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Finally a catalyst?


BYI has underperformed IGT lately and really has traded in a fairly tight range for the better part of a year.  We’d say this stock is in need of a catalyst and Thursday night’s earnings could be that catalyst.  We project BYI to beat F2Q consensus by roughly 5% - revenue of $249MM and Adjusted EPS of $0.79.  We expect BYI to exceed consensus in both gaming ops and gaming equipment sales.

FQ2 DETAIL

We’re projecting $89MM of gaming equipment revenue ($11MM ahead of consensus) at a 47.7% gross margin ($6MM ahead of consensus).

  • The Street is projecting a $5MM QoQ decrease, while we are projecting a $6MM QoQ increase.  We believe the Street is wrong because:
    • In the last 7 years, there has only been 1 year where December revenues have not been materially higher than September’s.  Since BYI’s fiscal year end is in June, F1Q tends to be the weakest quarter of the year for them for gaming equipment sales.  The average uptick from F1Q to F2Q over the last 7 years has been $11MM.
    • Replacements are usually weaker in September than December, since the September quarter is a seasonally strong quarter and casinos typically avoid disrupting their floor during that time.
  • 5,050 units recognized in FQ2
    • 900 international unit sales
    • 4,150 NA unit sales
      • A QoQ increase in replacements excluding Canada
      • ~600 units shipped to Atlantic lottery corporation
  • ASP of $16.5k, down QoQ and YoY, reflecting mix shift towards Canada and IL VLTs
  • $5MM of parts and other revenue

We’re projecting $57MM of systems revenue ($2MM below the Street) at a 72.5% margin ($3MM below the Street). 

  • BYI guided to a QoQ increase due to commencement of installations to Canada and/or South Africa

We expect gaming operations revenue of $103MM ($5MM above the Street) at a 70.7% margin ($2MM above the Street).

  • Should see growth in the WAP foot print and benefits of a full quarter of revenues from Michael Jackson and Grease units installed in September
  • Gaming operations revenues have increased for the last 7 quarters.  While it’s true that September is a seasonally stronger period for gaming operations revenues, we would point out that:
    • BYI’s footprint has less seasonality than WMS or IGT since a lower % of its install base is on true revenue share vs a fixed fee
    • Since FY2005, the average decline from the September to the December Q has been $1MM - the Street is projecting a $3MM sequential decline
    • Growth in BYI’s install base is a large mitigating factor to seasonality.  In the September Q, the WAP install base grew 26% QoQ and there was low single digit growth in all other categories outside of centrally determined games.  Even if there were no incremental placements in the December quarter, and assuming that all those WAP units weren’t placed in the beginning of July, there should be a nice increase in the number of average installed units in the December Q compared to the September Q, which should lead to QoQ growth.
    • The reclassification of the centrally determined units from gaming operations to systems already occurred last quarter had a $1.5MM impact on gaming operations (no impact to total revenues or bottom line)

Other stuff:

  • SG&A: $68MM
  • R&D: $25MM
  • D&A: $6MM
  • Net interest expense: $4MM
  • Tax rate: 38%