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Solid quarter boosted by unusually high systems hardware sales




  • $29.4 MM revenues from SHFL for 37 days
  • 51% - recurring revenues
  • FX adverse effect:  2 cent loss in Q, particularly Argentina.  Expect losses to continue.
  • NA units sold: 3,652 (2,000 replacements)
  • International units sold: 1,500
    • New market:  Australia/Asia 
    • Higher sales in Mexico/Central America offset by South America weakness esp Argentina
  • ASP:  lower primarily as a result of mix and lower ASPs in certain international jurisdictions (Mexico). Expect back half 2014 to be better.
  • EGM:  Excluding $3MM one-time inventory charges related to acquisition, margins were 51% 
  • Gaming operations benefited from NY lottery and 2,985 leased Equinox EGMs 
  • Centrally determined units declined primarly because of removal of Mexico units
  • Systems gross margin decreased primarly due to higher mix of hardware revs 
  • Table revs: $14.3MM ($8.8MM utility revenue, $5.5MM prop table gain rev)
  • Table product margin 71% after excluding $1MM of inventory charges related to acquisition
  • Expect effective tax rate to be 35-36% for remainder of FY 2014
  • Interest expense for Q was $11.8MM ($6.9MM incremental with term loan B, higher RC).  Going forward, $21MM/Q ($17MM or $0.27 per share related to SHFL).
  • $507MM SHFL intangible assets amortizing over 9 years. $5.5MM amortization attributed to SHFL.  Going forward, $13.5MM per quarter.
  • Pro forma leverage: ~4x; target goal: 3x in the next 2 years
  • Avoided $22MM in ticking fees due to closing the merger sooner than expected
  • FY 2014 EPS guidance:  $4.30-$4.50 
  • Adjusted EPS more appropriate measure
  • Annualized synergies +$40MM, up from $30MM; a run rate by end of 2014;  half of $40MM will be realized in 2H 2014 (mostly in SG&A)
  • Expect SG&A to decrease as a % of revs
  • Integration process has been better than expected
  • Table baccarat/pai gow poker off to good starts
  • Sold 250 games in Asia
  • Sold over 1,000 VGTs units in Illinois; will continue to make inroads well into FY2015
  • Normal seasonal decline of variable games was impacted by softness in GGR
  • Gaming ops revenue:  45% variable (meaningful portion generated by NY Lottery)
  • WAP install base:  expect to see higher growth starting in June quarter
  • Will see further WAP and premium games
  • Invests in gaming ops will continue
  • FQ2 systems gross margin:  lower end of internal guidance but had record revenues
  • Systems expect gross margins to be around 72% for remainder of  FY 2014
  • Systems revenues 2014:  +20% growth
  • Casino environment more competitive than ever before
  • Interactive:  expect NJ customer to take advantage of marketing promotions
  • Gaming ops business will grow at the end of 2014 and into 2015
  • Will show more WAP products at G2E 2014
  • Operating margins ex items was a record 27% 


Q & A

  • Sales force busy with Pro Wave
  • Synergies: 50% payroll and 50% legal/marketing (mostly SG&A)
  • Equinox:  Asia/Australia - no change in cabinet strategy
    • Cabinets being placed on a fixed fee basis-- helping game ops business rather than EGM sales
    • Will be coming into US, timing uncertain due to regulation standpoint
    • Additional tool to increase ship share
  • 2014 guidance range:  systems (good visibility); expect economy to be status quo; great backlog; table games will penetrate international markets; about half of cost synergies of +$40MM have been already achieved
  • Revenue synergies?
    • Difficult to forecast
    • SHFL slot content never been launched in South Africa where BYI has relationships
  • Pro Wave  
    • 10% ASP Premium
    • Backlog stronger than Pro Curve
  • Maintenance fees not increasing bc they're increasing prices.  They're increasing bc customer base expanding. 
  • New game releases later in FY 2014 gives them optimism in the back end of year for game ops
  • Illinois VGT
    • Avg 600-700 per quarter
    • 1,000 per quarter is a high goal.  Next quarter may be a touch lower.
  • Mix issues:  did not release much WAP/premium releases and performance has declined e.g. NASCAR which needs refresh

RH: Bullish Thesis Intact

Takeaway: Please join us Monday, February 10th at 1:00pm EST for a Flash Call on RH. ***Call details will be posted morning of 2/10

Please join us on Monday, February 10th at 1:00pm EST for a Flash Call on Restoration Hardware (RH). On the call we will revisit our bullish thesis on RH and address current challenges in the market - real and perceived. 


RH: Bullish Thesis Intact - Call details


Given all the noise out there in the market, we want to be clear about delineating risk/reward around each of the following three durations:

  • TRADE (3 weeks or less)
    • Sentiment - and the key issues we hear from investors
    • Risk scenarios based on how RH likely fared operationally and financially in 4Q while retailers were dropping like flies
    • Is the Company's guidance at risk, and if so, how much?
    • 'Deferred Revenue' has gotten a lot of attention year-to-date. Is the concern justified, or overblown?
    • How is e-commerce trending?


  • TREND (3 months or more)
    • Catalyst calendar throughout CY2014
      • Store opening cadence
      • Category launch
      • Catalog drops, or lack thereof
    • Management transition - life after Carlos


  • TAIL (3 years or less)
    • Inflection point(s) in square footage model
    • Impact of larger format stores on the comp
    • Trade-off between in-store vs. direct revenue
    • Gross Margin Opportunity, real or perceived
    • SG&A leverage - or lack thereof?
    • Capital intensity (something no one asks about)



The dial-in details and the presentation will be circulated on Monday prior to the call. Please email  for more information.


McCullough: No Need to Be a Cowboy on Friday's Jobs Report

Takeaway: Hey Jesse James. Put your gun back in its holster.

I am getting a ton of questions from institutional investors on what I think tomorrow’s January jobs number is going to be.

  1. I have no idea.
  2. The question is being asked because consensus still doesn’t want to miss a big up move.

I'm probably going to go into the print with relatively flat net exposure and low gross. I've covered a lot of shorts on red, so I have a lot to do putting shorts back on.


But no need to be a cowboy.


Betting on an unpredictable jobs number? That’s cowboy. I’ve been there and done that. And I failed. Unless you've got some inside information, no one has any edge. No one. (Apologies to Mark Zandi, Steve Liesman, etc).


McCullough: No Need to Be a Cowboy on Friday's Jobs Report - z 45


Moreover, the risk range on the S&P 500 right now is wide at 1735-1803. And the VIX is sitting right in the middle of its risk range of 14.91-20.41 too. So it’s not the spot to play cowboy.


Unlike a lot of pundits, we don’t pretend to have any edge on the monthly non-farm payrolls figure. While many market pretenders toss out pie-in-the-sky predictions, we don't. No real pro or analyst will.


In other words, unless you’ve got some inside information leaning either way is just a guess.



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Takeaway: We are removing JPMorgan (JPM) from Investing Ideas.

Hedgeye Financials Sector Head Josh Steiner is pulling JPM from Investing Ideas. For now.




We still like this name from an intermediate/longer term standpoint for the same reasons we cited when it was added to Investing Ideas. But in the short-term, the growing risks abroad augur poorly for a globally-interconnected bank like JPMorgan.


Moreover, the recent trend of softening economic data in the US is also unsupportive.


JPM is a name that we can revisit on the long side when the Emerging Market risk profile is in retreat, rather than rising, and when we have better visibility into whether the recent US data is hitting a speed bump or something larger.


The S&P 500 is down approximately -3% since JPM was added to Investing Ideas. JPM is essentially flat. 


Takeaway: Tomorrow's NFP print will be the main event on the labor front, but we think we already have a pretty clear picture of what's happening.

Editor's note: Below is a detailed breakdown of this morning's jobless claims data from Hedgeye Financials Sector Head Josh Steiner. For more information on how you can subscribe to Hedgeye click here. 


Labor is Slowing, but Only Modestly

The strength of the labor market has cooled off modestly. We key off the year-over-year rate of change in rolling NSA (non-seasonally adjusted) initial jobless claims. This week the data was better by 5.5% vs the same period last year. However, if you compare that with the preceding three weeks of data, it reflects a modest deceleration. The last four prints have been: -8.5%, -7.9%, -7.2% and -5.5%.


It's important to remind investors that initial claims tend to hit a frictional resistance around 300,000. As such, the closer we get to 300K, the more we'd expect the rate of improvement to converge toward zero. As such, it's not surprising that the rate of improvement is slowing, but we're more interested in the short-term acceleration/deceleration relative to the trendline rate of change. On that basis, the last four weeks represent a bit more of a slowdown than what the trendline would suggest.


To be clear, we're not overly concerned here, but in light of the weak ISM print and elevated overseas concerns, it's important to keep tabs on whether we're in the early days of a real slowdown or just a short, counter-trend speed bump.


The Numbers

Prior to revision, initial jobless claims fell 17k to 331k from 348k WoW, as the prior week's number was revised up by 3k to 351k.


The headline (unrevised) number shows claims were lower by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.75k WoW to 333.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.2%



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This Thunder Bay Bear Loves His Shorts (and Jorts)

Takeaway: Year-to-date Hedgeye CEO Keith McCullough is batting 25 of 29 in his short calls in Real-Time Alerts. That’s an 86% success rate.

Despite a 1% move higher today, the S&P 500 is still down over 4% year-to-date. US #GrowthSlowing and #InflationAccelerating (on the margin) will do that to you.


We don’t run from bears here at Hedgeye. We love them. In fact, we warned our subscribers and called this latest move down. It's time-stamped.


This Thunder Bay Bear Loves His Shorts (and Jorts) - so cute bears


In Real-Time Alerts (one of our four core products designed for individual investors), Hedgeye CEO Keith "Mucker" McCullough has amassed an impressive all-time career batting average just shy of 79% on the short side. Better yet, year-to-date he’s batting 25 of 29 in his short calls. That’s an 86% success rate.


Here’s a look at our recent trades in Real-Time Alerts to give you some perspective.


This Thunder Bay Bear Loves His Shorts (and Jorts) - km6


Hedgeye's affinity for the bear may have something to do with “Mucker” hailing from the mean streets forests of Thunder Bay, Canada. That of course is where bearded men are unafraid to sport the jorts and rock out to Bryan Adams ... and where bears roam free. The jury is still out.


Bottom line. Does it pay to be a Real-Time Alerts subscriber? We’ll let you be the judge.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%