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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