Hot & Cold

“I will have naught to do with a man who can blow hot and cold with the same breath.”



This is the coldest morning the East Coast has had to deal with since Sandy. My prayers go out to the children, sick, and elderly who have to go through this with no power or heat.


Back to the Global Macro Grind


Get’em while they are h-h-ot! That’s what the perma-bull marketers said yesterday as US stocks were having their 1st legitimate up day in the last 7 trading sessions. It’s been a long 1.5 month drought. Literally everything that didn’t work in October went straight up. All the pundits nailed it. Welcome to November.


In other “recovery rally” news – the headlines from the manic media changed, suddenly, this morning:

  1. “Anger As Fuel Shortage Hampers Recovery” –BBC World News
  2. “Scope of Sandy’s Devastation Widens, Death Toll Spirals” –Reuters
  3. “Power Restoration May Take Longer Than Expected” –New York Times

But don’t worry – there a plenty of Keynesians who still believe in Broken-Window Economics who will be out peddling stories this morning about how America is seeing a jobs and hurricane recovery.


We have no idea what this morning’s US Employment Report will bring. Only a moron would have a “forecast” for a number that the government makes up. China gets that – so they are going to start making up their numbers a little faster too.


China Daily noted that the National Bureau of Statistics said China will “revise its GDP accounting methods” in line with international standards. Perfect. So the China recovery is going to get really h-h-ot now!


As our hawk-eyed Asia analyst Darius Dale wrote to our Institutional Clients yesterday, this is the “most bullish data point emanating from China today – inclusive of the sequential acceleration in Manufacturing PMI and the PBOC’s record $6B injection into Chinese money markets this week.”


“From what we’ve noticed, international standards for GDP accounting = shoot first; ask questions later (i.e. report the most positive headline figure you can and subsequently revise it down 1-3 times in the coming months/years). This bodes well for a sequential uptick in China’s YoY GDP growth in 4Q12E!”


In other economic “recovery” news out of Europe:

  1. Spain printed a PMI reading of 43.5 for OCT vs 44.6 in SEP
  2. Germany’s slowdown stayed the same in OCT with a PMI reading of 46.0
  3. Italy’s PMI remained well below the “50 recovery” line at 45.5 OCT vs 45.7 SEP

No worries there. Markets in Europe were relatively hot this week (other than in Greece). These poor Greek guys are having a heck of a time reconciling the media’s “recovery” rumors with economic reality. Greek stocks dropped -15% from October 22nd’s YTD high to yesterday’s close, leaving this -11% down week as the worst week for the Athex Index in 4 years.


Across asset classes, as always, there are plenty of Hot & Cold risk management signals to consider this morning:

  1. SP500 climbed back above its 1419 TREND line of support; but remains below its TRADE line of 1432 resistance
  2. US Equity Volatility (VIX) closing at 16.69 remains in a Bullish Formation; could go to 20 if this jobs report is bad
  3. US Dollar Index continues higher this morning, +0.35% to $80.32; bullish on both our TRADE and TAIL durations
  4. EUR/USD trades down to the low-end of our immediate-term $1.28-1.30 risk range (bearish TAIL remains)
  5. Hang Seng +1.24% last night makes it the 1st major index in Asia to make higher-highs
  6. KOSPI, Nikkei, Sensex were all up > 1% too, but are all making lower-highs, not confirming the Hang Seng
  7. Germany’s DAX and France’s CAC making lower-highs versus September, again
  8. Russia’s RTSI Index remains under crash-test assault, -0.3% this morning (-18% from #GrowthSlowing’s to in MAR)
  9. CRB Commodities Index remains in a Bearish Formation at 296 (Bernanke’s Bubble)
  10. Copper, down -0.5% this morning to $3.47/lb remains in a Bearish Formation as well
  11. US Treasury 10yr Bond Yield of 1.73% remains bearish TRADE and TAIL w/ resistance at 1.75% and 1.91% respectively

And, finally, US Equity Fund outflows (ex-ETFs) continued last week with another -$1.4B yanked. So, was yesterday’s 1-day move a head-fake? Are you feeling hot or cold?


I’ll let the market answer the 1st question for me today. If we confirm 1419 in the SP500 and the VIX snaps 15.54, that would be bullish. On the second question, my arthritic hockey knuckles are officially numb as I sign off from a chilly Westport, CT.


Out immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.49-109.96, $79.68-80.47, $1.28-1.30, 1.70-1.75%, and 1, respectively.



Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hot & Cold - EL


Hot & Cold - ELVP


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




  • SAME: Product revenues and gross margins came in ahead of our estimates but the beat was driven by other product revenues rather than new game sales, most of which could be categorized as one time.  Gaming operations sales and margins were also above our estimate, but the beat was not on the core install base or yields, but rather related to interactive.  The "interactive" beat came at a steep price - higher SG&A, R&D, and D&A- all higher than we thought.  So bottom line is that the core business is still "eh" and the verdict is still out on interactive but the additional disclosure was good.


  • SAME:  WMS expects regional budgets will be flat YoY with maybe a 3-5% uptick.
  • PREVIOUSLY: "We expect economic conditions and the gaming industry sentiment to remain challenging....We believe it will take several quarters of meaningful improvements in general economic conditions before we see operator confidence build to the point where they're notably increasing annual capital budgets, and right now we're not expecting such a rebound."


  • LITTLE BETTER:  Revenues were actually up modestly YoY and WMS expects continued improvement in the balance of the year.
  • PREVIOUSLY: "For our first quarter, we expect revenues to approach the levels of revenues in the September 2011 quarter with stronger revenue growth in the back half of the fiscal year."


  • SAME:  WMS reiterated the same range with ramp down as the year progresses to the lower end of the range.
  • PREVIOUSLY: "We expect R&D in fiscal 2013 to increase to a range of 15% to 16% of revenues and that SG&A depreciation will also increase as a percentage of revenues."


  • SAME:  Ship share of new openings has been in the high teens.
  • PREVIOUSLY: "Our floor share of new casinos continues to average in the high teens."


  • SAME:  There was growth this Q and WMS expects continued growth throughout the year.
  • "With a healthy number of open orders for participation units, we expect growth in the installed participation footprint in fiscal 2013.”


  • SAME:  With more than 70% of their install base refreshed and with 35% having the latest content launched over the last 3 quarters, capital spend on gaming operations equipment and PP&E should be 20% lower in FY13.
  • We do expect aggregate capital spend on gaming operations equipment and property, plant and equipment to decline in fiscal 2013 by 20%.


  • SAME:  Given the refreshed and growing install base, completion of a major facility plus amortization of Finite Life intangible assets from two acquisitions completed in the June Q, D&A will be higher in FY13.
  • PREVIOUSLY: The participation footprint expansion, coupled with placements of VLTs in Illinois, of gaming machines on operating leases and the completion of two large PP&E projects in early fiscal 2013 will continue to drive higher depreciation in fiscal 2013."


  • SAME:  On an annual basis, WMS stated that higher revenues will be offset by planned higher spending that supports new product flow and the building of a foundation for interactive products and services.
  • PREVIOUSLY: "We expect the increased spending on operating expenses will largely offset the increased gross profit contributions from higher revenues in fiscal 2013."


  • BETTER:  Since launching in July, they already have 2MM active monthly users and 550,000 daily active users averaging $55k of daily revenues to WMS.
  • PREVIOUSLY: "Our social gaming pursuits were bolstered by the Phantom EFX acquisition and we recently directly published a suite of slot-based games with our Jackpot Party Casino on Facebook. I'm pleased to note that the initial beta results are far exceeding our expectations."

FY2013 ASPs

  • SAME:  WMS expects variability in ASPs especially if they start shipping more units to IL.
  • PREVIOUSLY: "So I think ASP, the upside is limited for fiscal 2013 on ASP. But I do believe that in the second half of the year when we launch our new products and cabinets and form factors, we'll have an ability to see an uptick in our pricing. But I'm not sure, given the first half, if it will offset it enough."

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Takeaway: We were cautious on the ability of SBUX to deliver in 4QFY12. The company delivered and demonstrated its growth capability.

Starbucks exceeded our, and the Street’s, expectations during 4QFY12.  The Americas division offset slower international revenue growth as earnings came in at $0.46 versus $0.45 consensus.  The dividend was increased 24% from $0.17 per share to $0.21.  We were advising caution ahead of the quarter, mistakenly, as our concerns about trends sequentially decelerating in the Americas dictated our view of the quarter.  This quarter, and management's commentary, has demonstrated to us that Starbucks is managing its growth accordingly.  The opportunities for the company are vast and 4QFY12 results suggested that management is likely to continue to achieve its goals over the coming months.


We backed away from our years-old bullish stance on Starbucks in April based on our concerns around the company’s ability to manage a large portfolio of brands while managing its already-complex business model.  Management’s commentary on the conference call communicated to us an acute awareness of the challenges that growth presents and a willingness to invest proportionately alongside the company’s expansion.  CEO Howard Schultz’ reluctance to reciprocate some analysts’ exuberant expectations demonstrated a sober and grounded approach on the part of management.  Below is a telling quote from Schultz that directly addressed the concerns we have expressed on the company’s rate of growth:


“We've been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand while at the same time developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand… we are highly confident that despite any turn in the current economy that we can anticipate, that we have the tools, the resources, and most importantly the power in the marketplace to navigate through this by what we've been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008.”

Below we go through the results and FY13 outlook provided by management.


4QFY12 Recap


Revenues for the fourth quarter were slightly below expectations but grew at 11% versus 4QFY11 with same-store sales in the Americas providing a substantial upside surprise.



  • SSS growth of 7% vs 5% consensus
  • Treat Receipt promotion in August a success
  • Living Social offer was availed of by 1.5 million customers in less than 24 hours
  • Nearly 500 million K-Cups were shipped in FY12, 15.6% of single cup market
  • Technology playing an increasing role in driving top line
  • Channel development continuing to support sales – blonde roast, refreshers
  • $3 billion loaded onto Starbucks cards in FY12



  • Sales grew 23% y/y boosted by new units and 10% comps
  • Co-op markets – China, Thailand, Singapore, and Australia – had positive comps
  • Management positive on the rate of volume growth in China
  • Unit growth in the quarter was 18.2%



  • SSS growth of -1% vs 1% consensus
  • FX was a drag
  • Softness in Germany was offset by positive SSS in UK despite poor traffic during Olympics
  •  EMEA team has embarked on a “Renaissance Plan”, focused on transforming all areas of the business
  • Launched My Starbucks Reward program in select markets

Operating Margin

  • Strong sales and operating efficiency in the U.S.
    • Targeting labor schedules
    • Increased sales leverage over fixed costs
    • Commodity costs didn’t have a material impact on margins in 4Q
  • CAP margins continue to improve on double-digit comps
  • EMEA is targeting mid-teen margins over the longer-term



  • FY13 EPS expected to be $2.15 versus $2.06 prior
  • 15-20% growth each quarter with 1QFY13 at low end due to leadership conference and Verismo launch
  • Targeting revenue growth in the range of 10-13% with MSD comps and 1300 net new stores
    • Further acceleration in CAP growth
    • 2,000 remodels in FY12 and 2,000 more planned in FY13
  • Verismo will be expanded to pursue the multibillion dollar global opportunity


SBUX THREADS THE NEEDLE - sbux earnings report card











Howard Penney

Managing Director


Rory Green




Takeaway: We believe the quarter is not the story. Singapore should stabilize and Macau growth is accelerating, as is market share for LVS.

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




  • SAME:  Singapore missed expectations even on a hold adjusted basis.  However, Macau was better and the dividend was raised.  We believe the quarter is not the story.  Singapore should stabilize and Macau growth is accelerating, as is market share for LVS.


  • BETTER:  LVS raised its quarterly dividend by 40% to $0.35 per common share, or $1.40 per common share per year, beginning in 1Q 2013.  
  • PREVIOUSLY:  "I'd like to see some more dividends"


  • WORSE:  Sands Cotai Central EBITDA margins fell from 19.5% to 18.1%.  Lower than expected VIP hold (2.28%) and mass hold (20.7%) impacted results. 
  • PREVIOUSLY:  "We think that we've got some opportunities to grow margins obviously with the initial margin at the Sands Cotai Central being a little bit below what our historical margins are at the Venetian as a result of the mix of business being more heavily weighted toward VIP. We think as the mass market grows, both at Sands Cotai Central and really across the portfolio of properties in Macao, with the mass margins being significantly higher than the VIP margins, that we would anticipate margin expansion on a consolidated basis."


  • BETTER:  Hotel occupancy reached 88.9% during the quarter with ADR of $149. 
  • PREVIOUSLY:  "The hotels are enjoying strong occupancy, including 61% in April, 74% in May, 85% for the month of June, and the ramp continues into July."


  • SAME:  The connecting bridge is expected to be completed in December.
  • PREVIOUSLY:  "The air conditioned walk-over bridge connecting the Venetian and Four Seasons to Cotai Central opens in January of 2013."


  • SAME:  Mass drop per day increased to $6 million from $5 million in 2Q.
  • PREVIOUSLY:  "We believe that that segment will continue to grow and we believe we'll be a player in each of the three sub segments because of the amount of tables we have to offer, the rooms, the retail, especially Sands Cotai Central is built for that." 


  • WORSE:  A $15 million increase in the provision for accounts receivable adversely impact property EBITDA by ~$15 million.
  • PREVIOUSLY:  "We've continued to collect from the junkets as we have in the past and really see no deterioration from that perspective. Our reserves are growing a little bit just from a prudency standpoint. Against that total amount of receivables, we've got about a 15% reserve that's outstanding."


  • SAME:  LVS had some group cancellations in 3Q but 2013 group bookings are improving.
  • PREVIOUSLY: "Group rooms business and pricing is picking up for 2013. We are investing for the future in Las Vegas, renovating 1,000 rooms in our Venezia tower, remodeling and redesigning the gaming floor at the Venetian, and introducing a whole new entertainment offering in the fall."3




“Following a period of transition and re-focus on the development of products that address customers’ near-term needs, our newest for-sale and participation games continue to re-establish WMS’ excellence in the creation of differentiated content and games that deliver value to our customers. Over the next three quarters, we will begin to commercialize our latest games and platforms which were introduced to broad acclaim at the recent Global Gaming Expo. We believe these products are among the most exciting new games and cabinets we have brought to market and expect them to provide casino operators with new must-have products for their players."


-  Brian R. Gamache, Chairman and Chief Executive Officer




  • Expect to ship at least a 1,000 additional VLT's to Canada in the balance of  FY13 and additional units in FY14
  • Shipped 193 units to IL 
  • According to Gamache, WMS has never gotten better feedback on their products from G2E.  This reminds him of 2006 or 2008 when they launched BB2.
  • CPU-NXT3 operating system is already approved and the Gamefield xD cabinet has already submitted and is approved in some jurisdictions already.  Expect to submit the Blade cabinet later this month.  Anticipate shipping the first units of both these new unique cabinets which utilizes CPU-NXT3 platform in the March quarter.
  • MyPoker launched this quarter at Station's properties in LV and expect to roll out out more units with CZR in the regional markets in the March Q
  • Expect their ship share to new markets to average in the high teens. 
  • Expect their ASPs to be more variable in 2013 especially if IL VGTs become a larger percentage of the mix
  • Used game sales were higher, they are beginning to sell BB2 used game machines which garner higher prices.
  • The improvement in gaming content during the past year has resulted in higher than normal conversion kit sales over the last five quarters, and expect this will continue at least through the launch of the Blade cabinet.

  • Have 17 new participation games launching in the balance in FY13; therefore, they expected continued growth in their participation base and average daily revenue to begin improving in 2H13
  • About 70% of WMS's installed base has been upgraded to new hardware and operating system platforms, with just under 35% of the installed base having the latest games that were launched in the last three quarters.
  • R&D in the 15-16% of total revenues range in FY13, decreasing throughout the year as revenues ramp
  • Selling & Admin expenses declined YoY largely reflecting the impact in the prior year of $4.3MM of incremental bad debt expense for Mexican customers

  • D&A is higher primarily due to a greater depreciation associated with a continued transition and upgrade of their installed participation base along with the growth in the installed footprint and the completion of a major facility plus amortization of Finite Life intangible assets from 2 acquisitions in the June Q
  • Expect R&D, D&A,  and G&A to increase in a measured way throughout the FY13. Total increase is expected to be $30-35MM. Expect the non-marketing expense amounts to ramp slightly every Q throughout the year, reflecting additional headcount to support additional revenue growth. Marketing to increase more significantly in December Q and then level out at 30-40% of Jackpot Party's Social Casino revenue.
  • They expect aggregate capex spend on gaming operations and PP&E to decrease by 20% in 2013
  • Repurchased 5MM of stock in the September Q (~317,300 shares) and have ~143MM remaining in the current repurchase authorization
  • Revenues are expected to grow modestly from the September Q to the December Q and to slightly exceed Dec 2011 revenues. However, lower margin VLTs are expected to exceed 25% of new units sold this quarter, resulting in the product sales margin declining to a range of 48% to 49%. Operating income is expected to be slightly down QoQ, reflecting an incremental cost to support interactive products and services. On an annual basis, benefits from our higher revenues this year will be offset by planned higher spending that support new product flow and the building of a foundation for interactive products and services.
  • Details on their i-gaming initiatives:
    • Online gaming operations: Real money UK-based platform Jackpot and distribution of the 888 B2B poker platform in the US  (Play for fun and real money when legalized)
      • Earn money from Jackpot from player net wins 
      • First roll-out of a fully managed B2B real money online casino site will be in collaboration with Groupe Partouche in Belgium, utilizing our platform and operating infrastructure. Soft launch this Q and full go-live in Jan 2013. They will earn money through a rev-share agreement.
    • iGaming Product line:  royalty-based content licensing via remote game server integration through Jadestone subsidiary. Content distribution to online gaming customers. Have agreements with Betson & Unibet.  They get revenue share dollars every time their games get played. Will go live in early calendar 2013.
    • Social gaming/play4fun initiatives (B2B):  Platform allows their bricks and mortar customers to offer play for fun on their site. They get go-live fees and recurring monthly fees. If gaming gets legalized, they can convert these sites.
    • Mobile games through Phanton EFX: 
    • Social gaming: Jackpot Party on FB 
      • 2 million monthly active users and with it 500,000 daily active users yielding a very nice engagement rate of about 25%.

      • Kaunched Jackpot Party Social casino in July and averaged just over $55,000 in net daily revenue to WMS
    • They will launch Jackpot Party Casino on mobile devices in the near future
    • Total investment to enter the online by WMS was under $100MM spread over several years
  • Expect additional ship share increases over the next several quarters and years



  • Over the next 12 months, they expect that replacements will continue to be "tough-sledding."  Have the best visibility that they have had in some time because of the new cabinet launch and the Canadian VLTs.
  • They believe that they have 120k BB1 and BB2 cabinets installed that need replacing and that the Blade cabinet will help spur that replacement cycle
  • They are in ramp up and investment mode in their interactive businesses.
  • Think that the 2H of 2013 will be more robust. New launches will be more accretive to their existing footprint. The one headwind they have is that coin-in isn't doing as well with lower play levels at casinos.  Feel like they are in a great position going into 2H... locked and loaded.
  • What was the one-time IL game set sale?  It was another VLT jurisdiction where they had a game set delivered, have another one of those opportunities coming later this year.
  • The closest to recurring revenues in interactive is the social gaming sites for 3rd parties which have recurring licensing fees (Game server integration)



  • "Net income and diluted earnings per share in the September 2012 quarter reflect higher year-over-year research and development expenses to support the growth of interactive products and services as well as for the ongoing development and commercialization of a greater number of new participation and for-sale games and cabinets."
  • "Gaming operations revenues increased... primarily reflecting growth in revenue from interactive products and services and the third consecutive quarter of growth in the installed participation base to 9,632 gaming machines... partially offset by lower gaming operations daily revenue per unit"
  • "Gaming operations gross margin was 78.6% in the September 2012 quarter compared with 79.1% in the prior year, reflecting the impact of higher jackpot expense on wide-area progressive games, partially offset by the benefit of increased revenues from high-margin interactive products and services"
  • "Product sales revenues rose modestly reflecting sales of 693 new video lottery terminals (VLTs) for the Canada and Illinois VLT markets. Product sales revenues also include higher other product sales revenues including one-time software revenues of a VLT game set and higher revenues from used gaming machine sales, which more than offset the anticipated lower industry-wide shipments for new casino openings and expansions and a lower average selling price reflecting the higher mix of lower-priced VLTs and the competitive marketplace."
  • Product sales details:
    • 3,791 new sales (2,453 NA & CA; International: 1,338)
      • NA new openings and expansions: 727
      • Replacements: 1,726
    • ASP: $16,033
    • Used games: 1,660
    • Conversion kits: 2,400
  • "A 120 basis point improvement in gross profit margin due to higher product sales margin and a greater mix of gaming operations revenues. Product sales gross margin was 53.1%, a fiscal first quarter record, reflecting the mix of business, ongoing benefits from the Company’s continuous improvement and supply chain management initiatives, and the VLT game set software, which more than offset the impact of a lower average selling price and the seasonally lower unit volumes for the September quarter that typically impacts margin." 
  • "WMS was selected by the Manitoba Lotteries Corporation to join two incumbent suppliers to replace existing VLT units throughout the province." 
  • "During the quarter, Jackpot Party® Social Casino was launched and became one of the five largest and most popular social casinos on Facebook®, as measured by the number of daily active users and monetization rates."
  • "In September, the Company’s first-of-its-kind interactive, casino-branded Play4Fun™Network went live at a tribal casino in Iowa, enabling the casino’s players to access multiple play-for-fun slot and casual games online, all under the casino’s own brand association."
  • “We are extremely pleased by the initial success we are achieving in leveraging the value of our library of proven gaming content into the interactive markets, including social, casual and mobile entertainment. This success is reflected in the $9 million year-over-year growth in revenue from interactive products and services, and we anticipate a range of $35-to-$40 million in annual revenue for fiscal 2013 from these revenue streams. While the costs needed to build a sustainable foundation for interactive products and services impact near-term operating profitability, we believe this investment favorably positions WMS to participate in the attractive, high-margin growth potential of these opportunities that can lead to the creation of new value for our shareholders.” 
  • "Revenue from interactive products and services increased to $9.5 million from $0.7 million in the prior-year period, primarily reflecting the successful July 2012 launch of Jackpot Party® Social Casino on Facebook®, which currently ranks among the five most popular social casinos onFacebook based on the number of daily active users, coupled with organic growth in our UK-based B2C online website and the addition of Phantom EFX retail sales and Jadestone game server integration revenues."