BYI makes FQ1 on lower SG&A. Not a high quality quarter but not that important either. We continue to be bullish on Q4 and the long-term and, indeed, guidance was increased.
While BYI reported an "in-line" EPS number of $0.53, we can't really say that they "met expectations." If not for the 21% decrease in SG&A, BYI would have missed EPS by a mile. Higher FY2010 guidance and a bullish outlook is good enough to forgive a weak quarter of equipment sales.
While we were disappointed in the FQ3 top-line, our thesis on BYI never focused on this quarter. It's about owning the cheapest gaming equipment manufacturer into what we believe will be a huge cyclical rebound in replacements and abundant new market opportunities spurred by governments' need to fund ballooning fiscal deficits.
Despite an in-line EPS number, Bally's $196MM revenue missed our revenue estimate as well as the street's by $8MM and $10MM, respectively. Excluding the casino operations, which no one really cares about anyway, the miss was driven by weaker gaming equipment sales. BYI reported $62MM of equipment sales vs our $70MM estimate and $77MM consensus estimate. The $8MM difference between our estimate and the actual number was evenly split on lower new gaming device revenues and other equipment sales. New units sales were 3.5% below our estimated 4,079 number and ASP's were 3.6% below our estimated sales price of $14.6k. BYI missed our North American shipment estimate by 300 units but partially made up the miss by higher international shipments.
Gaming operations was a touch better than Street expectations and a little below our estimate - the September quarter is typically seasonally weak. We were amused when Haddrill called out Ramesh for sandbagging the systems numbers, because we think that's exactly what he did last quarter when he basically guided to a systems number higher than $47MM reported in June but lower than the mid-50's run rate. We think that BYI's decision to guide to system's revenue for the year was a smart move since no one really knows how to model that business and therefore the street and buyside continually undervalue it.
All the detail aside, SG&A really saved the day. While some of the savings were clearly due to lower litigation and auditing spend, we think the vast majority was driven by salary cuts. BYI did say that SG&A would be higher next quarter. Of course, so will revenues. We are quite bullish on FQ2 and think Street estimates need to come up.
As expected, BYI's outlook on 2010 and beyond was very bullish, and for good reason:
- Operators signaling willingness to open their wallets a little wider in calendar 2010
- Opportunities to enter numerous new jurisdictions domestically and internationally beyond FY2010
- Exciting new games to be previewed at G2E
- New platform for system gaining traction and the increasing likelihood of being able to install their iVIEW DM "bridge" technology onto IGT and WMS devices
- Elimination of most of the IGT litigation and getting all the accounting issues behind them