BYI: FQ4 EARNINGS PREVIEW

Our FQ4 estimate is 2 cents ahead of consensus for EPS and $6MM above the street on revenues.  No call on the near-term stock action but the long term fundamentals are potentially explosive.

 

4Q09 Preview

We estimate that BYI will report $0.57 of EPS and $228MM when they report on August 12th.  Here’s the breakdown:

  • Casino operations: $10MM
  • Product sales: 5,400 new unit shipments at $14,300 a piece, total gaming equipment revenue of $89MM at a margin of 48%
  • Systems revenue of $55MM at a 75% margin
  • Gaming operations of $74MM at a 70% margin
  • SG&A of $60MM
  • R&D of $20MM
  • Interest expense of $3.6MM

 

2010FY Outlook

 

From the last conference call:

 

“The Company is in the early stages of planning for fiscal 2010; however, it currently believes that its strong base of recurring revenues and diversified business model will allow fiscal 2010 Diluted EPS to exceed levels expected to be achieved in fiscal 2009.”

 

“We expect several positives for our earnings per share compared to the start of last year. First, a higher level of gaming operations revenue; second, a higher level of system maintenance and services revenues; third, lower interest costs; fourth, more international jurisdictions in which to sell; and fifth, much broader and more exciting products in both games and systems. Plus, our recurring revenues for this last quarter were up 48% of total revenues, giving us better visibility”

 

We think that BYI will give a wide guidance range on the upcoming call, like last year… the kind you can drive a truck through.  As a reminder, consensus is at $2.37 per share.  We agree that FY2010 should be a year of growth for BYI, despite an anemic number of new casinos/expansions opening over the next 12 months.   That being said, we think that 2010 is simply a “bridge” year for BYI and the slot industry as a whole…. The real upside is 2011-2013.

 

Here’s how we get growth in 2010:

  • Annualizing our 4Q09 gaming operations revenues and assuming zero growth, we get 5% year-over-year-growth.   If you add some units here you get to more than 5% growth
  • We have North American units down about 11% next year because we are assuming some pickup in the replacement market (see “REPLACEMENT/NEW: A TALE OF TWO DEMANDS”, published July 1, 2009) and total new unit shipments down 7%.  However, some decrease in unit shipments is offset with an assumption of 3% ASP increases, which we think is conservative
  • To date, BYI has sold very few conversion kits.  However, conversions should be a pretty good opportunity given the 90% margins (this is WMS’s secret sauce of +50% product sales margin).  We’re not suggesting that conversion sales will approach WMS because BYI’s base of games is tilted toward mechanical reels, but even 1000 conversion kits at $3k would add 3 cents a share
  • Interest expense was over $5MM in 1Q09 and we think that it will be about $3.5MM in 4Q09, and continue to modestly decrease into 2010.  That’s about $0.07 cents a year.  As a reminder, BYI is levered less than 1x
  • Recurring maintenance fees on units hooked up to BYI’s system grew to $13.1MM in 3Q09 from $12MM in 1Q09, and we expect them to grow to over $13.5MM in 4Q09. These fees are basically at 100% margin.  As more bonusing software is deployed on the roughly 100,000 iVIEWS in the field, BYI should be able to continue to grow the fees they get, even if they don’t install a single new system.  If we simply annualize our 4Q09 estimate for recurring fees, that’s another 3 cents
  • BYI has already announced several new systems contracts for its windows bases system.  We think Windows based product will allow them to tap a huge market of smaller casinos.  They are by far the largest supplier of systems for casinos with over 2,000 units

 

YouTube from 3Q09

  • “We continue to expect that the margin on our game sales will increase into the high 40s over the next several quarters”
  • “We are becoming cautiously optimistic that gaming operators replacement game-buying demand will begin to improve in the fiscal year 2010”
  • “Our retool product portfolio, combined with a pipeline of exciting new products coming up, increasing customer's satisfaction levels and a very strong list of sales opportunities, allowed me to be optimistic about the Systems business during fiscal year 2010 and beyond”
  • “So going forward, we do feel that 45% on game sales can definitely increase two or three points in the short-term and as we sell more conversion kits, we think that we have the opportunity to get the 50% plus. Of course, our interest cost is coming down which drives down our pretax margin. We are taking some initiatives as well on international tax planning, but it's premature to project the lower tax rate at this point.”

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