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Tempered expectations for the quarter but bullish outlook for 2Q2010 and beyond

  

After watching WMS and WYNN get slammed after reporting what we believed were solid results, our expectations for Bally's release Thursday after close are "tempered".  Then again, the stock go crushed yesterday and it's not like we've been touting the quarter.  For us, the play is long-term.  BYI has managed strong year over year growth in EPS in one of the worst periods for slot sales we've ever seen.  Not too shabby.

For the fiscal Q1, we're slightly below Consensus EPS of $0.53 for 1Q2010.  We're guessing that some fear of a miss or lower expectations are priced in given that the stock has traded off 9% since 10/23.

As we wrote about on October 23rd, in our "WMS 1Q2010 PREVIEW", there weren't a whole lot of new and expansion units shipped this quarter and replacements should be down sequentially due to seasonality.  We estimate that BYI's shipments to NA markets in 1Q2010 were roughly 2,750 down from 4,001 units in 4Q09. We expect international shipments to be down about 5% since shipments to Australia won't be material until 2Q2010.  Our total new unit sales are just shy of 4,100 units with ASP's around $14,600.  The higher mix of conversion kits sold in the quarter and higher ASPs should help margins which we expect to be slightly north of 48%.

BYI gave pretty good guidance regarding it's systems business on its last call; stating that the June quarter was a trough at $47MM and that while the September quarter should be better it probably won't be a mid 50's quarter revenue wise. Our estimate for systems revenues is $50MM in 1Q2010 with margins at 75%.

Despite the September quarter being a seasonally weak quarter for gaming operations, we think that BYI could actually report better than expected results in this segment given the large number of games that were introduced over the last few months.  We estimate $74MM of gaming operations revenue in 1Q2010 at a low 70's margin.

While BYI did not provide quarterly guidance on its last call, we do think that they are more likely to do so on this upcoming call, especially if they miss the street number.  On the last call (see the "YOUTUBE" section below), BYI spoke extensively on how good the December quarter is shaping up to be.  We agree; the December quarter does look good to the tune of EPS of $0.65 vs consensus of $0.58.  Here are our preliminary thoughts on FQ2 (Dec):

  • Systems business should have a record quarter given the backlog
  • Materially more openings and expansions, as well as a seasonal uptick in replacements
  • Shipments to new international jurisdictions like Australia and Singapore
  • Strong backlog for game ops

"YOUTUBE" FROM FQ4 RELEASE AND CONFERENCE CALL

  • We expect margin on our game sales will be in the high 40's over the next several quarters
  • Year-on-year sales of conversion kits increased by about one-third. This is a testament to our improving video content, which remains an opportunity and should result in additional conversion kit sales moving forward
  • There will be new and exciting international opportunities for Bally over the next 12 to 24 months. We've been building infrastructure in anticipation and our team is ready to execute. Markets such as Australia, Singapore, Italy and certain European countries remain the key focus for us
  • Our product pipeline for both gaming operations and sale games is stronger than it has ever been. Q4 saw the initial release of many new products...We've just launched our new Digital Tower Series of products and our new Jumbo cabinet. Our Fireball™ Digital Tower game is performing at levels between 2x and 5x half average in its initial installation. More games will follow to support the Digital Tower Series of games, and we believe this could be a great opportunity for our Gaming Operations business
  • Commencing in Q2, a new spinning wheel game and DualVision™ cabinet will be available for gaming operations
  • In game sales, we continue to produce world-class mechanical reel products. This range will soon include transparent reels in the much-anticipated classics, designed to replace valued estimated North American footprint of 40,000 to 50,000 successful but aging pre-Alpha Hi-D [high definition] north steppers
  • While the sentiment of our customers seems to be firming at this time, we are not predicting a significant uptick in the game-buying patterns for the remainder of this calendar year
  • We expect our maintenance revenues will continue to grow in fiscal 2010 to a range of $58 million to $62 million
  • Since April 2009, we have seen a significant pickup in systems-related purchasing decisions. This seems particularly true with respect to competitive replacements. Casinos deciding to replace their current, not very well supported systems with Bally's core and supporting systems products. This increased sales activity should positively impact systems revenue reported starting Q2 of fiscal 2010
  • Fragile state of the current economy gives us less than optimal visibility in the current year. However, we do see several specific positives for Bally in our fiscal 2010 when compared to our fiscal 2009.
    • First, we entered the new year with a higher level of gaming operations and systems maintenance revenues, and 48% of our Q4 revenues were recurring revenues.
    • Second, we have a larger footprint of games in the field to attack with conversion kits and our new model.
    • Third, internationally, we will be selling in some jurisdictions that are new to Bally.
    • Fourth, we have an enhanced product offering in both games and systems.
    • And fifth, there are margin opportunities in game sales, interest and other expenses
  • These positives will be partially offset by fewer expected new casino openings and expansions

  • Currently expect our fiscal 2010 diluted earnings per share to be in a range of $2.25 to $2.50.  Due to normal seasonal variations in our business and our expectation that general economic conditions will begin to improve in calendar 2010, we believe the earnings power of the company will be greater in the second half of the fiscal year.
  • [RE: Systems] September quarter may also not be as strong as those mid-50 numbers that you had seen in prior quarters. But that said, beginning in the April time frame, we saw our systems pipeline begin to build, and it's now at record levels, which is why Ramesh was so optimistic about our December beyond quarters for systems
    • We certainly would hope that the systems business would maybe have troughed in the June quarter, although I could say we're not going to give any revenue guidance for the September quarter on systems
  • We still believe that between the high 60s and low 70s, varying quarter-by-quarter based on jackpots and some seasonality, is the right range for gaming ops. Same thing on the systems, we think between 70% and 80% is the right gross margin range