In preparation for BYI's F2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



  • “Our North America replacement units sales were up year-over-year reflecting what we believe is a refocus by operators in investing in their casino floors and an increase in ship-share resulting from our improved content.”
  • “Cash Connection, which ended the quarter with 1,216 units, up 591 units from last quarter. Our ending WAP-installed base increased by 26% over the June quarter and 94% versus last year.”
  • “The game orders coming in after the show have been very encouraging.”
  • “Bally Mobile continues its strong momentum and has now grown to approximately 6 million users. Thanks to the measurable ROI, these mobile applications are generating for our customers, we are seeing significant growth, both in new customer acquisitions, which has grown by more than 50% year-over-year, and in the delivery of new features for existing customers.”
  • “We reached an internal milestone with GREASE and Michael Jackson, each crossing the 750 WAP and NAP placement target by a comfortable distance. MJ and GREASE remain two of our best performing WAP products.”
  • “The pipeline of new WAP and premium titles due for release continues to be very strong and will include some very well known Bally and third-party brand names including Beach Boys, NASCAR, Pawn Stars, Hot Shot and Tiki Magic.”
  • “We shipped 175 VGT units to Illinois during this quarter and have signed deals for over 4,000 VGT units in this market. We expect the entire rollout to take about two years to complete. As the distribution channel has consolidated, we now expect a higher mix of these missions to be outright sales rather than on lease.”
  • “International game sales units during the quarter were at 743 units, below our expectations, due to various market conditions and product approval timeline delays. Game sales in international regions remain an important growth opportunity for us. We have multiple product development initiatives currently underway focused on these markets.”
  • “The systems implementations in Canada and Africa are progressing well and we are gearing up for the significant implementations there during the coming months. This combined with growing opportunities for iVIEW DM lead us to be quite bullish on systems for many quarters to come.”
  • “We're excited that over the next six to nine months we think we've got some great product roll-outs specifically for those international markets. And of course on the system side of the business starting here in the December and March quarters, we expect some good international growth there from not only some big customers in Africa for example, but also our SDS and Windows. So we're very bullish on international over the next year or two, but you're right, near term some specific market conditions and some product development priorities that we put on domestic market has caused that to slow temporarily.”
  • “We'll point out that although we have high ASP on our game sales, our margin is not as high as some of our competitors due to the opportunity for us as we get more of our new cabinet out there to sell conversion kits that should drive the margins higher.”
  • “In the near team I think we are shying away from a dividend with the thought that purchasing our own stock remains a good investment, making sure that we have capital for acquisition opportunities if they come up. With our broad infrastructure we've now built support service, international infrastructure, the high cost of regulatory barriers, there could be acquisitions that would be near term accretive that we would want to keep some powder for.”
  • “We're very comfortable, our leverage ratio is below 2x, we'd be comfortable with the leverage ratio up to 3x given our high level of recurring revenue”
  • “When you think about openings and expansions, our fiscal 2012, I'd say there were probably about 20,000 new units coming on, 2013 at this point would, I'd say probably two Ohio properties plus one or two tracks, and maybe one of the Louisiana properties and Arizona you're at 20,000 units. Looking out to 2014, it's actually looking pretty well for openings and expansions with the remainder of the Ohio tracks. You could probably put in about 8,000 units, the new California tribal property at 2,500. So FY 2014 for us could be another year where you're looking at 15,000 to 20,000 new opening and expansions alone”
  • “In Mexico, we – there's been a little slowdown for us because they had moved so strongly to some Class III product a year or so ago. And then there was the sort of freezing up after some violence and some uncertainty in the market. That's starting to improve slowly”
  • IL VLT: “The 4,000 odd units we have sold now, I don't think it is front-end loaded; it is fairly even across the 24 months. And it's in fact the other way round, it may be actually light on the front-end because so far if you think about it about 350 establishments have been licensed and about 2,400 are pending, so still a long way to go there in terms of the units. And system connections, we have about 3,000 slot system connections that are signed up for systems and that's not complicated, that will start going live before the end of the calendar year, in fact in the next few weeks or so. And that should proceed in parallel to the game installations. One doesn't come in the way of the other at all.”
  • “We have the belief that our overall operating margin can continue to increase as we leverage revenue growth and margin against what should be a lower percent of SG&A against revenue over time. So, over the mid-term or so, we would hope to be able to get a couple more points in operating leverage”
  • “We expect our systems business to strengthen from this recently completed September quarter due to some of the visibility and some larger installs and also the September quarter can be seasonally slow for customers wanting to put a new system in during some peak season.”

GDP -0.1% in Q4

Takeaway: The advance GDP estimate for 4Q12 printed at -0.1% - the first negative growth quarter since 2Q09.

This note was originally published January 30, 2013 at 10:03 in Macro


Looking across the C + I + G + (E-I) componentry, the callout contrast is the strength between consumption and the weakness across the balance of the other constituents.  Personal consumption, which accounts for north of 70% of total GDP, accelerated sequentially for a net positive impact of 1.52% to real GDP.  The negative outlier was Government Consumption and Gross Investment which went from an outsized positive impact in 3Q12 ahead of the election (+.75% impact, highest since 3Q09) to a material drag, contributing a -1.33% impact to net GDP.


Net-net consumption accelerated, Investment and Net Exports moved to flat from an impact perspective and Government Consumption and Gross Investment served as an outsized drag on the quarter.  All-in, the negative headline print probably belies a more benign reality.  Housing continues to recover, employment trends remain positive, and the high frequency consumer data remains stable-to-better. 


Given these realities, does the market look through a rear-view 4Q GDP number and the negative influence of a government consumption component negatively impacted by odd comp dynamics?  More than likely. As such, we are sticking with our forward looking view that growth is stabilizing, which is validated by the strength in consumer consumption.


As Keith highlighted this morning, from a tactical investment perspective, domestic and global equities are moving to overbought and treasuries oversold, suggesting a near-term opportunity to book some gains and tighten up gross and net exposure a bit.  The current risk range for the S&P500 = 1492-1513


Ping us at if you want to dig deeper into this report.



GDP -0.1% in Q4 - GDP Component Contribution


GDP -0.1% in Q4 - GDP Componenet   Chg




With the inclusion of today’s GDP report, which came in in-line with our expectations for a trip to Quad #3 in 4Q (see chart below), our updated estimate range for 1Q is +1.8-2% YoY and +2-2.3% for full-year 2013.  The slightly lower handoff figure (i.e. 4Q reading) in the algorithm reduced these estimate ranges from +1.9-2.6% YoY and +2.3-2.6%, respectively.


What would get us to walk our estimates down from here (i.e. shift our expectations to the low end of our US growth risk range) would be a continued breakout in energy prices from current levels and a breakdown in the DXY through its 78.11 TAIL line of support. For now, however, an expanding yield spread (+29bps over the past month) augments our call for a move to Quad #1 here in 1Q13 and likely in 2Q13 as well. Expectations around this marginal economic delta should continue to bode well for domestic equities with respect to the intermediate term.





Christian B. Drake

Senior Analyst 


Darius Dale

Senior Analyst




Retail Exchange Fees: Pass-Thru Potential LT Positive

Takeaway: US retailers could now require that consumers pay an extra 1-3% in interchange fees for using plastic. Near-term non-event. LT positive.

Be careful what you pay for. As of this past Sunday, retailers could pass credit card interchange fees to consumers. In 2010 Congress passed legislation that required the Federal Reserve Board to regulate debit card interchange fees, and there was a subsequent settlement in 2012 between Visa/Mastercard and major US retailers about the right to pass along these fees to consumers. The retailers won the right to protect their margin against escalating exchange fees.


Under the settlement, the retailers can pass what they pay to the credit card company along to the consumer, and they need to post signage at the cash register noting their policy. This only applies to credit cards, as debit cards are excluded from the settlement. Furthermore, there are ten states – including some of the biggest – that have laws banning this practice (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas).


This issue really has not gotten much press, which we think is due to the near uniform sentiment by retailers of all types that passing along fees is a bad way of doing business, and they don’t plan on doing so. One retailer equated the 2% exchange fee as being about the cost of utilities – which is pretty much the cost of doing business.


We have no reason to doubt the intentions of these retailers, but we’d critically ask the question – if they have no intent on passing through the fees, then why fight with federal regulators for the right to do so? Our sense is that all it takes is for one or two big retailers to begin to pass through the fees successfully, and others will follow en masse.


Keep in mind that small merchants already do a version of this (and have for a while now), i.e. gas stations typically charge a 10 cent premium for payment by card vs. cash, and many small retailers will post minimum transaction amounts in order to use credit cards.


All in, it’s a slight positive for retail. The size of consumers’ total purchase might not grow if they begin to pay interchange fees, but they’d be directly funding margin with 100% of the fee, which might be too tempting to pass up for a retailer.  Alternatively, retailers could undercut one another by advertising prices that are lower by the amount of the fee and then recoup it at the point of sale.


Again, this is a non-event today. But is an issue to keep an eye on and one that is sure to develop over time. 


Retail Exchange Fees: Pass-Thru Potential LT Positive - checkout


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But not as good as we thought as taxi/airport traffic were worse than expected



We had previously indicated that the Strip gaming revenues could be up double digits YoY due to easy hold comparisons, particularly on the slot side.  However, with airport traffic down 0.8% and taxi trips down 1.5%, lower volumes are likely to eat into that hold tailwind.  We now see YoY growth in the +4-7% range assuming normal hold.  December slot hold is always lower than normal as 12/31 revenues do not get counted by the Gaming Board.  So for our purposes, we are projecting a December normal of 6.2% slot hold versus a "normal" normal of 7.4%.


More importantly, we are expecting slot handle and table drop ex baccarat to fall YoY.  Baccarat volume and hold are always big wild cards so we pay less attention to those metrics on a month to month basis.  With volumes like these, the headline print should look better than underlying fundamentals.  Sorry folks, but Vegas (and most domestic markets) is not recovering and that's bad for MGM.



Trouble In Vegas

The domestic gaming market has serious issues it must address. Since April of 2012, our Gaming, Leisure and Lodging team has churned out research discussing the lack of recovery in Las Vegas and the regional markets. It essentially breaks down to two points: demographics and economic sensitivity.



Trouble In Vegas - casino1



In terms of demographics, the truth of the matter is that younger generations aren’t enticed by what slot machines have to offer. The shrinking baby boomer generation has amplified gaming revenues in the past and attempts to appeal to younger players have not worked. Young people like video games, not Deuces Wild and archaic technology with random outcomes. 



Trouble In Vegas - casino2



On the economic side of things, gaming has proved to be more sensitive to economic downturn than virtually all other consumer sectors. Higher taxes in 2013 will certainly not help the situation, nor macro tailwinds. Addtionally, there’s a lower percentage of people gambling, smaller casino budgets, first time visitors are at an all-time low, daily hours gambled are at an all-time low and the younger crowd is busy clubbing, not gambling. Vegas and regional casinos will need a full blown economic recovery and new ideas if they want a shot at recovery.


In preparation for PENN's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “From a management team, we've been very focused on margins. I think we've done probably as good a job as anybody as in terms of holding or improving our margins during tough economic times.”
  • “I think it's Fortress' interest to stay as high a percentage ownership as they can within PropCo and OpCo for that matter.”
  • "Rationale for moving Perryville into the TRS for spin: “Maryland was because it's helpful in terms of mitigating some opportunities or creating some opportunities for OpCo to potentially acquire an asset in Maryland.”
  • “We are effectively finished with the IRS. That doesn't mean that some facts and circumstances couldn't change that might require us to go back, and I have to say that for attorney's purposes, but for all intents and purposes relative to the IRS, we're finished. We just need to get our gaming approval and get some financing done to obviously accommodate the spin.”
  • “The most compelling argument here is that the REIT, our PropCo, should have access to a lower blended cost of capital, which means quite candidly it would be much easier to bridge the gap between sellers' prices in terms what they would like to receive and what we might be able to pay for an asset”


  • “We have over 200,000 accounts signed up in Toledo since we've opened and we're still very encouraged about the prospects as we move into 2013 there.”
  • “We're right now very pleased with the flowthrough coming out of Toledo and expect similar kind of results in Columbus as that property now is – today is day 10. The early results in Columbus are very much in-line with what we would expect in a market of that size.”
  • “The promotional environment is very, very stable in the Charles Town / Maryland live battleground”
  • “I characterize our businesses that have not been impacted by new supply as generally flat. We're seeing visitation trends year-over-year flat and spend per visit generally flat in markets that are stable. Really not seeing anything different than what we saw in the second quarter.”
  • 2013 outlook: “I think the initial feedback is most people seem to think that we're in a pretty stable environment, nobody is projecting or feels comfortable that we're going to get a hockey-stick recovery, nor do they feel like we're going to see any kind of significant downturn… Our thinking too, as we go into the fourth quarter and into next year that the promotional environment is going to be – going to remain stable”
  • ‘We have seen erosion of business from the Columbus and Dayton markets into Lawrenceburg, certainly that will continue as we now have opened in Columbus... Clearly we're doing a lot of things to reduce our cost structure in Lawrenceburg to maintain our margins as best we can and I think our efforts from that team there have been working, even though we are seeing the loss of visitation from those feeder markets that previously only had Lawrenceburg as a gaming option.”
  • Q: “Is the Marlyand lobbying expense projection in your EBITDA guidance for the balance of this year”
    • A: “No, the amounts that we're spending in Maryland are decisions made on the day-to-day basis as the tactics of the campaign unfold. And so, therefore, what we are not doing is trying to project exactly how much we're going to spend, nor do we want to forecast how much we're going to spend for obvious strategic reasons”
    • “Just to be clear on the $20 million lobbying that is in your current guidance, but the $11 million October to-date and whatever you go above that is not in the guidance? Correct.”
  • “Toledo is doing a little bit better than we thought and I think Charles Town is doing a little bit better than we thought and then there's some offsets to both of those in different markets across the United States. Clearly, the Gulf Coast area is a bit challenging, and clearly not exactly as healthy as we would hope, but those are relatively small properties.”
  • “Next spring when Horseshoe Cincinnati opens, I think it's going to be another inflection point where we're going to see another set of new business volumes that are going to cause us to react accordingly as well. So, I think there's a lot left for us to do in Lawrenceburg”
  • “I would generally say, so far so good, slightly less than we expected, but there's a lot more that has to evolve before we can make any conclusions on what our new business volumes will be at our Hollywood Baton Rouge property”
  • “We have been up looking at a number of different markets in the Province of Ontario and we are active in discussions with local governments and also the province themselves about, certain markets there. I think, there's no question that what they want to do is resolve the direction they want to head in Toronto before they do anything with the operations that are affected by the Toronto decision. So, most of what we've looked at to-date have been markets that have no effect on a Toronto decision. We don't see ourselves competing for Toronto because of the level of capital investment required”
  • “Right now our focus is in building our coalition, which includes business leaders in several key areas across Texas to continue that mantra of letting them put it out to the ballot. We think going in that the position should be for gaming where the footprint of gaming already exists, which is at the racetracks. And so, this may take various forms as we get through the legislative process, but first focus, let the people decide and then we'll get a little bit more specific in terms of the actual legislative vehicle as we get closer to the session.”
  • Ohio racetracks:  “We are waiting for the approvals from the lottery and racing commissions to relocate our tracks. We need to get that before we get this started, hopefully, that'll occur before the end of the year. We hope to break ground end of the year, early 2013, and we're talking about a first half of 2014 opening, if all goes well right now”
  • “We continue to show improved margins at the M, given a very flat revenue environment there. And I don't think as we look into 2013, that's not going to change it all. We don't see any kind of robust recovery in Las Vegas right now. Construction continues to move very slowly there. The general economic conditions for 2013, I think are going to be very similar to what we saw in 2011 and 2012.”

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