The LVS Q1 shouldn’t be awful. In fact, it could surprise the Street on the upside. Our revenue, EBITDA, and EPS estimates are above the Street consensus. What will drive the upside?
- Easy comparison – Palazzo generated only $120 and $18 million in revenue and EBITDA, respectively, in Q1 2008 as the property was still ramping. By contrast, Q4 Palazzo EBITDA climbed to $42 million, a seasonally similar quarter to Q1. It doesn’t appear the Street is factoring in last year’s slow ramp.
- High convention exposure – Room rates and occupancy should look very strong relative to the rest of the Strip due to the long booking windows of this business.
- Macau – The Macau numbers were much better than expected in Q1 and The Venetian grabbed its fair share. We’ve got a good idea of The Venetian’s Q1 revenues and based on those numbers, property EBITDA should be up significantly from last year’s $108 million.
- Cost Cutting – LVS is probably much farther along than most people think. See discussion below.
We remain positive on the Macau prospects going forward. Unfortunately, the rest of the quarters won’t look as good as Q1 in Las Vegas for LVS. Q2 shouldn’t be awful but the convention business seasonally dissipates in Q3. A pure leisure environment won’t be good for room rates. The convention business reemerges in Q4 but bookings do not look very good. This will be a very difficult quarter for Venetian/Palazzo in Las Vegas.
Margins appear to be the most underrated piece of the LVS long thesis. Sheldon Adelson recently upped the ante from initial targeted cost cuts of $250 million to $470 million. Relative to the $890 million in total company EBITDA generated in 2008, this is a huge number, maybe too big. See the chart below. The Street is obviously very skeptical. However, the cost cutting strategy appears to be better thought out than we initially thought. In other words, we’re not so sure that this was just Mr. Adelson “blowing smoke”. There seems to be more input from the rest of the (remaining) executive team. Here are some details:
- $180MM of cuts at the US entity:
- Cutting everything that’s not making money
- Cut 285 employees at corporate in the most recent round of cuts
- Will likely shut down the few retail outlets they operate
- Lower end customer expects less so in theory shouldn’t really damage the brand or guest experience
- Replacing “older slot guys” with fresh graduates that are more productive (so 1 for every 3 that are fired)
- $270MM cost cuts in Macau
- Got rid of 1000 construction workers on Sites 5&6
- Better sharing of infrastructure btw Sands & Venetian
- Had over 300 people in the marketing department alone
- $20MM of cuts at corporate
- Hiring several in house attorneys to reduce the millions spent on outside council
