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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

Q&A

  • “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