Solid quarter boosted by unusually high systems hardware sales
CONF CALL
- $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
