Takeaway: The momentum continues for BYI's with a beat and raise despite the challenging competitive and macro environment

BYI beats the quarter on the back of better gaming equipment sales and margins and strides in their gaming operations business. FY13 guidance was also raised



“Our first quarter fiscal 2013 results continue to reflect the success of our expanded game studios, our new technology platform, and our successful execution on a number of other initiatives, including the entrance into new markets. We expect continued growth from each of our businesses as both our visibility and our customer partnerships are at remarkable levels, and we continue to identify new growth opportunities."


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




  • WAP revenues increased 92% YoY and 37% QoQ
  • Launched NASCAR successful across the casino floor across iVIEW and iVIEW DM
  • Expect continued improvement in gaming equipment margins 
  • Game sales:  3,865 units to NA, 3,078 replacement units.  Replacement uptick reflect a pick up in the replacement market and BYI's higher ship share.
    • After factoring out the lower priced VLT and VGT units in the Q, ASPs would have been up 1% QoQ
  • Expect game equipment margins will approach 48-49% by the end of FY13
  • Linked progressive systems count excludes Ontario linked games - those are in daily fee and rental
  • Effective income tax rate was 37.3%.  Expect effective income tax rate will be between 37-38.5%.
  • Feedback post G2E has been very encouraging
  • BYI mobile continues its strong momentum - they now have 6MM users.  Seeing significant growth in new customer acquisitions (+50% YoY) and in the delivery of new applications.
  • Expect their 12 major operators including the recently announced GameAccount Network to feature the bally virtual game library on their portals during the FY2H12 generating incremental revenues
  • MJ and Grease remained their best performing WAP titles
  • Pipeline of new WAP titles remains very strong:  Beach Boys, NASCAR, Tiki Magic, Pawn Shop, etc
  • Shipped 175 VGT units to IL this quarter.  Expect their rollout of 4,000 units to take 2 years.  Expect most units to be for sale rather than lease.
  • International game sales were below their expectations
  • Added 6,000 slot machine connections to their systems business this quarter.  Implementations in Canada and Africa are progressing well. They are very bullish on systems for many quarters to come.  Using NASCAR with their ELITE BONUSING SUITE is a big catalyst for their systems software business.
  • Recurring revenues accounted for 53% of the last 4 quarters' revenues
  • They do not view their recent success as a good run but as sustainable. 



  • International guidance:
    • There are several markets required additional regulatory improvements
    • Issues with Argentina's trade balance
    • Feel like they have some great product roll-outs over the next 6-9 months
    • Part of it is that they focused on NA development recently, perhaps to the detriment of international sales
    • Expect strong systems growth over the next year or so
  • Pricing pressure on participation and sales
    • Their pricing is strong and remains consistent
    • They are not capping their WAP products
    • Feel like with their iDECK and product, they are providing good value to their customers
  • Update on Italy:  Continues to be a challenge.  Have 300 games out there producing mixed results. Still feel optimistic in hitting their 1,000 unit target by year end. But it takes time to tweak the games.
  • What drove upward guidance: 1) very positive feedback on G2E, 2) Growth in game studios, 3) Faster improvement in product margins 4) better visibility in systems 5) more confident on VLTs
  • For now they are shying away from paying a dividend. Would rather keep dry powder for buybacks and accretive acquisitions.
  • The units moved into systems were more like low single digit yields.  Therefore, what's left in gaming operations is more comparable to Class 3.  The 8,000 units - $1.5MM/Q - mostly are from system maintenance on SDS and the balance is from selling additional products to SDS.
  • Would be comfortable leveraging up to 3x given their stable revenue base
  • Growth opportunity:
    • Video lottery is a relatively new market
    • 2014 openings actually look pretty good:  Ohio tracks (8K); IL VLTs, CA tribal (2.5k)
    • WAP is an emerging area for them
  • NASCAR is the first time a brand has been used in the systems arena
  • Watching their bad debt expense which is up a bit this quarter.  Feel like they are being sensible in providing customer financing but not aggressive and pulling business forward like some competitors.
  • Gaming reform in Mexico:  Market is slowly starting to improve after things froze up post violence
  • The multi-connect base for their VLTs is not complicated.  They may be light on the front end depending on the pace of licensing. The multi-connect will start going live over the next weeks. The two are not really related (game sales and multi-connect that is).
  • There was some unusual jackpot expense this quarter - still believe in the 68-73% range for gaming operations. 
  • September is a seasonally slow Q for systems installations
  • Remaining Atlantic Lottery unit shipments:  expect them to be more front end loaded than previously
  • Think that in the Nov-Feb timeframe both of those projects will go live (S. Africa & BCLC) and continue for several years after that
  • Pawn Stars is not WAP. Super HOT SHOT is the first WAP follow up game



  • Raised FY12 guidance to $3.05 to $3.35
  • BYI reported $0.77 cents, coming 10% ahead of consensus estimates
  • Board approved new $150MM buyback program. BYI repurchased $67MM worth of stock since 2Q
  • BYI's "leverage ratio remains comfortably below 2.0 times, which leaves the Company’s share repurchases unrestricted under the terms of its credit agreement. This quarter represented the 20th consecutive quarter the Company has repurchased its common stock."
  • Gaming equipment highlights:
    • BYI's shipped 670 Video Lottery Terminals ("VLT") to the Atlantic Lottery Corporation and initial Video Gaming Terminals ("VGT") units to IL. 
    • ASP: $16,863
    • International shipments were 16% of total
    • "Gross margin increased YoY... primarily due to mix and cost reductions on certain models of the Pro Series line of cabinets"
  • Gaming operations highlights:
    • WAP CASH CONNECTION install base increased to 1,216, up 94% YoY
    • "Gross margin decreased YoY primarily due to higher jackpot expense."
  • Systems highlights:
    • $21MM of maintenance revenue
    • "Gross margin increased... primarily as a result of the change in mix of products. Specifically, hardware sales were 26% of systems revenues, and software and service sales were 34%, as compared to 28% for hardware and 33% for software and services in" 3Q11.
  • Bally and IGT "announced today they have entered into a Settlement and License Agreement that will end their pending patent litigation in the case styled IGT v. Bally Gaming Int’l, Inc., Civil Action No. 1:06-cv-00282-SLR (D. Del.). As part of the settlement agreement, BYI will obtain a patent license to IGT’s bonusing portfolio under confidential terms and will dismiss its counterclaims with prejudice."


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • BETTER: BYI reported a strong quarter beating expectations on game sale units and margins, systems margins, and overall gaming operations.  BYI also raised their guidance for FY13



  • BETTER:  EPS guidance was raised from $3.05-3.35 from $2.95-3.30


  • SAME: BYI reiterated that they expect game equipment margins will reach 48-49% by the end of FY2013.
  • PREVIOUSLY:  "We still expect our game equipment margin will approach 48% to 49% within the next two to three quarters due to continued reductions in material costs on each of the Pro Series cabinets."


  • BETTER:  Michael Jackson and GREASE units both passed the 750 threshold.
  • PREVIOUSLY:  "With respect to Michael Jackson and GREASE, I think we have said historically that we saw both of these games as having the potential to reach total placements of 750 each, and we still feel that way. The numbers are meeting or exceeding our expectations, and... cannibalization does appear low and low partly because Bally has a pretty small WAP footprint, and because these games are quite unique."


  • BETTER:  New FY 2013 income tax rate guidance is 37-38.5% excluding any reinstatement of the US R&D credit.
  • PREVIOUSLY:  "We anticipate our effective income tax rate in fiscal 2013 will be between 38% and 39%. This rate does not assume reinstatement of the U.S. Research & Development Credit."


  • LITTLE WORSE:  Italy continues to be a challenge and they are making some tweaks.  300 games are currently outstanding.  Still optimistic that they can reach 1,000 by the end of FY 2013.
  • PREVIOUSLY:  "We expect to have an installed base of around 1,000 VLT units in Italy by the end of FY 2013.  



  • SAME:  While international game sales were disappointing this quarter, BYI remained bullish on growth prospects in the medium to long-term.  BYI continues to be invested in market expansion infrastructure and initiatives, including South Africa, Canada, Australia and the global video lottery market. 
  • PREVIOUSLY:  "We are looking at further opportunities in New Zealand; we just went live over the last few months and of course, the South Africa installs are going on schedule."

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PCAR: Solid Quarter for Our Best Industrials Long Idea

Takeaway: $PCAR executing well and is taking market share in a cyclically depressed industry. Build schedules and Construction markets stabilizing.

PCAR: Solid Quarter for Our Best Industrials Long Idea

  • Market Share Gains:  Navistar is likely to continue to struggle with customer perceptions of its EGR engine, and possibly its financial stability.  NAV may also have difficulty meeting its target date for introducing the 15L ISX engine for Cummins.  In addition to its own solid product line-up, PCAR should benefit from Navistar’s share loss.
  • Aftermarket Parts:  To a certain extent, the truck industry relies on a razor/razor-blade model.  The continued aging of the truck fleet in PCAR’s key markets – which is driven by weak industry sales - should continue to support margins.
  • Construction Exposure:  Paccar management noted increased interest from construction groups in getting additional vehicles.  A good portion of the US Class 8 truck fleet is directly or indirectly tied to construction activity, potentially supporting new truck and aftermarket demand.
  • Cyclically Depressed with Upside:  Share gains, a record old Class 8 Fleet, improving construction activity and an effective, long-term focused management leave PCAR as a top long idea.  We see valuation upside to the mid-50s.  Please see our August 16 Truck OEM Black Book for additional information on the industry and PCAR.


Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012


Takeaway: We would not be long SBUX heading into earnings on 11/1

There is plenty to like but too much uncertainty to get behind this name ahead of the quarter.  Our research process is telling us to not be long SBUX for the second successive quarter. 


Starbucks reported worse-than-expected 3QFY12 earnings and we believe there is significant risk of an additional miss in 4QFY12.  We expect comparable sales to grow in line with consensus but believe that the likelihood of a substantial upside surprise is remote.   The macroeconomic environment represented a headwind for Starbucks in 4QFY12 but company-specific factors are also hampering profit growth. 



Our Stance Ahead of the Quarter


We would remain on the sidelines through the 4QFY12 earnings release.  Consensus is assuming a sequential slowdown in comps for the Americas division but we believe global macroeconomic concerns will weigh on FY4Q results and the outlook for FY13. We expect a shortfall versus sales and EPS estimates for Starbucks’ FY4Q results.





To become more constructive on Starbucks shares, as we were from March 2009 through May 2012, we would need to see management focused on a less complex web of operations.  With the core business, CPG, and the Verismo home brewer, Starbucks has more than enough growth to satisfy investors.  Increasing the number of “four-wall” concepts under the company’s umbrella is, in our view, not a promising development.


Starbucks has usurped McDonald’s as the most-loved restaurant stock among sell-side analysts.  This is not a badge of honor from the perspective of the stock price. Below are some of the key guidance metrics for the upcoming quarter and the full fiscal year 2013:

  • 4QFY12 revenue growth of 10-12% versus the street is at 11.8%
  • 4QFY12 EPS of $0.44-0.45, growth of 19-22% versus consensus of $0.45
  • FY13 targeted revenue growth of 10-13% versus the street at 11.7%
  • 1,200 net new stores – acceleration in U.S., China, possible acceleration of closures in Europe (the company has said that 25% of the store base in Europe is unprofitable)
  • FY13 EPS of $2.04-$2.14 versus consensus of $2.13, according to Consensus Metrix
  • FY13 is locked for coffee costs through 11 months at favorable prices. ~100m tailwind to operating income




The coffee tailwind is a well-documented tailwind for Starbucks.  What is less well-known is the extent to which comps have slowed and what return on investment the company has been receiving on its growth initiatives.  We believe that there is significant risk the company sets out to manage (bring down) expectations among investors ahead of FY2013 results. 


Over the long-term, we believe that Starbucks is one of the best-positioned consumer-facing companies given the growth prospects that management has outlined.  Over the near-term, we believe that expectations are overly optimistic and we would look elsewhere for exposure to restaurants on the long side.


SBUX CLOUDS IN MY COFFEE - sbux consensus



Howard Penney

Managing Director


Rory Green





In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance






  • BETTER:  The strength of the close-in pricing and bookings was a big surprise in Q3.  Prudent cost management also helped.  While management did not want to provide any concrete 2013 guidance, their outlook is much more optimistic than the past couple of quarters.



  • MUCH BETTER:  Significant close-in demand across all markets, including Europe, catapulted RCL to an impressive Q3 beat.
  • PREVIOUSLY:  "What we see is that we are in fact able to drive the late business at good volumes. Clearly not at the rates we would like to be commanding for these products, but we are able to drive the business. So that is coming from actually all European source markets....Volumes essentially will need to be higher on a year-over-year basis, the close-in volumes, because we have a larger capacity hole to fill in Europe because of the way that the market developed this year....and at this point, I can say that we are finding that."


  • SLIGHTLY BETTER:  the booking environment has stabilized in general.  North America and Northern Europe are on a normalized booking curve while Southern Europe booking remain "closer-in" than seen historically. 
  • PREVIOUSLY:  "Over the past couple of months, bookings have been running slightly ahead of this time last year from both Europe and North America. We have seen a shift to a closer in booking window in key European source markets, particularly those in Southern Europe. The booking window for North America and most other non-European countries is largely the same as it was at this time last year."


  • WORSE:  Load factor is trailing that of last year.  RCL mentioned a ship in Asia scheduled in early October that has only filled 60% of capacity due to the tensions between China and Japan.  It is one reason why 4Q yields on a constant-currency basis was lowered by 1%.
  • PREVIOUSLY:  "The fourth quarter is yet another story... as of the time of our last call, both load factors and APDs were running ahead of the same time last year. For the last few months bookings have been rather stable, and with only 28% of our inventory in the more volatile European itineraries we are hopeful to return to yield improvement in the fourth quarter."


  • SAME:  Load factors continue to be a little higher YoY.
  • PREVIOUSLY:  "Our order book is solid at this point, our load factors are running ahead of a year ago."

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