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EPS was better but revs fell far short of expectations. The latter will likely impact the stock action. We see little in FQ2 to change our positive long-term thesis.

We like the set up.  The positive long-term thesis was teed up in our 8/9/09 note, “BYI: THE LONG (TERM) AND SHORT OF IT”.  We explicitly avoided making a call on the quarter even though we were two cents above the Street (they actually did 3c above).  The stock will likely be down today due to a big revenue shortfall.  We hope so.  There is little in the quarter’s numbers that dent our very favorable long-term view.  The only real negative takeaway was the decline in participation units which we need to get more color on.

After the close yesterday, Bally’s reported revenues of $205MM and EPS of $0.58.  They missed the Street revenue estimate by 8%, but beat Street EPS and ours by 3 cents and 1 cent, respectively.  Guidance of $2.25 - $2.50 was wide (as predicted) and in line with expectations.  We’re not sure the EPS beat will be enough to offset weak revenues in investors’ minds.


The revenue miss came primarily from gaming equipment and systems revenues, somewhat offset by better margins on gaming equipment sales and operations.  The lower revenues do not concern us as system sales and international slots are notoriously lumpy.  Lower SG&A bridged the gap of lower revenues.  Other income, lower tax rate, and lower R&D helped beat consensus.  Below is a detailed review of the quarter and some further thoughts.

Gaming Equipment Sales

  • BYI missed our revenue number by $11MM.  $5.6MM of the miss was due to new unit sales and the balance was due to lower used, parts, & other sales.
    • North American units were spot in line with our estimate, however, international units which were down 22% y-o-y, 306 units light of our estimate
    • Pricing was only a touch (60bps) below our estimate
  • Other revenues came in $5.3MM below our estimate, but the mix was heavily skewed to conversion kits.  Our best guess is that the margin on “other”  improved to 65% from a 20’s-40% margin over the last four to five quarters


  • Systems sales came in $8MM below our estimate.  However, to be fair, this is really the most difficult segment to model due to the timing of revenue recognition.  We feel good about management’s comments on the call regarding systems in FY2010. There is a six to nine month lag between when BYI wins a contract to when the system is installed, and it can take even longer to recognize revenues.
  • Maintenance revenues increased to $13.5MM and with the launch and ramp of new applications installed on its 130,000 iviews in the field, management expected a strong ramp of maintenance revenues to $58-62MM in FY2010
  • Management also expects a strong December 2009 quarter.  BYI will be doing LVS’s Marina Bay Singapore and PNK’s River City installation
  • We expect the September quarter to be better than the June quarter, but still below the mid 50’s recent run-rate

Gaming Operations

  • Gaming operations revenues where $3MM below our estimate but gross margin was only $0.4MM below our estimate due to higher margins
    • WAP/LAP units decreased by 211 units sequentially
    • Rental and daily fee games decreased by  616 units sequentially
    • Centrally determined games increased by 1,287
  • Decline in participation units is probably the only aspect from the quarter that could have negative longer term implication
    • Management seems committed to produce more Millionaire games which will help the WAP/LAP segment
    • Management must explain the rental and daily fee decline – we will have a follow up


  • SG&A was 54.3MM, below our estimate.
    • As a reminder, last year BYI had some “unusual” expenses including at least $10MM of legal expenses (mostly regarding the IGT litigation) as well as auditing expenses relating to their restatements
  • Other income was $2.7MM, mostly from FX – which we did not model
  • We thought it was odd that BYI didn’t break out 4Q09 financials and instead they only broke out 4Q09 financials for the slot business
  • Share count looks like it ticked up a bit, despite the buyback
  • Total debt decreased by $60MM sequentially, cash flow generation was strong with total operating cash flow net of investment spending equalling approximately $136MM for FY2009


  • BYI guided to $2.25-$2.50 per share, growth that will be driven by
    • Higher international units
    • Higher ASPs
    • Higher conversion kit sales, which mean higher margins for gaming equipment sales
    • Higher base of gaming operations units
  • EPS will be slightly more back-end loaded than expected, the street was projecting 46% of EPS in the 1H FY2010.
  • BYI does have some large systems installations coming with LVS’s Marina Bay Sands and PNK’s River City opening in calendar 4Q09/1Q2010
  • Deferred revenues were down sequentially again, even though the company says that deferred revenue isn’t a good proxy for forward revenues, we do find comfort in the a large backlog