Solid quarter driven by systems (how much was recurring?) but cracks emerging in gaming ops and product sales.




  • Game sales: 3,213 in NA of which 2,182 units were replacements 
  • International sales were down partly due to importation restrictions into Argentina offset by increased sales in Mexico
  • ASP continued to be impacted by lower priced VGT units and mix to lower price jurisdictions internationally like Mexico
  • Gaming operations: NY lottery market was very strong 
  • Centrally determined system units declined due to removal of certain licensed fees in Mexico
  • Systems:  was slightly ahead of their expectations. 
  • Expect Systems margin of 75% for full year 2014
  • Effective income tax rate was lower due to a settlement with the IRS from an audit of their financials of 2006-2009
  • Received an additional 27k shares as part of their ABB program
  • MJ - want to be starting something and Jackpot Empire were released in the first Q
  • Based on their current release schedule, they do not expect their WAP install base to grow QoQ in 2Q but do expect growth to resume in 2H14
  • Lots of rave reviews around ProWAVE cabinet.  It will start shipping in early 2014. They believe that the fact that most of their game library will be available on day 1 will be huge for them.
  • Expect systems revenue to grow at least 10% YoY in FY14
  • Super Slot Line product drastically reduces the cost of upgrading casino floors. This will allow them to sell a lot more of their system applications.
  • Interactive - continue to expand their presence in Europe.  Both as a content and technology provider they are well positioned in the US. Expect to go live in NJ & NV.
  • They will be able to offer their customers a single view of their customer - which is a key point of differentiation for them
  • Have received gaming approvals in 14 of the 20 jurisdications needed for closing
  • Kevin's assumption of the acquisition integration frees up management to focus on running their business
  • 1Q results came in slightly ahead of their expectations. Now expect that quarterly diluted EPS will now be more equally weighted across the remaining Q's.
  • Their guidance does not include the 9 cent favorable tax settlement with the IRS in this first Q
  • They are confident that they will see meaningful growth resume in their gaming operations business in the 2H14


  • Customer feedback from the ProWAVE cabinet and they expect to see sales in F3Q.  They don't think that ASPs will increase greatly when they release the cabinet.  They don't expect margins to be impacted by the new cabinet - they are just charging a higher ASP so they don't expect a hit.
  • Flat to slow growth in gaming operations install base - not a decline
  • International game sales fell short of expectations. It's not where they want to be. They have been working hard to developing game content that appeals to international jurisdictions. Feel like that effort is beginning to bear fruit but they are not yet there...content is getting better so sales should follow. Hoped that they would be getting a few more games into Argentina but that didn't happen. Believe that SHFL will help them
  • Updates on synergy guidance - early close will save them about $18MM of expenses. Still think it will be at least $30MM.
  • Thinks that WAP yields will continue to improve. They are positive about the yield improvements in the future
  • Takeaway from G2E was that they need to stay on their toes with R&D and innovation
  • Haven't seen any real competitive pressures in the Q. Expect 2Q to be equal or greater than Q1. Still feel like they are getting more than their fair share of the IL market.
  • NASCAR took yields down a touch this Q
  • Game sale ASPs - domestically, prices are more or less holding up the same as before. Given that NA sales aren't a huge part of their business, they have been able to maintain price more so than competitors.  ASPs were hurt by more sales to Mexico in the Q.
  • Regulatory changes in Mexico - don't believe that that will have an impact on them. Most of the changes are really attacking grey area single machine locations and skill based games.
  • Biggest drop was more of conversion to sale of non-premium games. With regards to their premium footprint it remains quite healthy. 
  • They are investing a lot more R&D in the WAP and daily fee segment going forward. Pawn Stars is doing great. Have a lot of good content coming in the premium daily fee segment.



  • The Company increased its fiscal 2014 guidance for Diluted EPS to a range of $3.80 to $4.10 and now expects that quarterly Diluted EPS will be fairly equally weighted during fiscal 2014. This guidance does not reflect the impact of the planned acquisition of SHFL entertainment or any acquisition-related costs or savings or the effect of the favorable tax settlement realized during the first quarter of fiscal 2014.
  • The acquisition is expected to close prior to the end of this calendar year. The completion of the SHFL entertainment acquisition remains subject to SHFL shareholder approval, the approval of certain gaming regulatory authorities, and other customary closing conditions.
  • "We showcased seven new wide-area progressive (“WAP”) titles at last month’s Global Gaming Expo (“G2E”), up from three new titles shown last year, reflecting our escalating R&D commitment to our gaming operations footprint. Customer response to our new WAP, premium, and for-sale content, as well as to our new Pro Wave cabinet, which was one of the stars of the show, was very encouraging.”
  • “Operating margins increased to 25 percent when excluding costs related to the planned acquisition of SHFL entertainment, which marks our highest quarterly level in more than three years"
  • “Revenues that are recurring in nature were a quarterly record and represented 57 percent of total revenues driven by a first-quarter record in WAP revenue and quarterly records in systems maintenance and services revenues."
  • "During August, we amended our existing credit facility and successfully syndicated our new $1.1 billion Term Loan B with an all-in yield of 4.375 percent. The planned acquisition of SHFL entertainment will be funded with proceeds from the Term Loan B and excess capacity on our existing Revolving Credit Facility, which had $505 million undrawn as of September 30, 2013.”
  • Gaming equipment: 3,995 new units / ASP: $16,307
    • 20% international 
    • 456 IL VLTs
    • ASP of new gaming devices decreased 3 percent to $16,307 per unit from $16,853 last year, primarily as a result of lower ASP’s in certain international jurisdictions
    • Gross margin increased to 50% from 47% last year, due to continued cost reductions on the Pro Series line of cabinets and sales mix.
  • Gaming operations: Gross margin increased to 70% from 69% last year, primarily due to lower jackpot expense
  • Systems: 
    • Maintenance revenues of $25MM. 
    • Gross margin decreased to 75%, primarily as a result of the change in product mix. Specifically, hardware sales were 30% of systems revenues, and software and service sales were 37%, as compared to 26% for hardware and 34% for software and services in the same period last year.
  • SG&A increased to 29% of total revenues as compared with 27% last year, primarily driven by $5 million of costs associated with the planned acquisition of SHFL entertainment.
  • In connection with the pending acquisition of SHFL entertainment, the Company incurred professional and other fees totaling approximately $5.2 million during the first quarter of fiscal 2014, with additional acquisition-related fees and expenses anticipated to be incurred throughout the balance of fiscal 2014.

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more