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Rules of Thumb

This note was originally published at 8am on April 09, 2014 for Hedgeye subscribers.

“A good rule of thumb is that if you’ve made it to thirty-five and your job still requires you to wear a name tag, you’ve made a serious vocational error.”

-Dennis Miller


As many of you may have noticed, our research team has been busy so far this quarter adding new names to our Best Ideas list.  In fact, later today we will be doing a conference outlining our short case on Yelp (ticker also YELP).  No surprise, at more than 10x market cap / revenue the short call on YELP has garnered some interest because clearly if we are correct, there is valuation downside.


Rules of Thumb - yelp


Tomorrow we will be going over our short case on Annie’s (ticker BNNY) and this one has also garnered a lot of interest.  In fact, one prospect responded to our marketing email suggesting it was somewhat irrational to short a stock with 20% short interest.  In part, he’s right as there is increased risk of a short squeeze, but more broadly his email begs the question: is it an appropriate rule of thumb to not short highly shorted stocks?


Interestingly, based on the market factors we track, highly shorted stocks definitely do not consistently outperform lower shorted ones.  In fact, over the last six months, the lowest quartile of short interest stocks are up 14.4% and highest quartile of short interest stocks are only up 12.5%.  Now to be fair, over other time frames, high short interest stocks have outperformed, although rarely meaningfully so.


There are also a number of studies highlighting that over time highly shorted stocks underperform.  Specifically, a paper from a group of MIT professors titled, “Short interest, institutional ownership, and stock returns”, concludes:


“Stocks are short-sale constrained when there is a strong demand to sell short and limited supply of shares to borrow.  Using data on both short interest (a proxy for demand) and institutional ownership (a proxy for supply) we find that constrained stocks underperform during the period 1988 – 2002 by significant 215 basis points per month on an equally weighted basis . . .”


So, the moral of the story is that you shouldn’t let “tough to short stocks” get in the way of a good short idea.


Back to the Global Macro Grind . . .


Yesterday, we held our quarterly themes call and touched upon our three key macro themes heading into Q2.  These themes are #ConsumerSlowing, #HousingSlowdown, and #StructuralInflation.  Rather than give you my complete rehash (you can actually listen to the replay here), I wanted to highlight a key slide and point from each section.


Clearly, with consumer discretionary stocks relatively underperforming in the year-to-date (-5% on the YTD versus utilities +9%), the #ConsumerSlowing is not new news.   In this presentation, though, we truly tried to quantify the impact of commodity inflation on the median consumer by rebuilding their income statement.   As it turns out, the average American consumer spends more than 20% of after tax income on food and utilities.  When gas and motor oil are added to the mix, the combined total of direct commodity exposure of after tax expenditures is closer to 27%.


The average consumer also primarily generates 95% of his or her income from wages, self employment, and/or government income. In aggregate, less than 1.5% is currently sourced from interest and dividends.  So, perversely, as interest rates are kept low, it constrains the average consumer from earning more income and also leads to dollar devaluation.  This dollar devaluation then inflates commodity prices and squeezes the consumer from the cost side. 


The second key theme of #Structuralnflation gets away slightly from the concept of commodity inflation via dollar debauchery and looks at the potential for a labor market that tightens quickly.   A key reason this may happen is because businesses have been consistently under investing in both capital expenditures and employees.


The Chart of the Day compares the year-over-year change of capital investment by businesses, compensation of employees, and corporate profits after taxes going back to 1983, so more than thirty years.  As this chart shows, over time investment in infrastructure and employees largely maps with corporate profits.  The exception of this is the last five years in which corporate profit growth has CAGRed at near 20%, while capital expenditures have CAGRed at +1.3% and employee compensation at +0.9%.  The point being if hiring reverts to the mean it will likely be good for economic growth, but also accelerate inflation meaningfully.


The last theme for Q2 is #HousingSlowdown.  This is obviously a reversal of our view for most of 2012/2013 where we were calling for acceleration in home prices.  That parabolic move off the bottom is now decidedly in the rear view mirror based on our models.  The most compelling support for a decline in housing demand and commensurately home prices is mortgage applications.

From the peak in April of 2013, purchase applications are down by -20%. 


Further, the combination of both purchase applications and re-fi is now trending at a growth rate of -55% versus the same month a year ago.  A key culprit behind this dramatic decline is the new Qualified Mortgage (QM) rules that were implemented as of January 10th.    


While on one hand, more stringent underwriting rules will prevent excesses from developing, the new QM rules are also basically taking new and young home buyers out of the market.  So be forewarned, the #HousingSlowdown is no illusion!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.64-2.75%

SPX 1830-1867

Nasdaq 4044-4203

VIX 14.11-16.62

USD 79.58-80.31

Gold 1277-1312


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Rules of Thumb - Chart of the Day

Accepting Little Bubbles

"For a very long time everybody refuses and then almost without a pause, almost everybody accepts."

-Gertrude Stein


That’s the closing quote to David Einhorn’s quarterly letter for the 1st quarter of 2014. Fully loaded with social bubbles and burrito gas, it is vintage Greenlight Capital – self effacing and straight up:


Our longs were modestly profitable, our shorts lost a bit more than we made on our longs, and macro lost a little. The net result was a small loss in a market where some indices were up a little and others were down a little.”


In the March-April performance period, down a lot more than a little is how I’d characterize some of these social media and biotech bubble stocks. Having spent a lot of time with hedge fund investors, I don’t think Einhorn’s view on some of these balloons losing 90% of their value is anywhere in the area code of consensus either. Make no mistake, lots of hedgies are long these things.


Accepting Little Bubbles - bubbles


Back to the Global Macro Grind


There is a lot more than a little hedge fund supply in the marketplace today. HFR (Hedge Fund Research) confirmed that in Q1 of 2014, hedge fund assets under management hit a new peak of $2.7 Trillion. Not ironically, as hedge fund assets under management peak, performance starts to underperform a little too (Q1 2014 was the worst performance quarter for the industry since Q1 2008).


This was one of the main reasons why I was bearish on the US stock market in Q1 of 2008 (when Hedge Fund AUM peaked last time). Too many mo mo funds were long of the same names with the same catalysts. Back then it was an LBO “takeout” bubble. In 2000, it was a tech bubble. Today you can tell me how many funds are long Yahoo (YHOO) for the Alibaba IPO, but that looks a little bubbly too.


To be clear, being long of bubbles can be cool (as long as they don’t start to go down more than a little). Once they start to go down a lot, there’s this thing called draw-down risk that most hedge funds aren’t allowed to let ride anymore. Having toiled as a PM at some major US hedge funds in my day, I can tell you the only long-term strategy to survival is not getting smoked when everyone else does.


Einhorn rarely gets smoked.


Technically, a hedge fund should be hedged. But the super secret reality about the 2 and 20 business (or whatever Stevie was running at 5 and 50 back in the day) is that a lot of hedge funds get smoked, not when the market goes up – but when it goes down.


Yep. I wrote that. Been there, done that too. I’ve made every mistake you can make.


So, are you a consensus hedge fund or one like Greenlight who is willing to give up a little on the short side in order to make a lot? This common quest for the almighty alpha (on the short side) is called #asymmetry. And I like it.


Enough about what I think about this profession – I’m only a battered and bruised product of it. Here are some of the favorite quotes my teammates pulled from Einhorn’s quarterly letter. In terms of both style and substance, they are timeless:

  1. “The corollary to ‘twice a silly price is not twice as silly’ is that when the prices reconnect to traditional valuation methods, the de-rating can be substantial.”
  2. “Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and when the market reapplies traditional valuations to these stocks.”
  3. “There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers.”

Yes, it’s my entire team’s job to read, write, and learn about how the best players in this game think. The alternative to that would be depending on what I think (which would easily be the most dangerous thing for our business over time).


So, if you run a hedge fund and you’re having a tougher time than last year out there, don’t get upset with me writing about it. Think about the why and learn/do something about it.


Accepting that little bubbles are going to start to pop bigger ones (like, say, the US stock market’s all-time high price) is a process, not a point. While I agree with David that “what is uncertain is how much further the bubble can expand, and what might pop it” I don’t think the “what” is a silver bullet that can be legally obtained.


Having survived (made $ at a hedge fund in down tapes - 2000, 2001, 2002) the Tech Bubble, The LBO and Oil Bubbles (2008), and The Gold and Bond Bubbles (2011-2012), what I have learned about risk managing these suckers is quite simple:


First, they start to make lower-highs. Then the volume on down days eclipses the volume on the bounces (up days to lower-highs)… then bearish catalysts start to pile up… then what was happening slowly starts to happen more than a little – it happens all at once.


Our immediate-term Global Macro Risk Ranges are now as follows:


Nasdaq 3

EUR/USD 1.37-1.39

Brent Oil 108.48-110.79

Natural Gas 4.62-4.79

Gold 1

Corn 4.94-5.12


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Accepting Little Bubbles - Chart of the Day

April 23, 2014

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TODAY’S S&P 500 SET-UP – April 23, 2014

As we look at today's setup for the S&P 500, the range is 56 points or 2.42% downside to 1834 and 0.56% upside to 1890.                                       













  • YIELD CURVE: 2.27 from 2.31
  • VIX closed at 13.19 1 day percent change of -0.45%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, April 18 (prior 4.3%)
  • 9:45am: Markit US Manufacturing PMI, April, est. 56.0 (pr 55.5)
  • 10am: New Home Sales, March, est. 450k (prior 440k)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $2b-$2.5b in 2021-2024 sector


    • President Obama in Japan at start of 4-nation trip to Asia
    • Congressional Delegation led by House Foreign Affairs Cmte Chairman Ed Royce in Ukraine for meetings with major presidential candidates, NGOs, members of minority groups
    • House, Senate not in session
    • 10:30am: FCC meets on proposed rule that would make up to 150 MHz of spectrum available for wireless broadband use in 3 MHz band
    • 2:30pm: Consumer Financial Protection Bureau, other regulators at public forum on mortgage closing process


  • Ukraine weighs move on militants in east amid Russia warnings
  • Starboard asks Darden for investor say in Red Lobster spinoff
  • Dish said to target summer release for U.S. Internet-TV
  • Toyota outsells GM, Volkswagen in Jan.-March quarter
  • Buffett’s pay principles put to test on Coke vote: Winters
  • Apple’s slowing iPhone sales threaten stock after 5% slump
  • PTTEP agrees to pay Hess $1b cash for Thai assets
  • Australia to buy 58 more F-35 jets, scaling back initial plan
  • Charter said to be near deal for divested Comcast subscribers
  • Goldman unbowed as Barclays joins bank commodities exodus
  • Citigroup says has no plans to exit core businesses in Korea
  • Netflix said to expand into France by yr-end amid global push
  • Genworth to raise as much as $700m in Australia offer
  • LG Household considering making offer to buy Elizabeth Arden
  • Caesars Entertainment bids to build $750m New York casino
  • China manufacturing gauge signals economic weakness persists
  • Euro-area industry surveys increase as price weakness persists
  • Osborne hits U.K. deficit-reduction target; economy struggles


    • Air Products & Chemicals (APD) 6am, $1.35
    • Amphenol (APH) 8am, $0.96
    • Avery Dennison (AVY) 8:30am, $0.66
    • Biogen Idec (BIIB) 6:30am, $2.56 - Preview
    • Boeing (BA) 7:30am, $1.54 - Preview
    • Brinker Intl (EAT) 7:45am, $0.83
    • Celestica (CLS CN) 7am, $0.20
    • Delta Air Lines (DAL) 7:30am, $0.29 - Preview
    • Dow Chemical (DOW) 7am, $0.71
    • Dr Pepper Snapple  (DPS) 8am, $0.59 - Preview
    • EMC (EMC) 6:52am, $0.35 - Preview
    • Gannett (GCI) 8:30am, $0.46
    • General Dynamics (GD) 7am, $1.64 - Preview
    • Gentex (GNTX) 8am, $0.45
    • Ingersoll-Rand (IR) 7am, $0.26
    • Johnson Controls (JCI) 7am, $0.65
    • Lincoln Electric (LECO) 7:30am, $0.90
    • Manpowergroup (MAN) 7:30am, $0.68
    • Norfolk Southern (NSC) 8am, $1.15 - Preview
    • Northrop Grumman (NOC) 7am, $2.15 - Preview
    • Omnicare (OCR) 7am, $0.90
    • Owens Corning (OC) 7:28am, $0.35
    • Polaris Industries (PII) 6am, $1.16
    • Popular (BPOP) 8am, $0.67
    • Praxair (PX) 6:01am, $1.51
    • Procter & Gamble (PG) 7am, $1.02 - Preview
    • Reynolds American (RAI) 6:58am, $0.74 - Preview
    • Ryder System (R) 7:55am, $0.87
    • SEI Investments (SEIC) 8:30am, $0.40
    • Supervalu (SVU) 7am, $0.15
    • TD Ameritrade (AMTD) 7:30am, $0.34
    • TE Connectivity (TEL) 6am, $0.91
    • Thermo Fisher Scientific (TMO) 6am, $1.40 - Preview
    • Tupperware Brands (TUP) 7am, $1.16


    • Align Technology (ALGN) 4pm, $0.34
    • Angie’s List (ANGI) 4:05pm, $(0.06)
    • Apple (AAPL) 4:30pm, $10.17 - Preview
    • AvalonBay Communities (AVB) 5:26pm, $0.82
    • Cheesecake Factory (CAKE) 4:15pm, $0.49
    • Chicago Bridge & Iron (CBI) 4:01pm, $1.12
    • Citrix Systems (CTXS) 4:05pm, $0.59
    • Crown Castle Intl (CCI) 4:01pm, $0.29
    • E*Trade Financial (ETFC) 4:05pm, $0.23
    • Equifax (EFX) 4:10pm, $0.87
    • Everest Re Group (RE) 4:05pm, $5.42
    • F5 Networks (FFIV) 4:05pm, $1.25
    • Facebook (FB) 4:05pm, $0.24 - Preview
    • Flowserve (FLS) 4:07pm, $0.75
    • FNB (FNB) 4:15pm, $0.20
    • Fortinet (FTNT) 4:15pm, $0.09
    • Graco (GGG) 4:10pm, $0.82
    • Ingram Micro (IM) 4:05pm, $0.48
    • Lam Research (LRCX) 4:05pm, $1.17
    • O’Reilly Automotive (ORLY) 6:30pm, $1.58
    • Oceaneering Intl (OII) 4:01pm, $0.80
    • Polycom (PLCM) 4:05pm, $0.14
    • Qualcomm (QCOM) 4pm, $1.22
    • Raymond James Financial (RJF) 4:16pm, $0.77
    • ResMed (RMD) 4:05pm, $0.64
    • Robert Half Intl (RHI) 4pm, $0.44
    • Safeway (SWY) 4:05pm, $0.18
    • ServiceNow (NOW) 4:01pm, $(0.08)
    • Stryker (SYK) 4pm, $1.09
    • Susquehanna Bancshares (SUSQ) 4:30pm, $0.21
    • TAL Intl Group (TAL) 5:01pm, $0.96
    • Teradyne (TER) 5:01pm, $0.06
    • Texas Instruments (TXN) 4:30pm, $0.41
    • Tractor Supply (TSCO) 4:01pm, $0.37
    • TriQuint Semiconductor (TQNT) 4:02pm, $(0.12)
    • Varian Medical (VAR) 4:02pm, $1.03
    • Xilinx (XLNX) 4:20pm, $0.55
    • Zynga (ZNGA) 4:04pm, $(0.01)


  • Goldman Sachs Unbowed as Barclays Joins Commodities Exodus
  • WTI Crude’s Discount to Brent Widest in Five Weeks on Supplies
  • Investors Checking Out of ‘Hotel Mongolia’ in Limbo: Commodities
  • Soybeans Post Longest Slump Since July as China Demand May Slow
  • Copper Falls on China Factories as Nickel Touches 14-Month High
  • Coffee Reaches 26-Month High as Brazil Drought Raises Volatility
  • Gold Above 10-Week Low as Ukraine Weighed Against U.S. Recovery
  • Rebar Advances Most in 2 Weeks on Inventory, China Reserve Ratio
  • Monsoon Seen Below Normal to Normal in South Asia This Year
  • LME Seeks to Lure Dinner Guests From Tables to Metal Trading
  • Coal Glut Foils Price Rally With Miners Tied to Exports: Energy
  • Japan May Offer Canada Head Start on Pork Duty to Sway U.S.
  • China Move to ’Go Green’ May Mean Lower Copper Use
  • Ukraine’s Unpaid Gas Bills Dwarf U.S. Offer Amid Shutoff Threat

























The Hedgeye Macro Team














DDS - Debunking DDS at $155. We Like The Short Side.

Takeaway: DDS at $155 seems ridiculous. The asset play is maybe $50 on a great day. If people value DDS like a retailer again, the stock’s in trouble.

Conclusion: DDS with a $9-handle, or even an $8-handle, was enough to land a spot on our bench of short ideas. But with the spike in the wake of comments by Marcato Capital saying that the stock ‘may be worth $155’, we simply had to weigh in with what ludicrous assumptions you need to make in order to reach that value. We think the property value is maybe $50 per share – on a great day. Let’s not forget about the underlying business, which is looking toppy. We'll take the short side of this debate any day.



The comment that sparked yesterday’s rally was grounded in what could happen to DDS stock price if the company spins out its internal REIT. We absolutely agree that there is real estate value at DDS. The company owns 245 of its 296 stores outright,  or about 42mm square feet of retail anchor tenant space throughout the South. There’s another 19 stores where it has equity ownership through hybrid and ground leases.


But let’s consider a few things.

In January 2011, DDS first announced that it would spin off its real estate into a wholly owned REIT. But at the time, it failed to monetize its assets to the public. Three considerations…

  1. DDS had a sizable NOL that was set to expire at the end of its fiscal year (Jan 11). Proceeds from the internal REIT transaction were offset by the NOL, giving the company a $202mm tax credit in FY11. Because of the transaction assets were marked to fair value allowing the company to realize tax depreciation deductions by $5mm on annualized basis for the next 20yrs and $2mm for years 21-40. Simply put, this was a no-brainer at the time from a financial engineering standpoint. But it doesn’t mean that there’s a public market for DDS’ properties, even though the equity market thought so at the time.
  2. Typically one retailer would not account for more than 10% of a property owner’s income. The point here is that the pool of buyers out there is extremely limited for such a large number of stores.
  3. DDS’ current real estate portfolio is very heavily weighted towards B & C mall properties. These assets account for less than 20% of public mall REIT NOI despite their disproportionately high representation. The top 30% of mall properties for example account for 60% of public REIT NOI. Dillard’s presence at these premier properties is scant.



What About Value?

Let’s start with the only two assumptions that really matter here, which is a) the rent/foot for the portfolio and b) the cap rate (a de-facto discount rate – the expected rate of return based on the asset’s income profile).

a)    Most anchor tenants average somewhere between $4-5 per square foot. KSS is bottom of the barrel (strip malls are cheaper) at about $4.15, JCP is about $4.95, Macy’s at $5.15, and JWN at $6.30. On the properties that Dillard’s currently leases, it is paying around $4.90 per foot. But the catch here is that those are among the best properties in its portfolio. Our sense is that the properties in question (that could be monetized) are closer to $4.25.

b)   The cap rate is more theoretical, but no less structured. Usually it’s feast or famine. What we mean is that the lower rent-generating assets will command a higher cap rate (north of 10%), while the premium higher-quality properties will have a cap rate within 300bp of the risk free rate.  Given the preponderance of B and C malls in Dillard’s portfolio we suspect that we’d be looking at a cap rate of about 10%.

c)    Add those two assumptions together and you get a value of about $1.8bn, or about 38% of DDS’ enterprise value. That’s about $42 per share, about 55% below current levels. We’re not saying that this where the stock is going, but there’s another $3bn in Enterprise Value that needs to be supported by these things called Revenue and Margins. They sometimes get forgotten when people get overly pumped about real estate.

d)    Let’s assume for a minute that we’re totally wrong in our assumptions – after all, we have not had an independent appraiser visit each of the 264 properties owned by DDS. But where the stock is now, we don’t think we have to. Let’s assume that Dillard’s rent profile is an even $6.00 per foot – which is just a hair below JWN. Now let’s assume a cap rate of 6%, which is far better than you’ve got at Macy’s, and probably nearing the ballpark of what we might expect at Wal-Mart. That gets us to a $105 per share value. That’s within 10% of where the stock is trading today. You want to get to $155 in the stock? Use $6 per foot at the same yield we’re looking at today on a 30-year treasury. Good luck with that.   


DDS - Debunking DDS at $155. We Like The Short Side. - 4 22 2014 8 26 15 PM


And if the company does manage to pull off this public REIT, then ask yourself what it does with the proceeds. About 45% of it goes to pay off debt. So then it goes from having net debt to having net cash. That’s definitely a plus. But another thing people often forget to do when properties are sold is ask the question as to whether the company will remain a viable entity. If the answer is Yes for Dillard’s, which we suppose is the case (unlike the SHLD property debate), then we have to add back $200mm per year in rent. It has these properties now at a great rate (free), but when it sells them it has to pay to play.


The punchline for us on this one is that a $155 value is simply ridiculous. We have a hard enough time getting to $90. The asset play is maybe $50 at best – and that’s assuming there is liquidity (we’re uncomfortable assuming that one). More realistically, DDS sells off properties a few at a time, where the pool of buyers is far greater. That might help along the way, but shoots the big ‘public REIT’ call in the foot.  If people start valuing this like a retailer again, the stock is in trouble.


Declining participation installed base troubling but strong ASPs were the offset. We'll have more to say on IGT




  • Cost savings in $30MM in current fiscal year and $50MM on an annualized basis
  • Wheel of Fortune will be in DoubleDown at calendar year-end
  • Powerbucks:  expect NV and Canada to come online by end of FY
  • Avatar product:  performance surpassing Wheel of Fortune in 40% of locations where Wheel of Fortune and Avatar both exist; Avatar performing above mgmt expectations 
  • Crystal Core cabinet:  2nd Avatar game coming on new hardware platform - expectations similar to 1st Avatar game
  • Class II market:  next quarter, will release new titles in this market
  • South Africa:  2,000 terminals will come online in the next 18 months (IGT will secure 50% share)
  • International systems business:  in FQ2, deployed cloud product to UK.   Three casinos on our cloud product will expand to ten in the next coming quarters as well.
  • Replacing Aristocrat systems in South Africa (3 casinos)
  • Gaming ops yields increased sequentially in-line with seasonal trends.
  • Install base declined sequentially due largely to declines in MegaJackpots
  • Expect gaming ops gross margins for FY to be consistent with FY2013
  • Capex decreased to $15MM
    • Expect increase in 3Q/4Q  capex due to upcoming launch of new Crystal Core Cabinet but total CapEx lower than FY2013
  • International revenues declined 25% due to implementation restrictions in Argentina and soft demand in a few other markets
  • ASPs improved due to mix shift of higher priced units
  • Several of recent titles performing well in  the market, including Prowling Panther, high Volatility game designed for the gambler and Jade Fortune, a new Asian-themed game.
  • Launching Winners Choice in F3Q
  • Expect Doubledown revenues to be up 20% for FY
  • Tax rate elevated at 39.5% due to adverse impact of peso devaluation in Argentina.  Expect effective tax rate to be ~35% for reminder of year


Q & A

  • Working hard to protect yields; continues to expect  mid-single-digit decline in yields. Optimisitic on yields for F3Q, F4Q 
  • Non-gaming sales high:  higher than expected. Had IP settlement that timed in FQ2 rather than Q3.  Half of the increase is IP. Remainder of the growth is parts and conversions.
    • Normalized run rate probably average of last four quarters
  • Lots of noise in margins and product sales.  It's about flattish.  Upward pressure seen in ASPs.  Expect flat product sales margins to continue.
  • Non-box margins were pretty consistent with box margins
  • Cost savings come exclusively from SG&A
  • SG&A:  Still targeting 19-20% of revenue (excluding items); however, it can fluctuate given revenue trends
  • Class II similar to poker business.  Ready for an upgrade in that market. See good Class II growth in Mexico/South Africa.
  • Fierceness of the competition hasn't changed much
    • Competition coming from both price and product, esp MegaJackpot.  Another factor is the competition for operating expense $$ from their customers that is affecting both gaming ops and product sales.
  • #1 priority is to eliminate declines in installed base
    • Renovations at SLS and Cromwell have resulted in lower install base
  • Believe flat to down (more likely down) replacement cycle this year than last
  • Feel comfortable with R&D levels
  • DoubleDown is GAAP accretive now
  • On DD MAU, IGT focused on converting players into payers i.e. bottom line.  Not concerned about MAU decline
  • Continue to outperform expectations on ARP (average revenue per DAU); ARP is industry-leading
  • Need 30-60 days to quantify effect of Powerbucks
  • IL units in FQ2;  1,000 (pretty normal run rate).  Do not have ship share #
    • We think it was 44% ship share
  • South Africa is an expanding market.  Expect the market to be like product sales. May have a daily fee attached but more product sales than participation business
  • Making progress on the mobile product
  • Wheel of Fortune mobile will be out by end of calendar year too

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