• run with the bulls

    get your first month

    of hedgeye free



BYI missed on revenues but beat EPS expectations.  Net/net probably a negative for the stock today given the magnitude of the revenue shortfall.



BYI 2Q09 Earnings call:

  • 4Q game sales and ship share was back to “normal”
  • Revenues for gaming operations were at an all-time record
  • Cash flow $165.2MM for FY2009
  • Operating margins increased to 24.3% from 22.1% in FY2008
  • BYI saved $45MM per year through their employee base in India (from R&D and Systems developments)
  • The tax rate was a little lower than expected, expect 35-37% tax rate for FY 2010
  • They have $62MM remaining under their repurchase plan
  • Repaid the R/C to a zero balance at June 30th and have 0.7x leverage
  • BYI is assisting customers with some slot purchase activity
    • A/R days increased as a result
    • Expect customer financings to cause DSO’s to increase modestly over the next few quarters, although their DSOs are still below competitors
  • 4,001 units were shipped to NA
    • Estimate 21% ship share
  • Margins on game sales are expected to be in the high 40s over the next few quarters
  • Increase of conversion kits by 33% y-o-y
    • See this as a big opportunity
  • International markets are a big opportunity
    • See growth in the next 12 months (Singapore, Australia, and Italy)
  • Margins on gaming operations increased reflecting better management of games in the field and better management of working capital
  • Replacement cycle in NA continues to be sluggish, they are not predicting a big uptick in buying patterns over the next two quarters
  • Expanding in Mexico and BYI is excited about opportunities in Italy
  • They are re-entering Australia over the next few years
  • Systems maintenance revenues were $13.5MM in the quarter and expect them to grow to $58-62MM in FY 2010
  • Since April 2009, BYI has seen a significant pick up in systems purchases.  Many casinos replacing their legacy systems. Should see the benefit in Q2 2010 (remember the lag in this business)
  • New player tracking system is performing well across 10,000 devices
  • Two more casinos with more than 2,000 games each are replacing a competitor’s system with a BYI system, a new Macau casino (with relationship with a competitor for all their other systems business) will open with a BYI system
  • Server gaming initiatives should drive growth (business intelligence, iVIEW DM, etc)


FY 2010 outlook

  • Cautious optimism is returning to many casino operators
  • In the long term, they are very excited about opportunities for slot manufacturers – there is a perfect storm of new markets, pent up demand, and new products and initiatives
  • Less-than-perfect visibility in 2010,
    • Higher level of gaming operations and systems maintenance revenues
    • Larger footprint of games in the field to attack with conversion kits and replacements
    • In some new international markets that they weren’t previously in
    • The guidance of $2.25-$2.50 … does not include significant revenues from new jurisdictions



  • “Cautious optimism” applies to geographically diverse customers , not just Vegas centric customers
    • Seeing CEOs paying more attention to maintenance capex
  • Not forecasting unit sales (being up or down) but do think that margins will be 46-49%... with conversion kits helping them and margins going higher in the long term
  • Saw IGT cut deals on MegaJackpot with MGM and another deal with BYD – did IGT take share from them?
    • No
  • Pieces in game ops- what are the trends? WAP/LAP decreased – what happened there?
    • Had good growth in Class 2 and centrally determined, flat units in premium units – but better win per days
    • Tower series (over 100 placed in 45 days) and Jumbo series are doing great
    • Putting out more Wheel products in next 60-90 days
    • WAP/ LAP: Millionaire 7’s – launching a new game to replace that, and launching a few new replacements for Quarter Millions
      • Expect a rebound later this year (calendar)
  • Systems – what’s embedded in guidance?
    • It usually takes 6-9 months from when a deal enters their pipeline to when they recognize revenues, so the September quarter should be weaker than the 50’s(MMs) again but in April pipeline started to build … so you should see that by Dec Q
    • Have pretty good visibility here
    • Saw a drop off in orders in July 2008-March 2009, and saw a big pick up in April and thereafter
    • Think that systems business troughed in the June 2009 quarter – but don’t want to “guide” quarterly or to revenues for the business
    • Some of their benefit in systems is taking competitor business, but some of it is just a rebound in tech spending
  • Unit shipments? Tick up in shipments? What happened in the 3Q09?
    • March 2009 – lost some share because they were slower to do financings, not as aggressive discounting, and had 700 units get deferred
    • Feel like they are still in the low 20’s ship share for next 2Q’s then they’ll see
  • iVIEW DM surpassing iVIEW in FY2010?
    • No, have 130,000 iVIEWs sold… maybe they still sell more iVIEW s in 2010 vs DM but after that see DM as dominated
    • They think that iVIEW DM will be additive as some customers are getting both
  • Business Intelligence doesn’t require regulatory approval in most jurisdictions, power winners got approvals in most jurisdictions this past year and have a bunch of other applications getting approval this year
  • Several quarters ago, several operators removed participation games.  Now that they have cleared covenant hurdles are those participation games coming back?
    • Think that over the last year, participation as a % of floors has decreased a little
    • For BYI they have really focused on better management of their real estate and getting out new launches
  • Gross margins? Is above 70% sustainable?
    • High 60’s and low 70’s is the right margin going forward
  • Why didn’t they give investors a heads up in weakness of systems this quarter if they have such great visibility
    • Only guide toward earnings… so perhaps they should have been more clear about the lag in the systems pipeline
    • Excited about City Center – have iVIEW DMs there
  • Edge in Class 2 with WMS entering the market?
    • Game driven by a system – so the fact that they are dominant in systems there really helps them
  • International business
    • They went from single digit % of total unit shipments to low 20s now
    • Just got licensed in several African countries, Greece, Australia, etc
  • Used game sales were down, hence even though they had lower “other product sales”, the mix was skewed towards replacements
    • Remember that conversions have 90% margin vs used/ parts and others are much lower – maybe 40% on “average”
  • Don’t expect them to have 49% margins every quarter going forward
  • Other: FX and interest income



It was no surprise when OEH missed estimates on last week.  We still think Street estimates are too high for the balance of the year, as well as for 2010 but what is the real value?



“The Company plans to make further disposals of non-core assets in the coming quarters as we continue to deleverage the Company in line with our target and reach a four to five times ratio of debt to average EBITDA by the end of 2011.” – OEH Management 


Despite another quarter of terrible numbers and a seemingly outrageous valuation of 18x 2009 EV/EBITDA, we believe that if the company is serious about monetizing some of its assets, the real value of the company may be higher.  As we wrote about in “NAV: WHO CARES?” on 06/10/2009, given the dearth of transactions at the upper upscale and luxury end, change in the “traditional” set of real estate buyers, lack of financing, and the uncertain timing of any recovery, per key (Net Asset) values are difficult to determine.  However, our best crack is that OEH’s NAV lies somewhere north of $11/share.


We think that potential buyers of trophy assets (like the Cipriani) would be willing to pay a price that provides a break-even scenario in the first few years as fundamentals recover.  On the 2Q09 call, OEH discussed selling up to 8 properties to help de-lever the company over the next 2 years.  Below is our attempt to try to quantify the proceeds of some potential assets sales. 


Windsor Court, which is under contract, and the Bora Bora asset are currently in the process of accepting bids.  OEH did not specify the sales price for Windsor Court other than stating that proceeds will materially exceed the $37MM mortgage on the property.  Our best guess is that Windsor Court will fetch $45MM -$50MM, or between $140-150k per key.  Bora Bora was purchased by Orient Express in March 2001 for $19.6MM.  We also believe that there is some land that comes with the asset.   We think that OEH should be able to get more than the initial purchase price - perhaps $30MM.


Other assets that we expect to come on the block include:

  • The Grand Hotel Europe
    • 2007 EBITDA of $21MM, 2008 EBITDA of $23.6MM, 2009E EBITDA of $13MM
    • Rates are in roubles, so the hotel took a huge hit this year after an unusually good year in 2008 when the rouble depreciated about 27.5% against the dollar in the 1H09
    • This is the largest EBITDA producing asset in OEH’s portfolio with 300 keys
    • Since the Russian economy is levered to oil, a recovery in prices could help them sell this asset at north of $200MM and perhaps closer to $230MM
    • Selling a majority stake in the asset is also a possibility
    • Given the volatility of the Russian market, we don’t think this asset is high on the list of for sale properties
  • Hotel de la Cité
    • With 61 keys located in Carcassonne, France, this asset is located in a “day trip” market which OEH mentioned was suffering the most in the current environment
    • 2007 EBITDA was $0.9MM, 2008 EBITDA was $0.1MM… our guess is that they are loss making this year
    • Our best guess is that this asset would fetch about $20-25MM
  • Keswick Hall & Inn at Perry Cabin
    • We believe that OEH would love to sell these assets, but the market just isn’t there now.   However, they fit the bill of “weekend getaway” markets
  •  Westcliff Hotel
    • Located in Johannesburg, South Africa, this asset is not key to the portfolio
    • Most of the customers that go on the OEH safaris stay at the airport hotel in Johannesburg so there’s not a lot of synergy with the Westcliff
    • We think OEH would sell this asset for a bid of $20-25MM
  • Lilianfels Hotel
    • Located just outside of Sydney, Australia in the Blue Mountains National Park
    • Another day tripper hotel
    • Best guess at value: $20MM
  • Pansea Porfolio               
    • We think that at least one of these assets will be up for sale in the next two years

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What's Next? Monkey Time...

I love my banana.


Now the Fibonacci Monkeys are going to be chasing the 200-day Moving Monkeys and we’ll eventually get overbought.


What’s next?


The SP500’s immediate term resistance is 1,018 (a higher-high, and YTD high). After I we watch the monkeys fling’em at that line, we’ll make a new call from there. Provided that the US Dollar continues to be compromised, my intermediate term level of 1,041 resistance has every reason to be realized. The nightmare scenario for those who tried to call a crash again (AFTER the 4-day correction), is a SP500 futures picture of up 10-15 handles in the morning.



Keith R. McCullough
Chief Executive Officer


What's Next? Monkey Time...  - bananas

Game Time YouTube: Bernanke Burns The Buck

Our Game Time call was that he would pander – he just pandered.


There was no signal of raising rates – explicitly or rhetorically. Bernanke said the Fed is going to “gradually slow the pace” of buying UST Bonds, but that’s just a political plug.


Per Wikipedia: to pander means, “in politics, portrayal of one's views to fit in line with a certain crowd of voters the candidate is attempting to impress.”


Ben Bernanke is pandering to the political pressures associated with getting a core constituency paid: Bankers, Debtors, and Politicians. He is hostage to his own personal history (studying depressions) and those savvy politicians who understand how to use that personal history as a backboard for their compromised agenda.


While, in the long run, this doesn’t end well for those paying the bills (US consumers via inflation and the Chinese holders of US Debt), in the immediate term you should continue to focus on how you can get paid. Just understand the dynamics of US Dollar Devaluation, and capitalize on it.


The US Dollar is down on the day, and everything priced in those dollars is up.



Game Time YouTube: Bernanke Burns The Buck - bern


Retail: Destocking Over?

Inventory destocking and clean-up across the supply chain appears to be at an inflection point now that the majority of the branded apparel and footwear vendors have reported 2Q results.  The chart below shows branded apparel and footwear sales to inventory spreads over the past several quarters vs. the trend at Macy’s (one of the largest sellers of all these goods).  Yes we know that most vendors have become less and less reliant on the department store channel, but with the dominance of Macy’s market-share in branded retailing, it’s still worth a look. We’ll have a better picture of this over the next week or two when every other retailer reports 2Q inventories, but for now it is clear that the delta on sales/inventory is getting better on the margin. 


The bottom line here appears to be that this is good for most links in the supply chain.  But we can’t improve this delta (hence boosting Gross Margin) by simply shrinking inventories forever. At some point, companies are going to have to actually buy inventory if they care to grow their respective businesses. This actually smells a little like Wall Street to me, where many people are not ALLOWED to be bullish because they (or their PMs) are too afraid of being run over making a positive bet on a consumer discretionary company. At some point, retailers are going to have to start to open the gates. My sense is that this will be around Holiday. That’s also the time when we eye a period (Spring) where the delta on compares won’t be as easy, and companies will need to either benefit from, or suffer with, the capital deployment decisions made today.


Bottom line is that I still think that the Quality Trade returns in early 2010, and companies that are proactively preparing to grow their businesses for the New Reality will prove that today’s numbers are far too low (RL, BBBY, UA, and even Nike later in the year). PSS is in there – though I accept that it does not deserve the ‘quality’ label. Junk is as junk does. That’s WRC, GIL, and JNY. And yes, include ROST and TJX in there. I know everyone loves them and they’re not ‘junky,' but we’ll start to see quality of earnings and incremental ROIC head in that direction next year.


Retail: Destocking Over? - Sales Inventory Growth


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