BYI F3Q 2014 CONF CALL NOTES

Solid Q, particularly in systems. Wide FQ4 guidance equally brackets consensus.

 

 

PREPARED REMARKS

Financial Results:

  • F(x) losses FYTD $0.09/share
    • $0.02 impact in FQ2
  • Sold, 5,278 with 3,459 units in North America and 2,496 were replacement units
  • ASP $17,203, up 7% 1,100 premium Pro Wave cabinets and higher ASP in Int'l markets and lower VLT/VGT  
  • Gaming Ops: down based on rental and daily fee revenue due to customer buy-out of older non-premium units.  Gross Margins were 65% driven by higher Jackpot expenses of $1.5M vs. last 8 qtrs   2,198 leased at lower margins and $1M of asset charges - expect segment annual Gross Margin 67-71%
  • Systems Revenue:  ahead of expectations due to end game hardware upgrades.  Gross Margins 71%, down from 73% due to higher mix of hardware revenues = 45% of total revenues vs. 38% last year.
  • Maintenance Revs:  $24.4M
  • Table Products:  $29.5M of utility  $14.6M proprietary table game revenues.  Leased 70% of total revenues.  Margin 76% ex $2.3M of charges
  • Eff Income Tax Rate 37%,  F4Q 36%-37%
  • $1.9B of debt outstanding, since SHFL paid down $102M of debt.
  • FCF was $166M YTD, inclusive of acq costs vs. $150M year ago
  • Paid down $64M of debt, 3.9x leverage debt while repurchasing approx 150,000 share for $10M of common stock
  • Leverage Ratio below 3.75x, then borrowing cost fall by 25 bps
  • Allocate majority of FCF to debt repayment to reduce leverage to 3x by end of Calendar Year 2015.
  • Updated full year fiscal 2014 guidance for adjusted EPS to a range of $4.35 to $4.50.
  • Annual guidance includes $3.21 per share for the nine months ended March 31, 2014, which is comprised of adjusted earnings per share of $3.12 plus add-back of $0.09 per share loss from unfavorable foreign currency movements incurred during the first nine months of fiscal 2014.
  • This results in a range of adjusted EPS expected for the remaining three months of fiscal 2014 of $1.14 per share to $1.29 per share. - consensus is $1.21

General Commentary:

  • First full quarter of combined, SHFL $40M cost synergies by end of calendar year 2014
  • Reorganized sales structure by region and yielding value
  • Good utilization of India development centers for SHFL products
  • EGM sales good quarter 22% 
  • First YoY increase in NA replacements ex Canada
  • Illinois during FQ3: 739 VGT units sold, sold >4,100 units thus far, expect to continue to sell into IL until 2015
  • Expect to sustain the year-over-year improvements in North America replacement sales during Q4 as well.
  • Equinox cabinet doing well in Asia (Macau, Philippines, Singapore and Cambodia), Australia - 1,819 units shipped to international regions in Q1
  • Optimistic to leverage SHFL content worldwide,
  • SHFL EGMs shipped 5,278 across the globe
  • Despite a 60 units sequential decline in overall WAP installed base, cash connection grew by 30 units and WAP revenue set an all-time quarterly record with yields up about 11% versus the previous quarter.
  • MD3 Shuffler replacing MD2 and MD1 Shufflers
  • Interactive: I-Gaming gaining traction in NJ and more free to play gamers signing up daily
  • Systems: iVIEW, iVIEWDM and Elite Bonusing Suite - top 5 customers = 35% of revenues vs. 45% previously.
  • Added two new Ohio casinos to systems business.
  • The majority of the 450,000 slots connected to BYI systems are still either without an iVIEW or have an old version of it and thus may not be capable of leveraging the newer system software features including the Elite Bonusing Suite, bonusing modules. And to-date, there are only 34,000 iVIEW DMs in the field.
  • Systems revenues at least >25% greater in 2014 than prior year, but 2015 likely lower than 2014 but at higher margin than 2014.
  • TableView optical chip recognition product is very close to completing its field trial at two casinos with a very high accuracy level. 
  • Strength of BYI and SHFL, producing higher revenues and add'l cost saves.   
  • Gross profit from North America replacement sales represented only 11% of gross profits during the quarter and in Gaming Operations, only 45% of revenue was variable fee based. Even within variable fees, a significant portion was based on the highly stable New York lottery market.
  • Asia: strong systems pipeline
  • More than 50% of revenues are recurring.
  • R&D spend rising with revenues
  • Focused on innovation and the future - core business will never waiver as look to drive new revenues
  • Look to new technology areas that will accelerate revenue and profit growth

Q&A

  • ASP trends, seeing any aggressive pricing or financing? value is found in BYI products, maintaining price discipline on game content, pricing flat to better since G2E.
  • ASP 7% increase - how frame ex. Star Games?   Domestic ASP +7% (Wave) and overall ASP +7% (Australia higher ASP and pulled overall ASP higher).
  • $10M repurchase, how frame vs. debt reduction - when see dislocation in market, will enter market.  Currently have just under $140M of add'l share repurchase activity remaining, also limited by debt covenants. Focused to achieve 3x leverage or lower.
  • Why 15c spread to guidance with two months remaining - delta of range is 3%...and early in integration of SHFL and now more broadly based
  • Pipeline - a lot more visibility by customers and hardware across all segments, and seeing lots of interest in I-View products. Customers desiring upgrading software.
  • Quick customer decisions may repeat, not specific to this quarter - was two customer specific. 
  • Systems maintenance side - why decline last two quarters while rest of systems increasing - FY15 > FY14 > FY13, last few quarters unique due to game count reductions, maintenance happening later.
  • Back out 1x, SGA line, adjusted SGA be down FY14 vs. FY 13, but look at SGA as % of revenue and drive toward an adjusted operating margin and want to increase adjusted operating margin. 

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