tonight's presidential debate, we've examined the performance of several different asset classes and their performance from January 20, 2009 to today to see just how well President Obama has done during his first term.



Obamanomics: The US Dollar - USDChart


Takeaway: Weak Missouri Sept gaming revenues doesn’t bode well for regional gaming operators needing a strong final month of the quarter

  • When released next week, Missouri gaming revenues should show roughly a 5% decline YoY despite a favorable calendar.  Other states probably performed better on an absolute basis but we fear results were below expectations in most states in September.
  • New competition from the Kansas Speedway is certainly hurting results but we would’ve expected better.  Indeed, as shown in the chart, the seasonally adjusted trend should’ve been about 3 percentage points higher.
  • We don’t want to be overly focused on the one market of Missouri but we did hear anecdotally that September may not have been the strong finish to the quarter that the calendar would’ve predicted.  The regional gaming operators probably needed a decent September to make the quarterly revenue estimates.


Spending Is A Tax

This note was originally published October 03, 2012 at 07:46 in Early Look

“Milton Friedman reminded us that to spend is a tax.”

-Edward Prescott


On my flight to Denver last night I finally got through half of The 4% Solution. The aforementioned quote from Prescott (Professor of Economics at Arizona State) is representative of what you’ll find in the book - historical reminders that will get you to think.


Thinking, instead of reacting to the daily-double on Spanish bank bailout rumors, matters. History is littered with short-term policy decisions that resulted in long-term structural risks. History is also a guide for those of us who want a solution for a better future.


Not all “economist” ideas are dumb. Some of the simplest ones are just too hard for politicians to swallow. As Vernon Smith (Professor of Economics at Chapman University) suggests, “cutting government spending, as opposed to cutting interest rates… could be a critical step to recovering from a financial crisis” (The 4% Solution, page 50). Try getting Bernanke or Geithner to say that.


Back to the Global Macro Grind


Enough of the thinking already – if the Europeans print another $100-300B to bailout Spain, and Timmy backstops it with his friends from France via the IMF, the Eurocrats can blow that dough right down a rat-hole faster than you can, baby. Bull market.


After being down for 8 of the last 12 days (SPX closed up a marginal +0.09% as someone spiked AAPL into yesterday’s close) US Equity futures aren’t down yet this morning because the Europeans turned to Rumor On.


Risk off, Rumor On. That’s the political ticket. Or is it?


Tonight we’ll see if Romney can land a punch. If he can’t, I think he’s out cold. If I were him, I’d bring some music to Obama’s wide open economic chin.


Here’s where the US economy finds itself after a -69% GDP slowdown in 6 months to 1.26%. It’s a Bush/Obama Keynesian Trifecta:

  1. Rising Corporate Taxes (at 39.2% USA has the 2nd highest corporate tax rate (next to Japan) in the world (The 4% Solution, pg 48)
  2. Less than 50 days to the Fiscal Cliff (Pelosi and Geithner are going to save you from what they perpetuated, allegedly)
  3. Less than 1-3 months (depending on how they change the rules) on bonking the Debt Ceiling (again)

So, you can save yourself $50,000 a year sending your kid to Keynesian Economics School to come up with a solution like this:

  1. Cut Corporate Taxes to Canada’s levels (28%)
  2. Whack what it costs to employ everyone getting paid by Big Government in Washington, DC
  3. Fire Bernanke, replace him temporarily with Volcker, and bring back Strong Dollar

I’m not in Denver to run for office. But I think I could give Obama a good go on stage tonight if they let me. Americans are sick and tired of losing and being lied to. If you need a Canadian to be your Gladiator in this public economic Forum, I’m game.


Now that that’s off my chest, back to the market…


Last Wednesday, I said “Buyem!”, yesterday I wrote a Risk Manager note in the morning titled “Sellem!” What else do you expect me to do when watching this clown show? This is no longer about anything other than every man and woman fighting for what they have left.


Like I said on the Morning Client Call yesterday (every day at 830AM EST), “I’m just a man in a room” barking about this stuff. Whatever my ideas may be, they don’t superimpose systemic risk on the world’s consumption growth like Bernanke’s ideologies do.


Here are some multi-factor, multi-duration, risk management thoughts supporting why I sold stocks on green yesterday:

  1. US Dollar Index has held its long-term TAIL line of $78.11 support
  2. EUR/USD has failed, again, at its $1.31 TAIL risk line of resistance
  3. SPX vs VIX is breaking down (again) to the bear side, as VIX holds its long-term TAIL of 14-15 support
  4. SP500 snapped its immediate-term TRADE line of 1451; no support to 1430 on the same duration
  5. Russell2000 is back below its March 26th closing high of 846 (making lower long-term highs now)
  6. Bonds (UST 10yr 1.61%) continue to confirm that Growth and #EarningsSlowing matter more than Spanish rumors

If we don’t have the political spine to cut corporate taxes and government spending, at the same time, we’ll look more and more like Japan (or Spain). Don’t believe me? Give it 4 more years.


Sure, it will take some short-term commodity and stock market pain (like it did in the early 1980s and early 1990s) but, in return, we’ll get our hard earned currency back. That will drive oil prices lower, and US consumption higher.


Strong Dollar, Strong America – my name is Keith McCullough and I support this message.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1770-1786, $109.07-112.86, $79.54-80.29, $1.27-1.29, 1.57%-1.64%, 829-846, and 1430-1448, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spending Is A Tax - Chart of the Day


Spending Is A Tax - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%