BYI F3Q13 CONF CALL NOTES

Record systems sales and low tax rate drive a record breaking quarter


“This record quarter continues to mark a historic period of sustained operating improvement and success which is shaping up to meaningfully continue for the foreseeable future”

 

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

 

 

CONF CALL NOTES

  • Unfavorable FX loss of $0.03
  • 4,098 units were sold in NA, of 2,842 were replacement units
  • Domestic ASP's would have been up if you strip out the impact of the lower priced VLT and VGT units sold in the quarter
  • 42% of international units went to lower priced jurisdications, compared with 17% last year
  • Cash connection linked units were 1,413 units as of the Q end - up 53 units QoQ
  • 68-73% is their expected range for Game Ops margins
  • Systems:  Driven by go lives in Phillipines, SA, NZ, and US.  Expect hardware and software revenues in every Q from Canada and SA in every quarter for the foreseeable future.  However, this quarter did not have any Canadian install revenue in there and only one SA casino went live. 
  • Expect their income tax rate will be 36.5% for 4Q
  • Raised an additional $400MM of incremental capital (bank debt), at a more favorable pricing grid, no limitation of restricted payments and buybacks provided leverage is below 2.75x.
  • Purchased an additional $6MM of stock since the quarter closed under a 10b-5 program
  • Will received 2.5MM shares at the end of April under their Accelerated Buyback Program
  • FCF increased to a record $67.5 million, allowing them to paydown nearly $65MM of debt this quarter and reducing their leverage to 1.5x
  • The release schedule of new WAP product coming out will help to continue to grow their footprint. They are pleased with the initial release of their NASCAR game. Once the soft launch is complete, the rollout should progress rapidly.  Pace of WAP growth should pick up over the next few quarters.
  • Will also preview some new excited WAP products at G2E this year
  • The improvement of their gaming operations content is due to increased studios development capacity
  • Continue to invest more in player research
  • Have every reason to be bullish about their games
  • Some of the game content that they have been working on to target international regions will be released in the coming quarters and should help them grow their international sales
  • Systems revenues should continue to set records and FY14 should be even better
  • Added 10,000 systems slot connections to their family this quarter
  • Their systems applications work on high speed and regular networks. They are one of the few systems providers to offer products for existing floors that aren't wired for high speed internet.
  • Interactive is one of their most underappreciated businesses. Have over 90 casinos using their interactive solutions. BYI's i-gaming platform continues to be a leading choice for their customers.
  • Extensive core systems base is a huge strategic advantage
  • Their operating leverage should continue to improve
  • They are continuing to look for tuck in acquisitions
  • International revenues were 18% of total revenues this quarter and they have a big opportunity to grow 
  • Will give FY14 guidance on their 4Q call in August

 

Q&A

  • For game sales they have a bunch of products scheduled to hit the market from May-July in new markets that they don't normally participate in
  • While they have steady flow of game ops content coming out, they are not locked into anything and can adjust releases to demand
  • Bad debt is about 9.1MM compared to 8.2MM for the comparable 9M sales period last year. Still less than 1% of sales.
  • NASCAR is the most anticipated WAP game out there right now. Initial returns that they have seen over this past week are very positive. Expectations for placements are along the lines of MJ & Grease if not better.
  • Average order size for game sales have gone up a touch
  • Pricing would have been similar to what they have reported the last few Q's if you exclude the VLTs and VGTs. They remain disciplined. 
  • Replacements sales account for only 10-12% of their profits
  • Will have the 1.6-1.7MM reduction in shares before the end of April - accounts for 3 cents of earnings
  • Got hit by about 3 cents of FX this quarter. In SG&A they were hit with 2.5-3 cents of one time items. 
  • $3.35-3.45 guidance... that's the tightest guidance range that they have given going into Q4.  Variability has to do with how NASCAR flows and their yields in general.  Variation around replacement sales and IL.
  • About 2/3rds of revenues in systems came from recurring customers. Systems has been building towards this pace. 
  • Yields on game operations did trend up in March, however they haven't seen as much movement in their yields because they have the latest and greatest products. Their products are yielding around $100/day.
  • Think that using an ASR to pull in 7% of their market cap is pretty efficient. 
  • If you back out Canadian VLTs, how are replacements trending?  One operator did a large video poker purchase which may have taken some capital out of the market. 
  • They are very happy with their competitive position today.  No comment on WMS.
  • Follow ups to MJ & Grease are in the works. Feedback on Pawn Stars is between good and very good.
  • MGAM's products are only linked to their games.  BYI's tournament product is a systems product that can work across the floor.
  • Canada shipments will continue throughout 2014 and maybe 2015.  
  • International customers are waiting for new content from BYI. 
  • In Q4, hardware should be a little lower next quarter and software a little higher in Systems

 

HIGHLIGHTS FROM THE RELEASE

  • "The Company increased its fiscal 2013 guidance for Diluted EPS to a range of $3.35 to $3.45. This guidance assumes an effective tax rate of approximately 36% for the full fiscal year."
  • “Our recent premium and WAP product launches...have returned strong initial performances in many different locations... We are also preparing to release an impressive array of new for-sale game titles developed by our game studios and third-party development partners. The spate of major global systems installations and significant upgrades, the latter at the rate of more than one per week, continue to bring a new operational and marketing dimension to many casino floors, while providing a solid strategic base for crucial future integration with our mobile andiGaming platform initiatives.”
  • "During the third quarter, we purchased 641,000 shares of common stock for $31 million at $48.79 per share. The new $300 million share repurchase program and accelerated share buyback announced today continue to demonstrate the confidence and visibility we have into our long-term growth trajectory. Including the announced $150 million accelerated share buyback, Bally will have purchased more than $1 billion of its common stock since November 2007.”
  • Gaming equipment: New gaming devices: 4,923 at an ASP of $16,051
    • Revenues increased... driven by higher domestic replacement sales, including the shipment of 788 Canadian VLTs, as well as by the shipment of 656 units into the Illinois VGT market
    • ASP of new gaming devices decreased ...primarily as a result of a higher mix of lower-ASP VLT and VGT units sold in the quarter and lower-ASP units sold in certain international markets.
    • International shipments were 17% of total new unit sales
    • Gross margin increased... due to continued cost reductions on the Pro Series™ line of cabinets and sales mix.
  • Gaming operations: 
    • Revenues increased ...to a quarterly record ....driven primarily by a 73% growth in the installed base of WAP games.
    • Gross margin decreased...primarily due to higher jackpot expense.
  • Systems: 
    • Maintenance revenue was $23MM
    • Gross margin increased... primarily as a result of the change in mix of products. Specifically, hardware sales were 36% of systems revenues, and software and service sales were 32%, as compared to 36% for hardware and 30% for software and services in the same period last year.

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