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




  • BETTER: BYI reported a solid quarter which exceeded Street expectations across almost all business lines.  Margins on equipment sales were particularly impressive even without the one time 200bps customer benefit.  Guidance was also better. 




  • BETTER:  NA replacement units were up YoY for the 7th consecutive quarter.  BYI thinks they had 20%ish ship share in F2Q 2013 - much higher than F2Q 2012's share of 16%.
  • PREVIOUSLY:  “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.”


  • SAME:  Cash connection had 1,360 units (up 144 units from last Q).  BYI reported 87% growth in the installed base of WAP games. 
  • PREVIOUSLY:  “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.”


  • SAME:  Bally's Cloud-based Mobile platform has grown to more than 6 million users.   
  • PREVIOUSLY: “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.”


  • SAME:  BYI shipped 399 Illinois VGT units in F2Q 2013. All of BYI placements in IL have been for-sale so far
  • PREVIOUSLY:  “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.”


  • WORSE:  International game sales once again came in below expectations at 787 units.
  • PREVIOUSLY: “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.”


  • BETTER:  Systems revenue increased QoQ as guided by IGT. Gross margins were better than expected. Part of the guidance raise was attributed to better visibility on the systems front.  We continue to believe this segment is undervalued by investors.
  • PREVIOUSLY: “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 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.”


  • BETTER:  operating margins rose to 24% vs 20% in the prior year period. SG&A  declined to 28% of total revenues from 29% last year.
  • PREVIOUSLY:  “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”

BYI F2Q13 REPORT CARD - byi244

FNP: Focus

Takeaway: Getting closer to a sale of Juicy? Regardless of the decision, we think the team has focus. Only good can come from that.

Reuters just noted that FNP is exploring alternatives, including a sale, of Juicy Coture. It says that the company has been having discussions, but has not yet made a decision.


This is completely in-line with our thesis on the company, that Juicy has gotten to a point where disposing the asset and paying off debt will allow FNP to focus on its crown jewel – Kate Spade – which is one of the fastest-growing assets in retail. At the same time, it will have Lucky Brand to continue its role as the annuity in the portfolio to help fund Kate’s growth prospects.


It’s easy to get hung up on internalizing near-term growth and margin performance – a hundred million in revenue here or there, or margins plus or minus a point or two. That seems like a lot in a given reporting period.


But with Kate, the company is en route to adding another $1bn+ in revenue and doubling margins. Will COH or KORS double margins? Not when they’re sitting at 31% and 20%, respectively. In fact, we’d argue that COH and KORS margins will converge closer to 25% over the next 2-3 years.  Kate should get close as well from its current margin rate of around 12% (fully loaded).


Kate is doing it right. The company has been investing capital consistently back into building the operating platform to aggressively gain share. Some of that base investment tapers off as the company moves into adolescence. Our point is that in looking at what the company is capable of, think big. This is not about a few points of comp here or there.


We know that we sound like a broken record with our bull call on FNP. But quite frankly, it is a great story worthy of being a bull.


The company is hosting an analyst meeting for Kate Spade in 1Q where the growth opportunity should be more apparent to the investment community.


As for Juicy, we’re often asked “is it really worth anything?”, our answer is ‘definitely’. Think of all the times people chalked up certain consumer brands as being dead. It happened at FNP, actually, when the company owned Mexx – which was a far bigger dog than Juicy. We hate to pick a multiple out of the air in valuing assets, but does 0.5x sales sound in the ‘fair’ category? Sure, it's consistent with past transactions in retail. We wouldn’t be shocked by more. That suggests about $250mm, which could repay 65% of FNP’s debt.


(If the table below is tough to read, let us know and we'll send the file).  


FNP: Focus  - 1 31 2013 8 03 53 PM


Today we bought iShares MSCI Singapore Index Fund ETF (EWS) at $13.72 a share at 9:38 AM EDT. This is how you risk manage the range of something you like. Buying Singapore back on red as the margin of safety improves and TRADE and TREND lines of support hold.



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Pretty much what were expecting with the exception of better slot play in vegas and lucky table play.




  • The day after CNY, WYNN Cotai can begin the main construction (drviing of piles, building the foundation, etc). Process will take 36 months.
  • Not focused on revenue share in Macau


  • Wynn Cotai
    • Started construction on Wynn Cotai this week.  They are creating the foundation now.
    • In 2014 and 2015, they will get the structures and the interiors installed
    • No labor issues
  • Like to look at 'Urban Wynn' integrated resort opportunities as opposed to 'slots in a box'
  • Vegas:  feel good about 2013; tracking ahead in room nights and rates. Similar trends in 2014.  Hopeful for a great 1Q given Super Bowl and CNY
  • Not interested in racinos; don't trust slots in box.
  • 75% of $2 billion cash was held at the Macau sub
  • New junkets on 1st floor have been performing very well--they reshuffled 14 tables from elsewhere to increase yield
  • Having a very healthy January in Macau--a $100 million month (balanced throughout all segments)
  • Better margins:  enhancements of service quality and maintenance of the facility; good technological improvements in gaming systems
  • WYNN recently designed a high limit slot room in 3 phases
    • Phase 1 is complete. Phase 2 will begin after CNY and finishing in April.  Phase 3, which includes the addition of private slot suites, will finish in August
    • Will open next week 
  • Sees opportunity in Philadelphia and Boston
  • Spoke with MGM and LVS and the consensus is that China is healthy.
  • 'Murder tough' competition in Macau but healthy
  • WYNN COTAI:  1st spot on Cotai (from ferry and airport); building a Bellagio-like hotel
  • Not too concerned about the smoking ban; all junket rooms have exterior smoking terraces.
  • Continue to grow mass business
  • Confident they will get tables for their Cotai hotel.



  • Adjusted net income: $118.2MM ($1.17 per diluted share)
    • Net income was negatively impacted by a $47.9 million increase in tax expenses due to the timing of the payment of dividends from Macau, stock option exercises and capital expenditures.
    • Declared cash dividend of $1.00 to shareholders as of Feb 28
  • Macau
    • VIP turnover:  down 6.6% to $27.7 billion
    • VIP hold:  2.96%
    • Mass drop:  up 1% to $699.3 billion
    • Mass hold:  31.1%
    • Slot handle:  down 16.4% to $1.1 billion
      • WPD: $635, 15.3% lower
    • REVPAR: $303, compared with $304 last year
    • 504 tables (289 VIP tables, 205 mass market tables and 10 poker tables) and 840 slot machines.
    • Cotai budget: $3.5-4.0 billion
  • Vegas
    • Table turnover:  up 14.3% to $679.4 million
    • Table hold:  26.8%
    • Slot handle:  $758.4 million, up 14.9%
    • Non-casino revenues: $258 million, up 4.6%
    • REVPAR:  $201, up 1.8%
  • Cash: $2.0 billion 
  • Total debt outstanding at the end of the year was $5.8 billion, including $3.1 billion of Wynn Las Vegas debt, $749 million of Wynn Macau debt and $1.9 billion at the parent company.


Takeaway: Continue to like BYI's ramp, positioning, and valuation.

A solid quarter that beat us and consensus due to strong gross margins. We'll have more anlysis in an upcoming post.


“Our second quarter fiscal 2013 demonstrated continued momentum in all major business areas. I am happy with Bally’s trajectory and the steadily increasing visibility we have into our near- and long-term future growth"


-  Ramesh Srinivasan, the Company’s President and Chief Executive Officer




  • Game sales:  3,778 units in NA including replacements of 2,956 units
  • Continue to see an uptick in the NA replacement market
  • 399 IL VGT units.  Factoring out IL & CA units, ASPs would have been comparable to last Q
  • Margins benefited by 200bps from a customer's election to reduce costs but did not impact revenue. Now expect that product sales margins will be 50% for the balance of the year.
  • Cash connection: 1,360 units (up 144 units from last Q)
  • Systems:  As they continue to grow the average units connected to their systems and maintenance per unit their recurring revenues should grow.  Also benefited from conversion of Class II systems to Class III.
  • Reinstatement of the US R&D tax credit will lower their FY tax rate 
  • Higher game sale margins were offset by some one time legal and G2E expenses
  • Seasonality in certain variable fee games and reclassification of some game ops revenue to systems caused a slight QoQ decrease in gaming operations
  • Launching: Hot Shot Progressive and NASCAR on their Cash Connection link over the next few months. Pawn Stars also just launched. Tiki Torch is also launching later this year. So far they only released one game of MJ and Grease but more games will follow
  • Expect that the first set of output from their 3rd party game studios to be available for sale later this year. 
  • International game sales continue to dissappoint.  Sold 787 units. Have some local games that just launched and expect international sales to improve in the quarters ahead
  • Gaining good momentum with iVIEW DM and their Bonusing Suit of products.  Hosting their systems user conference later this year at Mohegan Sun.
  • Cloud-based Mobile platform offering a non-wagering portfolio of content and services continues its strong momentum and has now grown to more 6 million users
  • Making good progress with their online game distribution program.  Expect a dozen companies to feature their content.



  • Deal announced today acknowledges the undervalued nature of their sector. The potential for business disruption resulting from the deal could present an opportunity for BYI to gain further market share.
  • Still have a ways to go on gaming equipment sales - more conversion kits and more international sales
  • Canada and S. Africa implementations are going very well. No delays there. It's fair to say that over the next few years you should see some hardware and software revenue from these 2 markets in every quarter. 
  • Think that they had 20%ish market share in NA this quarter
  • Any change in operators' appetite for new purchases and replacements due to the weak regional numbers? No, they have continued optimism on their prospects
  • Slow down in the Game Ops growth was due to the timing of game releases and they were also impacted seasonality 
  • YTD game ops capex was right around $45MM
  • ASP's on a go forward basis: Stable.  Not seeing any pressure on their core business. 
  • Expect a continued pick up in steam on the VGT side.  With respect to Canadian VLTs they are into 1200 of a 1600 unit contract. 
  • Customer contract election benefit to game sale margins:  Benefited costs by 200bps and had no revenue impact. Had $2.9MM of unusual SG&A charges.
  • Guidance improvement:  ship share improvement, better game sale margins, and better Canadian sales. Only offset is that international game sales have been weaker
  • Assume $15-20MM/per Q of buybacks is included in their guidance.
  • Italy update: no change in status. Still working feverishly to improve game performance there.
  • Have not seen any major changes in the discounting aspect of the game sales. Good games continue to garner good prices.
  • Had some good collections this quarter on receivables which benefited their cash balance.  They will continue to paydown debt and buyback $15-20MM of stock. 
  • More conversions from Class II to SDS, should that continue? Assume that systems will continue to grow because of more links to the systems but nothing unusual in terms of systems conversions. 
  • Western lottery shipments starting in the March Q? Correct - think that the vast majority of those will ship into this fiscal year
  • PNK & ASCA: Think that with the consolidation, they will have a greater opportunity to sell systems to ASCA since they are already in PNK.  Don't know when and if that will happen though.



  • BYI beat the Street, reporting $0.80 and record revenues of $238MM
  • Raised guidance by $0.05-$0.15 to $3.20 to $3.40
    • Assumes a tax rate of 36-37%
  • "This quarter represents the 21st quarter in a row that we have repurchased stock. During the second quarter, we purchased 530,000 shares of common stock for $24 million at $45.43 per share. As of today, the Company has approximately $126 million available under its Board-authorized share repurchase plan"
  • Leverage remains beneath 2.0x
  • Gaming equipment: Revenue of $83MM with 53% gross margins
    • New devices: 4,565
      • Growth was "driven by higher domestic replacement sales, the shipment of 568 Canadian VLTs, and the shipments of units into the Illinois VGT market"
      • International was 17% of total
    • ASP: 16,553
      • ASP's were lower YoY "primarily as a result of a higher mix of lower-ASP VLT and VGT units sold in the quarter"
    • Gross margins jumped "due to continued cost reductions on the Pro Series line of cabinets and sales mix, a reduction in cost due to a customer contract election, and an increase in conversion kit revenue".
  • Gaming operations: $99MM of revenue at a 70% margin
    • YoY growth driven by growth in the WAP install base
    • Gross margin was down YoY due to higher Jackpot expense
  • Systems: $57MM of revenue at a 76% margin
    • $23MM of maintenance revenue vs. $18MM last year
    • Increase in margins was "primarily as a result of the change in mix of products. Specifically, hardware sales were 27% of systems revenues, and software and service sales were 32%, as compared to 33% for hardware and 33% for software and services in the same period last year."

PCAR: Don't Drive with the Rearview Mirror

Takeaway: In our view of capital equipment, orders matter and sales don't. Trading on historical sales is like driving with a rear view mirror.

Wait for Forward-Looking Data in the 10-K


  • Mostly ‘Takes’ on Quarter:  PCAR reported a quarter that initially reads quite well.  However, the EPS beat was mostly due to a lower than expected tax rate (29.2% vs. the ~32.2% imbedded in consensus estimates).
  • Capitalization Item:  Another negative is a footnote below the income statement reading :  “The fourth quarter 2012 includes the benefit of a $12.7 million reduction in cost of sales related to the capitalization of new product tooling that had been expensed in the first nine months of 2012. The positive effect on net income for the fourth quarter was $9.0 million ($0.03 per share)."  It is difficult to know how to interpret this item and management should have expanded on it on the conference call, in our view.  It could be viewed as PCAR slightly understating its profitability in the first nine-months.  Or it could be viewed as 'goosing' the quarter.  Regardless, the benefit was not in expectations and adds to the quarter's miss.
  • A Miss, Adjusted:  PCAR missed by a penny or two when the lower tax rate and capitalization items are backed out.  The street 'hates' it when these items are not clearly presented, leaving the shares to get hit harder, in our view.
  • Ignore the Quarter:  PCAR has a lot of things going well for it in 2013-2014 and 4Q 2012 was already well known to have been weak for the truck OEMs globally.  In the near-term, we estimate that Navistar has lost significant market share in orders through late 4Q.  That should benefit PCAR, among others, in early 2013.  Further, we see the end of tail pipe emissions regulations and a rebound in construction activity as significant potential benefits.  In addition to a record-old Class 8 fleet, there are a number of reasons to expect PCAR to perform extremely well over the next couple of years, in our view.  (See here for additional information on PCAR or ping us for more background).

PCAR: Don't Drive with the Rearview Mirror - navshare



  • Industry Improving:  The Class 8 market appears to have bottomed in late summer.  With recent and anticipated production curtailments amid a rebound in orders, industry dynamics look to have improved heading into 2013.

PCAR: Don't Drive with the Rearview Mirror - btob



  • Ahead of Itself:  We believe PCAR shares have room to run, but have been cautious on the rapid move in valuation ahead of fundamentals (see here for our recent note on PCAR valuation).  For mature companies, increasing share prices usually mean increasing risk, in our view.  A decline in PCAR shares to the mid-low 40s could provide an attractive entry opportunity for investors.
  • Look Forward:  In addition to the Volvo (2/6/13) and Daimler (2/7/13) earnings reports, we are interested to see the backlog data in the PCAR 10-K at the end of next month.  Backlog data should give us a better sense of order trends and market share with respect to NAV, which we expect to be an important upside driver for PCAR.  In our view of capital equipment, orders matter and sales usually don't.  Trading on sales is like driving with a review mirror, while anticipating order trends is key.


Jay Van Sciver, CFA

Managing Director

111 Whitney Avenue

New Haven, CT 06510


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