STRONG BYI Q - IGT READ THROUGH?

Systems drove most of the beat but there were a few positive takeaways for IGT.

 

 

BYI posted a great quarter last night and expressed its confidence in the future through the announcement of a big stock buyback.  The stock should be up big this am and we continue to like the name for the long-term.  However, after BYI pops on the open, IGT may be the more interesting stock over the near-term.  Much of BYI’s beat was driven by systems which is less important for IGT.  However, some of BYI’s conference call comments gave us more confidence in IGT’s FY2013 and upcoming quarterly earnings announcement.  BYI indicated a large video poker order in the quarter – IGT dominates the video poker segment – and expressed confidence in accelerating replacement demand and improving international orders.  IGT will report FQ2 earnings tonight after the close.

 

Back to BYI, on the back of record results in its systems business, BYI’s reported a quarter that handily beat consensus and our expectations.  A lower tax rate in the quarter helped offset some “unusual” but unelaborated SG&A expenses as well as a few cents of FX drag. 

 

In addition to reporting a solid quarter, BYI raised guidance, announced an Accelerated Buyback Program (ala IGT), upsized its share buyback program, and issued an upsizing and extension of their credit facility on more favorable terms.  All-in-all, the business continued to do well and BYI’s management team put their money where their mouths are in reinforcing confidence in the business with an aggressive share repurchase program.

 

 

Details:

  • Gaming equipment sales came in below our estimate on the back of softer ASPs.  Unit sales were spot in-line with our estimate with NA being slightly better and International coming in a little softer. 
    • BYI shipped more Canadian units than we expected but replacement sales were weaker than we would have thought.  BYI mentioned that there was a large order for video poker replacements that took some capital out of the market.  This bodes well for IGT, which likely got some large video poker orders on the back of some heavy promotions they are running. 
    • Weaker replacements were offset by better market share in new and expansion units
    • We got the impression that international sales should show some signs of a pulse in coming quarters if not next quarter
  • Systems was by far biggest upside surprise in the quarter and based on the commentary on the call it sounds like next quarter will be better with higher margins
  • Gaming operations was slightly ahead of our estimates with upside coming from better WAP placements/yields and what seems to be a lift from Pawn Stars.
  • Other:
    • SG&A:  based on the BYI commentary, the quarter’s $72MM included about $3MM of unusual expenses
    • R&D was higher than we expected
    • The 31% tax rate was below the 36.5% we were modeling
    • We assume that FX losses were in the “Other” expenses
  • We have them at 98 cents for 4Q which is 2 cents above their guidance range
    • That assume growth in systems revenue and margins
    • Improvement in international sales
    • A nice sequential lift in replacement sales
    • Continued growth in WAP placements
    • 2.5MM share reduction from the Accelerated Buyback Program

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