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Takeaway: BYI delivers a beat in the face of high expectations and a challenging competitive and macro environment.


Bally’s performance this quarter earned some stripes in justifying its premium group multiple.  Despite the higher bar set for the Company and challenging macro and competitive environment, they still managed to beat expectations.  Gross margins for all segments in of their business were better than we projected, and we were a cent ahead of the Street in terms of EPS.  Also encouraging was the continued buyback activity in the quarter and the re-upping of the buyback authorization.  Raising guidance was the clincher.

The biggest upside surprise in the quarter for us came from gaming operations.  We expected good growth in the Q due to strong WAP placements but actual results beat our number by 3%.  Margins were a little weaker than expected, but that did not impact EPS, as BYI benefited from the WAP link in NJ.  The results were particularly impressive given the reclassification of some low yielding centrally determined games into systems.  Assuming that Michael Jackson and Grease continue to perform well, gaming operations is poised to easily exceed $400MM in FY13.

Gaming equipment sales also beat our estimate by 5%, but the beat was due to earlier than expected shipments of VLTs to the Atlantic Lottery Corporate and the sale of 175 VGTs into IL which we didn’t expect to hit until next quarter.  We estimate that the VLT and VGT units boosted revenues by $11MM and EPS by $0.07-$0.08 this quarter.  However, SG&A was also likely boosted due to the sales commission component of that number.  Therefore the net affect was likely a lot lower. The one glaring negative in the quarter were international sales which are likely to continue to disappoint in the near future.

Systems revenue, while in-line with our estimate, generated better than expected margins.  Given the pending pickup in new system installs, which carry lower margins, we’re not going to get too excited about the high margin in the quarter.  However, as iVIEW DM continues to make traction and as more applications like NASCAR progress, margins should lift over time.  Top-line would have actually missed our number if not for the reclassification of certain centrally determined games.  To be honest, we’ve been asking BYI’s for years why those units weren’t in systems to begin with since that’s there they belong.

Given the results posted this quarter, the continued momentum of BYI’s WAP games, anticipation of NASCAR, continued improvement in replacement cycle, and the final opening of the VGT market in IL, coupled with visibility on their systems business, we believe that the stock can continue to work in the near-term.