BYD 3Q 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

  • WORSE:  What can we say?  It was well understood that the top line was under pressure, especially in September, but BYD didn't deliver the margin improvement.  Q4 guidance was awful, a little too awful if you ask us.  Guidance looks low ball.

LV LOCALS 

  • WORSE:  While EBITDA improved 8% YoY, it was less than mgmt's previous expectations.  BYD reduced overall marketing spend by over $1MM.  They started the Penny Lane initiative and will roll out Penny Lane throughout Midwest & South - giving players more bonuses more often.  BYD will launch a new advertising and marketing campaign in the coming weeks. 
  • PREVIOUSLY:  We believe these improvements in our operating margins are sustainable and as revenues grow, these improvements will drive even greater EBITDA gains. And as the Las Vegas economy continues to move in the right direction, the future for our Las Vegas Locals business looks increasingly positive.
  • And with $6 billion in the development pipeline, more jobs are on the way. Home building activity is at its highest level in years and existing home prices are up approximately 30% in Las Vegas over the last year. As these trends continue, they should drive increased consumer confidence. As a result, we are optimistic in our outlook for our Locals business.

MIDWEST AND SOUTH

  • WORSE:  Casual players pulled back sharply in their spend in September.  Paradise & Blue Chip were materially negatively impacted by new competition.  These markets are also impacted by government and military spending.  Delta Downs was a bright spot.  Diamond Jo grew visitation and gained 2% in market share.  Kansas Star grew but so did expenses as they opened the permanant facility to accomodate revenue growth.
  • PREVIOUSLY:  While gaming supply has grown in many regional markets, general economic conditions remain sound and our confidence in our business throughout the Midwest and South is as strong as ever.

BORGATA

  • BETTER:  Had a huge summer session and saw a solid 4Q. Higher property taxes reduced EBITDA by $2.1MM YoY.  Mgmt believes there is further upside in Borgata. 
  • PREVIOUSLY:
    • Positive trends have continued into the third quarter, which is the height of the traditional busy summer season. Borgata is clearly moving in the right direction.
    • We're very comfortable with where we are at competitively, and the position Borgata holds and kind of the current EBITDA trajectory of that property. So, I think with respect to continued efficiencies of that property, like all of our businesses, that there are always opportunities to continue to refine these operations and find ways to operate more efficiently.

I-GAMING

  • SAME:  Borgata will be aggressive in attacking the NJ I-gaming market. They have allocated a significant budget to attract players.  
  • PREVIOUSLY
    • Borgata leads the Atlantic City market by a wide margin and we are confident it will capture more than its fair share of the New Jersey online gaming market as well.
    • Together, we plan to offer a full suite of games, including poker, slots, and table games under the Borgata and Party brands, including PartyPoker.

DOWNTOWN

  • WORSE:  Construction, disruption and road work contributed to a 14% decline in EBITDA.  BYD continues to improve yield on their Hawaiian charter service and believes in their long-term redevelopment story at Downtown.
  • PREVIOUSLY:  We're also seeing a significant uptick in visitor traffic, as Downtown's popularity grows. This is particularly noticeable at the Fremont, which benefited from continued growth in pedestrian traffic along the Fremont Street experience. Our Downtown business is clearly moving in the right direction and we expect positive trends to continue.

PROPERTY TAX CREDIT

  • SAME:  4Q guidance does not include any potential benefits from property tax credits.  NJ Tax Court ruled that Borgata overpaid ~$48.5MM in property taxes and $10MM in interest.  The appeal process is ongoing and BYD still have appeals pending for 2011 through 2013 so the ultimate amount to Borgata could be much greater.
  • (Media reported $40-50MM Borgata tax credit for 2009/2010) We recently concluded the trial phase of an appeal of our property tax assessments for 2010 and 2011 and a positive ruling could result in refunds and tax credits as well as lower assessments going forward. We expect the tax score to make its ruling by the end of the third quarter

VISITATION

  • WORSE:  Borgata visitation was strong while visitation in the Midwest and South segments declined.
  • PREVIOUSLY:  It's really kind of a market-by-market situation. I think when we heard from others about visitation, it's typically been outside of the state of Nevada, and we can certainly echo that. It's really more, what we would call frequency, the number of times during a month a person is coming in as opposed to straight out visitation, which is simply the number of people coming through the business, in a number of cases, our visitation is up but our frequency is down. And typically what happens as frequency declines, spend per visit goes up, not surprisingly as people have so many dollars for entertainment. In certain markets, and Nevada obviously was a bit of a better performer here, you've seen some more consistency year-over-year in frequency than maybe in other parts of the country.

PROMOTIONAL ENVIRONMENT

  • SAME:  The competitive environment is a market-to-market situation. 
  • PREVIOUSLY:  From a promotional environment standpoint, our marketing expense was flat year-over-year on and so, so we've been pretty consistent. I mean, how we choose to direct those dollars obviously changes, can change dramatically on a month-by-month, quarter-by-quarter basis, just to be as efficient as possible. And I guess my sense is that the promotional environment is similar to where we were last year at this time.