DEC IL LICENSING UPDATE

Takeaway: Incremental positive for IGT/BYI/WMS

IL approvals have biggest month yet in December

Yesterday, the Illinois Gaming Board (“IGB”) released a list of all licensees, which included 955 licensed establishments as of December 20, 2012, implying the approval of 305 incremental establishments – the largest increase yet.  The marks a big acceleration over the 164 granted in October and 105 granted in November.  To date, there have been no establishment licenses revoked and 37 establishments have been denied licensure.  There has been one terminal operator who had its license revoked along and 23 terminal operators and 1 manufacturer that have been denied licensure.  Currently, there are 2,522 establishments pending approval, a 5% decline from November and a noticeable decrease in the number of technicians and terminal operators waiting for licensure this quarter, which is a positive sign implying that the IGB is getting through the backlog.

Each location can have a maximum of 5 machines so 955 approved locations imply a current maximum market size of 4,775.  On October 10th, after 3 weeks of testing, the IGB allowed 65 establishments to go live with VLT gaming.  In the September quarter, BYI and WMS recognized several hundred game sales into IL.  In the December quarter, most suppliers will be able to recognize revenues associated with placements in this market. 

Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012, and by the end of 2013, the market should comprise of about 10,000 units.  Given that we are just in the 7th month of establishment approvals, it’s too early to say whether these estimates will come to fruition.  We expect that most of the VLT sales (upwards of 75%) will come with some sort of financing, but most will be accounted for as for-sale machines.

Our understanding is that ASPs should be around $12k range.  The consensus is that VLTs will win about $100 on average per day, with a large range depending on the location.  We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.

DETAILS ON PENDING APPLICATIONS:

Distributor:  3

Manufacturer:  3 (including Speilo and Konami)

Supplier:  6

Technicians:  23

Terminal handlers:  151

Terminal operators:  14

Establishments:  2,522 pending