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IGT REPORT CARD

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

 

 

OVERALL:  BETTER - IGT beat the Street and us pretty handily.  Interactive was a very nice positive surprise as was the number of shares repurchased.  Strong slot sales indicate higher market share and while discounting was implemented, it had a positive impact on the bottom line.  Guidance looks overally conservative.

 

GAMING OPERATIONS YIELDS

  • WORSE:  1Q gaming yields fell 6% YoY to $49.26 on lower megajackpot revenue as US GGR remain pressured.  It will be difficult to achieve flat yields by year-end. However, yields did beat Street expectations
  • PREVIOUSLY: 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.

GAMING OPERATIONS CAPEX

  • MIXED:  Expect to see a decrease in game ops capex driven by a decrease in new installments
  • PREVIOUSLY: 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. 

DOUBLEDOWN

  • BETTER:  DAU climbed 25% in F2Q.  IGT thinks that they can continue to grow DAU with the launch of new language sites but that may impact average bookings.  The pace of growth may not match that seen in F2Q. 
  • PREVIOUSLY: Revenue per user…[is] 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.

BUYBACK

  • BETTER:  Repurchased 4.4 million shares at an average price of $17.03/ share for a total cost of $75MM in F2Q.  We had $25MM in our model
  • PREVIOUSLY: 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. We expect to resume normal open market repurchases during the remainder of 2013.

REPLACEMENT OUTLOOK

  • BETTER:  Believed they gained ship share in both new and replacement markets.  IGT also captured 40% share in the Canadian replacement cycle.
  • PREVIOUSLY: 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.

PRODUCT SALES MARGINS

  • WORSE:  Overall F2Q product sales margins fell 3% points YoY to 52%, mainly due to targeted promotional activity and unfavorable mix shift.  IGT expects a low 51-53% range for the remainder of FY2013.
  • PREVIOUSLY: 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.

IGT F2Q13 CONF CALL NOTES

IGT delivers strong revs and eps, Interactive on fire, and buyback more aggressive than we thought. Guidance looks overly conservative.

 


"We are very pleased with our momentum through the second quarter, demonstrating the strength of our comprehensive strategy – leveraging our core business, broadening the distribution of our premier content, and generating shareholder returns.  As we continue to deliver on this strategy, we expect that this will be our fourth consecutive year of double digit growth in adjusted earnings per share from continuing operations."

 

-  Patti Hart, CEO of IGT 

 

 

CONF CALL NOTES

  • Estimate that they captured over 40% market share in the Canadian replacement cycle
  • IGT titles are driving more than 50% of their revenues on DoubleDown
  • Mobile gaming platform saw a remarkable increase in play
  • Remain confident that their investment in DD will more than exceed their cost of capital
  • Experienced a pivotal moment in Feb when NJ passed legislature to allow full online gaming 
  • In Canada they partnered with BCLC by hosting IGT content on BCLC's website
  • International: there is strong demand for IGT's offerings but there are systemic issues that have prevented IGT's participation in certain regions as well as economic issues.  Long term, they still expect international markets to outpace US market growth.
  • Confident that they gained ship share in both replacement and new market shipments in NA
  • Dolly Partner is doing well and was recently launched. Their skilled-based games are also gaining traction.
  • In international markets, systems products did well but product sales struggled
  • Expect that their objective of getting to flat YoY yields by year end will be challenging to achieve. 
  • Expect to see a decrease in game ops capex driven by a decrease in new installments
  • iIGT:  their online casino business grew but was negatively impacted by the absence of their European poker business
  • Double Down:  French, German and Spanish site launches should drive further growth; however, they could see declines in average bookings per user.  Still expect the transaction to be accretive by 2014.
  • Closed on a 5 year unsecured credit facility.  They lowered their borrowing costs by over 20% and extended their maturities.
  • Patti has never been more encouraged by IGT's prospects

 

Q&A

  • They wanted to be aggressive in tapping into capital budgets early in the calendar year
  • Traditionally their margins are in the low 50's range for product margins.  They expect to be there for the balance of the year.
  • Game ops: the biggest headwind is lack of stability in GGR trends across the States
  • Getting back to flat YoY yields may be a stretch unless they do something extraordinary
  • They are very excited about NJ.  They will use their content in NJ that they have been using for the past 10 years outside of the US.  The market in NJ has not matured to the point of sale yet.  For now, everyone is looking to decide which platform to use.  They expect to provide their content onto other platforms - they will be focused on casino style games only.
  • R&D and SG&A run rate?  They ticked up because of a jump in bad debt and some extraordinary costs with the proxy fight and Alabama charges. They expect that costs may tick down closer to 1Q levels aside from marketing costs related to DD.
  • Continue to see a shift towards lease operations and away from WAPs to standalones
  • They were unable to repurchase shares during the proxy battle
  • Model that they have used in Europe for online content and Canada - have all been revenue participation models. The cut for content providers have been a pretty tight range.
  • Wanted to be aggressive to taking share early in the year while their customers still had capital, especially if GGR continues to struggle
  • The decline in their NA install base has been due to heightened competition, shifting trend to standalone from WAP, and general weakness of GGR
  • Think that the introduction of a mid-tier participation products will help them (CSI, Family Guy, American Idol Encore)
  • They have not changed their approach to use of FCF  - first dollar to investment in the business then capital returns
  • Canadian VLTs:  3,500 
  • Expect that the vast majority of the balance of the units should ship this year. There may be some follow on activity as some locations top off their floors in 2014.
  • IL VGTs: only 500-600 units
  • DD - what to expect for the balance of the year in terms of momentum:  Think that they can continue to grow DAU with the launch of new language sites but that may impact average bookings.  Expect that they will continue to grow sequentially - but not necessarily at the same pace as they saw this Q.
  • Systemic issue on the international side?  Some impediments to importing into certain markets, continue to see major macro headwinds in Europe.  However, they still believe that they can grow high to mid-single digit over the longer-term internationally.
  • How many video poker machines did they ship?  It was "unremarkable."

 

HIGHLIGHTS TO THE RELEASE

  • Based on current expectations and the operating results for the second quarter of fiscal 2013, the company is increasing its fiscal year 2013 guidance for adjusted earnings from continuing operations to $1.26 to $1.32 per share. 
  • Revenues increased 11%...driven by growth in North America machine sales and social gaming
  • Non-GAAP adjusted financial measures for the second quarter ended March 31, 2013 exclude acquisition-related charges for DoubleDown, fees related to the proxy contest, Alabama note impairment and certain discrete tax benefits
  • Gaming operations revenues decreased 4%....primarily due to lower MegaJackpots revenue
    • Gross margin increased.... primarily due to lower jackpot expenses and depreciation
    • Installed base increase was driven by lease operations growth globally
    • Average revenue per unit per day ... was $49.26, down 6% ...primarily due to lower yields, most significant in MegaJackpots, and up 5% sequentially due to seasonal gaming trends
  • Product sales:  Revenues increased 16% .... and units recognized increased 40% to 14,300... primarily due to increased North America machine sales related to Canadian VLT customers, as well as an increase in North America new openings
    • Gross margin decreased... due to targeted promotional activity, unfavorable mix shift and higher non-standard manufacturing costs.
    • ASPs decreased 11% mainly due to targeted promotional activity and an increased mix of lower-priced VLT sales.
  • Interactive revenues increased 94% YoY and gross margins grew 600bps
    • Social gaming revenues...increased 31% sequentially to $54 million, primarily driven by an increase in both average DAU and average bookings per DAU
    • Average DAU were 1.7 million... an increase of 16% compared to the prior sequential quarter
    • Average bookings per DAU increased 19% sequentially to $0.37 
  • Second quarter operating expenses increased over the prior year quarter primarily due to additional expenses from DoubleDown and unfavorable bad debt provisions.
  • In 2Q, IGT repurchased 4.4 million shares at an average price of $17.03/ share for a total cost of $75MM

CRI: Let’s Put the Bull and Bear in the Octagon (Correction)

Takeaway: We can drive a truck through the Bull and Bear case on CRI. Here's our best stab at each.

Conclusion: Our bearish call on CRI is one that – especially today – has not gone our way. Let’s put on the accountability pants and see how the research call is changing – especially relative to a stock price that wants to do nothing but go up. We think that the bull/bear on this one is pretty well balanced – with a positive secular backdrop, but risky near-term positioning (and spending) to hit sales and margin targets that are already widely telegraphed. The +6% reaction showed that the market was looking for the negative momentum from last quarter to continue. We did too. Didn’t happen.   When we shake the Etch-a-Sketch clean and re-evaluating our position, we still come away with more risk than reward.

 

(Updated to include the correct e-commerce growth figures)

 

Here’s our take on the bull vs. bear research call: 

Bull:

  • Relatively high-return, defendable brand with dominant share (24%) in its core Baby business that will capitalize on a rebound in the birth rate after a 5-year buildup in the deferred birth pipeline (see Exhibits below).
     
  • The company is investing today in a) e-commerce fulfillment,  b) more company-operated stores (including outlets), c) centralizing headquarters, d) converting Canadian Operations to higher-margin dual-brand stores, and e) taking its sourcing operations back in-house – all of which should take margins to 14-15%. While we have a hard time internalizing the concept of a business with these characteristics sustaining this type of margin level, there’s arguably no reason why it can not get close temporarily if it wants to.
     
  • This suggests EPS in the $4.50-$5.00 range, or a 15%+ CAGR from current levels.
     
  • Cash flow might be bad today, but capex will ease as they start to harvest the benefit of their spending, leading to far better FCF characteristics in 2014/2015.  That’s precisely when the ‘birth boom’ should be in full swing. CRI should have the sourcing and fulfillment assets in place at that point to capitalize on the favorable operating environment with a lower cost structure.

 

Bear:

  • CRI might have dominant share in the Baby business, but that only accounts for 32% of CRI’s total. After backing out parts of its sleepwear business that we’d also consider equally as defendable, we’re looking at about 50-60%% of the portfolio has a competitive set that is no stranger to price competition and not as dependent on the birth rate.
     
  • Like for like sales in its portfolio are simply not good. CRI added $39mm in aggregate sales in the latest quarter, but $17mm-$18mm of that was in e-commerce alone. In addition, it added 14% more stores vs last year in Carters USA, which accounts for 29% of revenue.   We don’t want to ding the company for good performance in e-commerce, as it’s a critical part of growth. But with this store growth should we really be surprised that comps were up only 0.6% in Carters, down 0.5% in wholesale, and DOWN 9.5% at Osh Kosh? Not really. We’d rather the company focus on the productivity of its existing assets.
     
  • Gymboree just reported comps of -2% for it’s latest quarter (on a 2 month lag to CRI). If this ‘baby boom’ is materializing, we’re not seeing it yet in numbers. What’s interesting is that year-to date, we’ve seen a notable rebound in containerized traffic for Baby Apparel – about $3bn in retail value vs $1.9bn last year based on our math. Some of this is due to catch-up volume from last year’s port strike, but we think at least half represents real incremental shipments. Either this sales boost has yet to be realized by the major brands, or more competition is being attracted to the space – something that tends to happen when cyclical/secular trends turn positive in virtually any industry.

    CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - babyshipments
     
  • CRI’s inventories look fine – not good, not bad, just fine. The SIGMA chart shows that it’s going on its fifth quarter of improvement at a time when margin comparisons are getting more difficult. We almost never see multiples expand when this is the case. The punchline here is that the company needs to drive future stock performance by earnings upside. To its credit, that’s what it’s been doing, and our sense is that it simply set conservative expectations for the year today. But for a company that chalked up $0.08-$0.10 of a $0.10 beat to deferred SG&A and shipment timing (ie did not really beat), we’ve got to think that the Street is looking through the company’s ‘guide and beat’ strategy at least to a certain degree.

    CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - crisigma
     
  • Its' capital spending projects seem to be going according to plan, and we like the fact that more people transferred to Atlanta than the company previously thought. That suggests better continuity and more faith by the team internally in what the management team is doing. But we still can’t gloss over the fact that the sheer level of spending at this company is off the charts. Capex is going up from $83mm to $200mm this year – and we definitely are cautious towards that. SG&A growing by over 2x the rate of sales hardly puts us in our happy place. either. Not because the company should't be spending, but simply because its risky having so many balls in the air at once, and its causing free cash flow to evaporate. We’re modeling cash flow to erode from $195mm in 2012 to $30mm this year, and we don’t this we’ll see a rebound to ’12 levels until 2015.

 

 

THE BULL CASE ON AN INFLECTION IN BIRTHS

Here’s Hedgeye Healthcare Team’s overview on their expected increase in the birth rate. Contact or Tom Tobin () for additional color.

 

CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - 2

 

CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - 3

 

CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - 5


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WYNN 1Q13 CONF CALL NOTES

Takeaway: In-line quarter on a hold adjusted basis

In-line quarter on a hold adjusted basis

 

 

CONF CALL NOTES

  • Best quarter ever in China.  Did ok in Las Vegas.
    • Cotai budget just under $4.0 billion
  • Quality of competition has ticked upward in Macau

Q&A

  • LV hold-adjusted EBITDA: $105-108MM vs $120MM actual
  • Macau hold-adjusted EBITDA: $315MM vs $331Mm actual
  • Capital allocation if Philly/Boston bids don't come to fruition?  Want to maintain investment grade on non-recourse debt.  Dividend policy of $1/quarter can continue.  New Cotai debt borrowed at LIBOR + 1.75%.
  • Commisions in Macau were down because of higher hold with direct players relative to junket players
  • Customers buy money at cage which do not factor into drop;  should disregard Mass hold % in Macau; should only pay attention to win
  • Opened Phase 1 of high-limit slot space with 96 slots; will open 50 additional slots in time for May holidays
  • Believe mass business is healthy 
  • Direct VIP is doing well
  • 1Q provision of doubtful accounts is a good run rate
  • Annual meeting is May 16 in Macau and May 7 in LV
  • Afraid of the competition
  • Cotai:  design is finished; 1st stop from ferry terminal
  • WYNN will not get behind on US online gaming; currently, the future is 'murky' and WYNN is monitoring it
  • In the next month, there will be WYNN Cotai model photos and walk through video
  • WYNN Philly/Boston design:  No comparison to regional casinos (slot boxes)
  • Saw pickup in more corporate/convention trips 
    • 7% increase in rooms and revenues
    • 2014 bookings 'way ahead of pace' - much more robust compared with the last several years
  • Toronto/Japan: watching it closely
    • Toronto City Council votes on May 7
    • Japan PM is pro-gaming, along with several senators
  • Las Vegas trends:  Jan/Feb/March was similar
    • $600MM in table win: 70% is in roulette/baccarat (Latin America/European/Asian customers)

 

HIGHLIGHTS FROM THE RELEASE

  • Approved a cash dividend for the quarter of $1.00 per common share. This dividend will be payable on May 23, 2013, to stockholders of record on May 9, 2013.
  • Macau: Net revenues were $992MM and Adjusted property EBITDA was $331MM
    • Turnover in the VIP: $28.4BN, down 15.3% YoY
    • Hold: 3.14%
    • Mass table win was $243MM on hold of 35.5%
      • Chips purchased at the casino cage are excluded from table games drop and will increase the expected win percentage.
    • Slot machine handle was $1.1BN, down 23.4% YoY
    • RevPAR was flat YoY
    • 503 tables (288 VIP tables, 205 mass market tables and 10 poker tables) and 834 slot machines
  • Cotai Update: 
    • Project budget to be in the range of $3.5 billion to $4.0 billion. 
    • WYNN expects to enter into a guaranteed maximum price contract for the project construction costs in the first half of 2013. 
    • Started foundation work in February 2013 and expect to open our resort in Cotai during the first half of 2016.
    • In 1Q13, we spent approximately $76.3 million on our Cotai project
  • Las Vegas:  Net revenues were $387MM and Adjusted property EBITDA of $120MM
    • Table games drop: $669MM was up 2.2% YoY and hold was 26.7%, higher than the property’s expected range of 21% to 24%
    • Gross non-casino revenues were 1.6% YoY due to increases in hotel and food and beverage, which were partially offset by lower entertainment revenues.
      • Room revenues were up 4.8% on a 6% RevPAR increase
      • F&B revenues increased 6.0%... primarily due to the strength in our restaurant, night club and beach club businesses. Retail revenues were down 0.9%. Entertainment revenues were down 28.3% due to a show that ended its run at the Encore theater in November 2012
  • Cash:  $2.3 BN
  • Debt: $5.8 BN ($3.1BN Wynn LV, $749MM Wynn Macau, and $1.9 BN parent)
  • Corporate expense was down $7.0 million as WYNN incurred significant expenses associated with the redemption of the Aruze USA, Inc.'s shares during 1Q 2012

TRADE OF THE DAY: FCX

Today we shorted Freeport-McMoRan Copper & Gold (FCX) at $30.30 a share at 10:22 AM EDT in our Real-Time Alerts. Hello darkness, my old friend. Nice to see you back up here at lower-highs as the Commodity Bubble continues to pop. 

 

TRADE OF THE DAY: FCX - FCX totd


Growth Accelerating: Home Prices

Recent data from CoreLogic and the Federal Housing Finance Agency (FHFA) shows that home prices continued to rise through March with CoreLogic estimated 10.2% year-over-year growth, up from flat growth in February at 9.41% year-over-year in January. The FHFA Home Price Index reflects similar trends with prices accelerating month-over-month to 7.07% year-over-year growth in February. That's the fastest rate of growth since November 2009.

 

Growth Accelerating: Home Prices - CORELOGIC1


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