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




  • 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



  • 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



  • "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 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.


Today we bought ConAgra Foods (CAG) at $35.67 a share at 1:37 PM EDT in our Real-Time Alerts. Buying back one of Hedgeye Consumer Staples Sector Head Rob Campagnino's Top 3 Ideas, primarily because it's on sale. Rob's thesis hasn't changed (see our weekly Investing Ideas notes) and TRADE and TREND lines of support remain intact. 



Bullish TRADE: S&P 500 Levels, Refreshed

This note was originally published April 23, 2013 at 10:47 in Macro



Below 1557 (TRADE bearish); above 1557, back to TRADE, TREND, and TAIL bullish. We call that a Bullish Formation.


If you want to get all beared up about something, short Bearish Formations (like Commodities or Mining Stocks).


Across our core risk management durations, here are the lines that matter to me most:

  1. Immediate-term TRADE resistance = 1603
  2. Immediate-term TRADE support = 1557
  3. Intermediate-term TREND support = 1520

In other words, I got longer (gross and net) as we crossed and confirmed 1557. Can we snap that again? Sure. And there aren’t any rules against selling on that again either. But remember, that’s all immediate-term talk.


From an intermediate (TREND) perspective, both the US economy (Consumption Growth) and the SP500 continue to look bullish.


If the SP500 tests 1603, the VIX will probably have a 10-handle. At least that’s what my model is telling me.


Prepare for what most consider improbable, when it becomes more probable.



Keith R. McCullough
Chief Executive Officer


Bullish TRADE: S&P 500 Levels, Refreshed - SPX

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


In preparation for IGT's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "On the gaming ops side… the biggest driver of gaming ops yield for us is improvement in gross gaming revenue, which we haven't had a lot of good news in that area lately… We're going to float very closely to gross gaming revenues. We are over-indexed in Nevada and in Native American, because that's where our wide area progressive concentration is and that is the highest yielding product for us…  We're expecting a bit of a lift up in our yield, I think, on a going forward basis, expect to see kind of flat yields year-over-year when you think about it on an annual basis."
  • "What we're really focused on as a company is looking at the gaming operations assets and making sure we're generating the maximum amount of cash from those assets that we can generate for shareholders."
  • "I think we're in steady state actually right now. When we look out over the next couple of years, we think that the game ops capital is kind of at a fixed number for us in our planning.  The real money wagering part of the business… we feel very good about that business.  Last week, we launched in Mexico. There's only two online gaming license that were granted in Mexico. We also launched in British Columbia, ten days ago, with our real-money wagering. Feel very good about how that is going early."
  • [DoubleDown] "We see daily active and monthly active users above our expectations, the projections that we had for the company when we acquired it, the revenue per daily user, the churn rates, the conversion rates, everything that we looked at in the business…  I think the most important thing that we expected is when we acquired DoubleDown they were running at about $0.18 a day in revenue per user. They're now at $0.31 per day. We've launched four of our traditional titles that you would see in casinos and those games outperform anything else in the slot content world. So we feel very good about it, top to bottom. We feel good about the margins. We feel good about the track we're on to make it GAAP accretive in 2014 and we're still committed to that." 
  • "I would say the couple of areas that we feel stress in the business that capital could solve, one is in the talent area. As you move into social gaming and online gaming, the whole war for talent really heats up in that area, particularly on the mobile front. And it's not unusual to do kind of an acqui-hire, where you go and you buy the studio as opposed to hiring people one at a time. So we always have our eyes open for those things."
  • "We have $600 million left on our authorization for repurchasing shares. We have that kind of a window of two to four years, depending upon the valuation of the stock."
  • [WMS Deal] "So I would say that we haven't seen a lot of movement yet. I do think that it will create more rational pricing in the marketplace than what we have been experiencing for the last year, which, I think, is a good thing. There are a lot of laws in the VLT market around your ability to be both the machine and the system supplier and so those areas where Sci Games is the system supplier they're going to have some issues there with their ability to provide boxes, which we think is a good situation for us, where we have an opportunity to take market share."


  • "Our consolidated average sales price was down, but this was largely a reflection of the higher mix of video lottery terminal sales and a lower percentage of multi-layer display units sold."
  • "We expect to leverage our strong revenue growth this year into even higher operating income and earnings per share growth through responsible cost controls and increasingly efficient research and development expenditures, which can now be leveraged to benefit both our land based and online products alike."
  • "We expect to resume normal open market repurchases during the remainder of 2013."
  • "The domestic replacement market is kind of continuing to bump along… we would say cautiously optimistic with overall replacement, but increasingly optimistic with our opportunity to take more than our fair share of what comes in the market."
  • "On the margin side, the uptick in Product Sales margin was really attributable to non-box, in particular intellectual property contributions in the quarter. So we would expect margins to be more comparable to prior year excluding that one-time effect."

Is PG the Canary in the Staples Coal Mine?

PG reported Q3 EPS this morning, beating consensus by $0.03 per share, largely on the strength of cost savings.  However, Q4 guidance was below the Street, which is odd as the company essentially maintained (took up the low end by $0.02) its full-year view (updated for Venezuela on 2/21).   There seems to be some bad sell-side math involved, but regardless, the market isn’t treating the stock all that kindly today after what has been a very good recent run.   At 14% of the XLP, PG’s weakness is dragging the broader staples sector lower, displaying significant underperformance relative to the broader market.

Some folks we have spoken with have called PG the canary in the coal mine with respect to the staples rally, but we aren’t quite there yet.  While PG’s results were “meh”, we don’t think they are sufficient to derail what have been the primary drivers of the strong performance of the staples group – yield, low volatility, as well as expectations that the group is poised for top-line improvement and margin expansion.

However, we don’t believe that CL’s results (tomorrow) will be a positive catalyst for the broader staples group.  Meanwhile, MO’s print should be constructive for the best performing staples sector on our screen today (tobacco).   All things considered, we continue to see limited upside to estimates across the staples group for the next one to two quarters.

 What we liked:

  • Beating EPS estimates is always better than the alternative
  • +3% organic sales growth is consistent with the company’s year to date performance
  • Productivity savings continue to provide income statement flexibility
  • Continued strong U.S. market share performance
  • Higher marketing spend in the quarter

What we didn’t like:

  • Q4 guidance was weak relative to consensus, but that seems to be bad modeling on the part of analysts
  • Company seems to be playing games with organic sales growth guidance – full year stays at 3-4% despite having reported +2% in Q1 and +3% in Q2 and Q3 – 4% is all but  impossible at this point.  On the flip side, on Q2, the company took up its full-year organic sales growth guidance to 3% to 4% from 2% to 4% when it became apparent that 2% growth was unlikely.  Full year sales growth guidance should have gone to 2-3%, with one quarter remaining.
  • Pace of gross margin improvement slowed
  • Only modest improvement in FCF (+$32 million year over year)

We don’t know for sure that the fat lady has started singing for the staples group, but what we do know is that, at some point, valuation will matter and that someone should at least let the fat lady know that we are going to need her sooner rather than later.


Call with questions as we have run out of colloquialisms,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

DPS - OK Results and a Poorly-Timed Short Call Help the Stock

Top line hit consensus and core EPS beat by $0.07, with the CEO citing weather and a weakened consumer as responsible for the softness in Q1 volume results. Convenient store trends still look good, and lower gas prices behind an increased marketing spend could be beneficial in the coming quarters.


What we liked:

  • Core EPS ahead of consensus ($0.53 vs. $0.46), up 15% for the quarter
  • Revenue in line with consensus at $1.38B, up 1% (price/mix +3%; volume -2%)
  • Reaffirms FY EPS $3.04-3.12; and 3% FY net sales
  • Reported GM 57.2% vs 57.1% last year
  • Hawaiian Punch comps will be easier in 2nd/3rd quarters
  • Incremental brand investment behind the launch of  the TEN platform, expected to exceed $30 million
  • Increased marketing spend scheduled for 2H


What we didn’t like:

  • Commodity costs increased this quarter, in apple prices in particular
  • Packaging and ingredient costs are expected to increase COGS by 2% in 2013, on a constant volume/mix basis
  • Non-carbonated volumes mostly hit hard, -4% (Snapple -2%, Hawaiian Punch -14%, Mott’s +11%).
  • Continued softness in restaurant (QSR) trends
  • Weakness in TEN launch, a strategic Carbonated Soft Drink (CSD) with less calories playing to the wellness trend


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Early Look

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