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Defensive pressure starts a quarter early



IGT should not have been “extremely pleased” to report 2013 results and adjusted FQ4 EPS of $0.30, a sizeable miss from consensus of $0.34.  We suspect whisper expectations were for higher EPS.  We and others thought IGT may have been low balling FQ4 when they didn’t change annual guidance following a Q3 beat.  Our focus had been on the 2014/2015 headwinds as discussed in our recent “SLOTHY GROWTH” Black Book and indeed, the company gave pretty weak guidance that probably includes the accretive impact from an announced $200MM accelerated repurchase program.


FQ4 was bad across the board.  Here are some quick takeaways and our earnings table:

  • Guidance was weak and likely includes about $0.03 in accretion from the announced $200 million accelerated share repurchase. 
  • Commentary on the recognition of other significant items that are currently not determinable is also sketchy.
    • “GAAP earnings per share from continuing operations for fiscal year 2014 will include acquisition-related expenses, primarily related to DoubleDown, the amount of which is not determinable at this time.  The company may also recognize other items that are not currently determinable, but may be significant. For this reason, the company is unable to provide estimates for full-year GAAP earnings per share from continuing operations at this time.”
  • We already had $200MM in share buyback for our $1.35 estimate, although not accelerated - $0.01 accretive to our model
  • Gaming Ops below projection on all metrics – revs down, yields down, machine count down. What else can we say?
  • Sold 33% more units in NA than last year's but revenues were down 5% YoY due to a 29% decline in ASPs blamed on “product mix” and “targeted promotional activity”
    • The ASP decline isn’t just due to mix.  We had factored in that ~3,500 NA units would be sold at a steep discount of $9k (Video Poker) and used a $13k number for the balance of our estimate – which is about $1k below the average ASP in NA.  Whatever promotions IGT is offering are material.  Poor mix can also imply that their newer higher price boxes aren’t selling and customers are gravitating towards cheaper fixes.  Either way it’s not good.
    • To put the $10k handle ASP in perspective, IGT hasn’t had ASPs below $11k in any quarter since 2006
  • The only positive data point on Product sales was international box shipments which were up for the first time in 4 quarters
  • Product sales gross margins were terrible and reflective of the low ASPs and promotional activity
    • Both NA and International gross margins were the lowest we’ve seen in 3 years.
  • The bright spot on a YoY basis should’ve been Interactive but even here they missed the revenue number with MAU and DAU below our projections
    • Revenues for Double Down were flat QoQ. This is the first time IGT has reported zero QoQ growth for the crown jewel of their portfolio. 
  • SG&A up due to “increased advertising expenses in correlation with growing social gaming revenues” for the Interactive Division among other things.  Not good for this division where growth is clearly slowing. 
    • SG&A increased $21MM QoQ while social gaming revenues were FLAT.  If we strip out all of the other items on IGT’s list of increased expenses, we are still left with a big (~$13MM) QoQ increase on no revenue growth.
      • $2.4MM legal expense
      • G2E expenses are probably in the neighborhood of $3-4MM
      • Higher bad debt expense assumed to be $3MM



Strong metrics should carry into November.



Consistent with what we heard anecdotally, the underlying Macau metrics look even better than the great headline of 32% YoY growth.  The upside to analysts’ initial expectations of 15-20% growth was broad based.  Hold was normal and Mass was off the charts.  VIP volume and revenue growth was at 2 yr highs.  Going forward, we think November could be another 20%+ growth month.  Even December, which confronts a very difficult 20% comp, could be up in the mid-teens.


Looking at the concessionaires, LVS performed much better than the headline sequential share decline had indicated.  In reality, October was one of the best months of the year for LVS.  WYNN looks like a same-store growth story again.  In terms of market shares, SJM and Galaxy were the clear winners.  Our favorite stocks remain WYNN and LVS.  


We will have a more detailed note out later but here are our initial takeaways:




  • Including estimated direct play, VIP hold was a normal 3.04% and slightly higher than last year
  • Assuming the same hold % in each period, GGR would’ve grown 27% vs actual of 32%
  • Mass grew a whopping 45%, the highest YoY growth in almost 2 years
  • Rolling Chip volume climbed 21%, the most in almost 2 years as well
  • VIP revenue accelerated 28%
  • Slots were the laggard but still grew 10%, slightly above the YTD average


  • Overall share fell to 20.3%, its lowest level of the year.  However, the underlying metrics suggest this was actually a terrific month for LVS.
  • However, Mass share increased 130bps from the trailing 3 month average to 31.0% - its highest Mass share since May of 2009
  • LVS held very low on VIP.  Including direct VIP, we estimate hold was only 2.25%, 65bps below normal.
  • So while Rolling Chip volume grew 34% (the 2nd highest of the year), VIP revenue only grew 8%. 
  • Rolling Chip volume share was also the 2nd highest of the year


  • Grew GGR 35%, the highest growth rate in 2 years
  • More importantly, Mass grew 29% (also the highest in 2 years)
  • Hold % was normal but significantly above last year
  • Mass share was in-line with recent trends but we expect that to grow with the more aggressive marketing and promotional push at the property


  • MPEL’s share continued to decline, driven again by VIP volume
  • Mass share was fairly consistent with trend but Rolling Chip volume share hit its lowest level since November 2007, pre-City of Dreams
  • Hold percentage was normal and in-line with last year
  • On a YoY basis, MPEL’s Mass revenue growth led the market at 77% and was the highest rate since March of 2012 – no issues with their Mass business for now
  • Rolling Chip volume only grew 6% YoY


  • MGM share at 9.1% fell well below recent trend
  • Hold was below normal in both periods
  • Mass and Rolling Chip share was also below recent trend
  • GGR YoY growth was in-line with the market
  • Overall, MGM looks good on a YoY basis but sequentially weaker


  • Galaxy recorded the biggest sequential jump in share driven mostly by high hold percentage although volumes were strong
  • Hold percentage was well above normal and last year
  • Galaxy had the highest YoY GGR growth rate among the operators at 44%, again driven by high hold %


  • GGR share at 26.0%, its highest since March driven by high hold
  • GGR grew at the highest rate in 2 years


ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak

Takeaway: Equity funds followed through on their prior weekly record with another strong inflow in the most recent 5 day period; Bonds were weak again

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Total equity mutual fund flow followed through after the record week last week with another strong inflow of $7.9 billion for the 5 day period ending October 30th, well above the 2013 weekly average inflow of $2.9 billion. Domestic equity mutual fund flow was $4.2 billion in the most recent period with world equity funds collecting $3.6 billion in new investor capital.  Total equity mutual fund trends in 2013 now tally the aforementioned $2.9 billion weekly average inflow, a total reversal from 2012's $3.0 billion weekly outflow 


Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.1 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $2.3 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to a $798 million outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012


ETFs experienced declining weekly subscriptions in the most recent 5 day period, with both equity and fixed income ETFs seeing smaller inflows week-to-week. Passive equity products took in $8.7 billion for the 5 day period ending October 30th, a sequential weekly decline, with bond ETFs experiencing a $551 million inflow, also a smaller inflow than the week prior. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 9

ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 10



For the week ending October 30th, the Investment Company Institute reported another strong weekly subscription within equity funds with another $7.9 billion inflow into total equity mutual funds. The breakout between domestic and world stock funds separated to a $4.2 billion inflow into domestic stock funds and a $3.6 billion inflow into international or world stock funds. Both results for the most recent 5 day period within stock funds were above the 2013 weekly averages, with the domestic stock fund 2013 weekly mean at just a $442 million inflow and world stock funds having averaged a $2.5 billion inflow during 2013. The aggregate inflow for all stock funds now sits at a $2.9 billion inflow, a complete reversal from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds continued their weak trends for the 5 day period ended October 30th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.1 billion outflow, a sequential deterioration from the $2.3 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.3 billion, which joined the $789 million outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 17 of the past 22 weeks and municipal bonds having had 22 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $798 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.


Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $2.0 billion inflow in the most recent 5 day period. Hybrid funds have had inflow in 18 of the past 20 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.



ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 2

ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 3

ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 4

ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 5

ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 6



Passive Products:



Exchange traded funds booked inflows on both sides of the ledger with equity ETFs posting a $8.7 billion inflow, a sequential decline from the very strong $13.0 billion subscription the week prior. The 2013 weekly average for stock ETFs is now a $3.4 billion weekly inflow, a 50% improvement from last year's $2.2 billion weekly average inflow.


Bond ETFs managed an inflow for the 5 day period ending October 30th with a $551 million subscription, also a sequential decline from the week prior which netted a $1.3 billion inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $308 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.



ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 7

ICI Fund Flow Survey - Equities Follow Through on Record Week...Fixed Income Weak - ICI chart 8



Jonathan Casteleyn, CFA, CMT







Joshua Steiner, CFA



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PODCAST: McCullough Gets Naked ... On Shorts

Today marks Hedgeye's 6-Year anniversary. Founder & CEO Keith McCullough commemorates by offering his trademark humor, edge and "no holds barred" take on the markets and economy during this morning's macro conference call.



“There is no terror in the bang, only in the anticipation of it.”

-Alfred Hitchcock


More than seven years ago, when the lads started @Twitter, I’m not sure they were anticipating today.  At the time, there were simply brainstorming new business ideas and an idea for group SMS-ing was sketched out and not too long thereafter Jack Dorsey sent out the first tweet, which was:


“just setting up my twttr”


As I wrote in our Twitter IPO report earlier this week, it was certainly an inauspicious start.  I mean, who would have thought a 140 character revolution would have started with that, but it did and with the anticipation of the $TWTR IPO now gone, and all we have left is today’s bang. (Not to be confused with the free fall in the #Euro from the 25 basis point cut in European interest rates.)


I can’t tell you for sure, but given the number of times the investment bankers have raised the offering price (and who doesn’t trust investment bankers!), there seems to be little doubt that there is demand for the offering.   So, at the very least, we won’t have a $FB debacle on our hands.  Of course, where the stock trades today is anybody’s guess.


In the face of the optimism around @Twitter today, we thought we’d offer some contrarian counter points to the positive outlook for the company.  Yesterday, my colleague Hesham Shaaban (to give credit where credit is due Hesham did most of the work, but that’s why I’m the boss after all) and I gave a presentation on Twitter and raised a few flags.  So, if you are going to own $TWTR for the long run, here are few things we would consider:


1. #OverseasUnderwhelming – Currently, @Twitter has 179 million monthly active users outside of the United States.  This is compared to 53 million MAUs domestically.  Shockingly, the company only generated 26% of its consolidated revenue from international markets in Q3 2013.  On the metric of advertising revenue / monthly active user, the contrast is even more startling as US ad revenue / user is $2.10 in the U.S. versus $0.23. Or an almost 10x difference.  The implication here is that there are structural constraints to monetizing international users, which leads us to the next key issue. 

2#UserGrowthSlowing – In Q3 2013, $TWTR has its lowest sequential growth quarter ever as global monthly active      users grew only 6% sequentially.  Now, admittedly, this is still meaningful grow off a base of more than 230 million        MAUs, but compared to the prior four quarters, which showed 11%, 11%, 10% and 7% sequential growth, this is a            marginal slow down. 


Interestingly, @Facebook which has a penetration of 55% in the United States, compared to @Twitter’s penetration of 22%, has actually added more absolute users in the U.S. over the past three years.  This of course leads to the next question as to how penetrated @Twitter is currently.


3. #Penetration - A recent poll from Reuters/Ipsos suggested 43% of people that have registered for a $twtr accounts have either shut their accounts down, or don’t use it.  This compares to 12% for $fb on the same metrics.  The implication for @Twitter is that the implied penetration may be much lower.  For example, if 43% of users are actually inactive, this suggests a true penetration rate of all internet users in the U.S. of 39%, which implies a short runway of growth domestically.

Certainly, being one of the power users of @Twitter in finance, we do get the blue sky opportunity that @Twitter could evolve into a global cable network and become a true second screen for consumers.  The pie for T.V. advertising is north of $70 billion by some estimates, so even a small share of this pie would be meaningful for @Twitter, but between now and then we have a richly valued company that faces business model headwinds.


In the Chart of the Day, we’ve provided a table that shows the multiple you’d have to be willing to pay of market cap / sales to get a certain level of return.  As an example, if you buy the stock at $27 per share (effectively the IPO price) and you want a 20% return over the next year or so, you’d have to be willing to pay 15.0x our 2015 revenue estimate. (We have included the 150 million shares that will be dilutive post the IPO in our calculation of market cap.)


I’m not saying that won’t happen, but as Albert Einstein famously said:


“The distinction between the past, present and future is only a stubbornly persistent illusion.”


That all said, even as we have some issues with the @Twitter business model in the short run, there is no denying that the platform is revolutionary in its ability to allow the world to communicate, interact and engage.  As my colleague @KeithMcCullough tweeted in 2010 to @matterhornbob:


“twitter is a very comfortable arena for an accountable athlete in this business to compete – we don’t want to hide”




Keep your head up and your tweets on the ice,




P.S. In other news, we’d like to wish a bon voyage to our long-time teammate @RoryAGreen who is leaving us for the confines of @Insead and a MBA.  In celebration of this exciting move for Rory, and in appreciation of all his hard work, we will be tapping a keg of Guinness (he is Irish after all!) at our Stamford, CT office at 4pm. 


#IpoDay - Chart of the Day


#IpoDay - Virtual Portfolio

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