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Messy quarter but top line comes in strong.  Should be good enough. 



"Our fiscal 2009 results reflect a challenging operating environment which we believe stabilized during our fiscal third and fourth quarters... While we remain cautious on the timing and extent of the replacement cycle, we have been encouraged by modest upticks in spending by many of our casino operator customers over the past two quarters."




  • Gaming operations continues to feel the impact of a weak economy, although they are starting to see some stabilization in win per day. 
    • $50 win per unit per day
    • Higher sub-segment yielded north of $110 per day
    • Margins benefited from a higher percentage of fully depreciated games
  • Installed base should resume growth as the environment stabilizes.  International saw relative strength
  • Product sales domestic:
    • Domestic replacement units were 3,800 in the quarter 
    • Future unit sales will exceed trough levels seen earlier this year
    • Domestic non-machine revenues were impacted by lower systems revenues and lower conversion kit sales
    • Higher deferred revenues due to bundling
    • ASPs increased as a result of higher mix of MLD products
  • International product sales:
    • Continue to feel the effects of economic weakness - especially in Western Europe
    • Higher systems and conversion kit sales
    • International ASPs were down due to a higher mix of lower price units
  • Product sales gross margins should remain in the 50% range
  • Operating expenses would have decreased 17% ex-non cash charges
  • Cost reduction efforts are becoming more evident.  Previously announced two rounds of $100MM of cuts.  They have completed about $135MM of annualized savings.  2010 plan contemplates the remainder of these initiatives, which will be partially offset by PGIC and inflation
  • SG&A expected to remain at approximately $100MM and R&D to remain in the low $50MM's range
  • Bad debt provision of $9MM stemmed from customers being impacted by the weak economy
  • D&A was $65MM including game operations
  • Beginning in the 1Q2010 they will have to bifurcate the interest expense calculated on the converts impacting them by $30MM or 6 cents a share next year.  (Basically interest expense > cash interest because the convert is at a discount to par and it needs to accrete re: new FASB rules)
  • Quarterly rate rate to trend at 39-40%
  • Have $1.7BN available on their R/C line.  New FASB rules will reduce their debt by roughly $140MM because the converts will be accounted for in equity
  • Capital expenditures were $250MM in 2009 due to lower investments and falling PP&E, expected to trend in the $50-75MM although they continue to trend at the low end of that range



Patty's comments

  • "While we remain cautious, there was continued improvement in operator sentiment"
  • This quarter saw operators cautiously re-enter the market to replace aging product
  • 1,700 MLD's shipped in the quarter and are excited about the 2.0 version which will be showcased at G2E
  • Stabilizing win per days at $51 per day are encouraging
  • Believes that this year's product portfolio will provide better clarity on the direction of the company
    • Game ops - introducing Sex in the City
    • Center stage mega jackpot series - Wheel of Fortune experience
    • They will finally have a common hardware platform  
    • Presenting a package that includes a box and package of games
  • Focusing on getting a better ROI
  • Refocusing sales organization around account management
  • New options exchange program will better align management with shareholders
  • New organization will be more focused on operating efficiencies, ROI, and delivering content driven product
  • Remain cautious on predicting timing and scale of the replacement cycle
  • Want to leverage renewed focus on content in their product sales business
  • Continue cost cutting efforts which will provide them with a leaner business model
  • Significant changes to accounting and capital structure impacting 2010 guidance of $0.77 to $0.87 which includes 6 cents a share of non cash accounting changes




  • Interest income was $15.8, $36.8MM of interest expense
  • Conducting pre-G2E meetings with customers and the feedback has been very positive.  Like the MLD technology and greater balance between participation and for sale games
  • Guidance doesn't include revenues from new jurisdiction
  • Replacement assumption ranges from 2009 like to something better
  • Japan sales?
    • Continues to be a challenging environment.  Introduced 3 games in 2009 that performed at market level
    • Shipped 775 units this Q
  • Gaming operations for 2010 assumptions
    • Slight improvement in play levels and also a slight increase in install base
  • Walk through the deferred revenue accounting
    • The majority of the replacement units were recognized
    • As they sell more and more bundles it puts them into the world of the software accounting (a la BYI)
    • Two new accounting pronouncements that will let them more easily separate the boxes from the downloaded games
    • In Aria they will need to recognize those revenues over time
    • Apparently Rosario (Argentina) was also deferred, due to the bundle, despite company telling us otherwise
  • CityCenter and SBG color on other manufacturers
    • Inter-operability testing had to cease in October so that the opening can be flawless
    • So SB-system will be on all IGT machines and some WMS machines.  Everyone else will use Nex-Gen as a bridge 
  • Guidance implications - are they sandbagging?
    • Low end is fairly conservative around the replacement cycle, yields, and install base.  Top end assumes 4Q like replacements, slightly better yields and small increase in install base
    • IL:  just focused on matching product functionality to the market regulations
    • OH:  Still some political and litigation risk, gaming commission needs to be formed, expect some litigation.  Not likely to ship there in FY2010
    • We don't think the high end is sand bagging - 3,800 replacement units is way above recent quarters, new and expansion unit shipments will be down, and their install base hasn't seen much growth in years.  New markets probably won't ship in the next 12 months
  • ASP increase has been driven by 85% AVP mix and MLD units
  • ASP guidance?  Will it be like 16,000 or 14,000 next year. Will they lower MLD pricing?
    • They don't think the MLD pricing is an issue - save on conversion costs for steppers.  Are getting more creative on bundling the MLD with other products in their arsenal to get more on the floor
    • ASP's over time are moving up
  • Non-machine sales, very hard to model? International units shipped... how do we think about that?
    • Non-machine revenues is most susceptible to deferred revenues (systems piece - again, this is just like BYI)
    • UK pretty stable, continental Europe should improve in FY2010, seeing continued improvement in Latin & South America and Mexico can also provide growth
  • 45.6k units in game operations install base was domestic
  • Deferred units:  CityCenter and Rosario were the vast majority
    • Rosario will be a FQ1 revenue recognition event
    • Aria is a 2 year revenue recognition event
    • Washington 1,200 units recognized over 2 years (split btw this and last quarter)
  • What market share are they assuming in their range of guidance?
    • 40-45% for 2010
  • 6,900 were shipped last quarter and 6,700 recognized
  • International, what drove sequential improvement?
    • Improvement in non-box
    • PGIC assets are starting to nicely contribute to international
    • New box launched for Australian markets
    • UK also was up
    • ASP increase was also due to higher priced platforms



Positive takeaways following my initial read through of 4Q09 results:


Earnings came in at $0.24 per share, higher than both my $0.22 EPS estimate and the street at $0.21.


U.S. same-store sales growth improved to -1% from -6% in Q3, better than my -3% estimate.  Trends continued to improve on a 2-year average basis as well.


Consolidated same-store sales came in -1% relative to -5% in Q3.


SBUX raised its fiscal 2010 EPS guidance range to up 15%-20% from its prior range of 13%-18%.


This guidance assumes “modestly positive comparable store sales.”  As I outlined yesterday in my earnings preview, I thought guidance above -1% would be a positive catalyst for the stock.


Management also raised its margin growth guidance for the U.S. to up 200-250 bps, from its initial expectation of 150-200 bps of improvement.


SBUX expects to generate free cash flow of $900 million in fiscal 2010, in line with its fiscal 2009 level (came in above the company ‘s free cash flow goal of $500 million).


The company exceeded its Q4 cost savings initiatives of $180 million in the quarter by $30 million.


U.S. operating margins of 12% in Q4 were in line with my expectations, up 760 bps YOY.


International operating margins grew 470 bps YOY to 8.8%.



WEN stated on its earnings call that Wendy’s October same-store sales declined 4%.  Although management stated that 2-year average trends are still up 1% as the company is lapping a difficult 5%-plus comparison from October 2008, this -4% number is a significant sequential step down from the +0.1% result in 3Q09 (-1.4% on a reported basis, which includes the negative impact of 300 fewer units YOY serving breakfast, as shown in the chart below).  Management commented that this -4% excludes the impact of removing breakfast so this number is even lower on a reported basis.


When asked specifically whether BKC’s $1 double cheeseburger could be somewhat responsible for the sequential fall off in trends, management attributed the softer result to both a tougher comparison and marketing in early October that focused on more thematic, brand repositioning “You Know When It's Real" advertising rather than value/price point advertising.


Based on MCD’s guidance for October U.S. same-store sales of flat to negative, both MCD and Wendy’s experienced a sequential slowdown.  Again, BKC did not provide any specific color around October trends, but it did say the $1 double cheeseburger had provided a lift to traffic trends in the markets where it had already been launched in fiscal Q1, and it was launched nationally on October 19.  If this product’s success continues, October will not experience the full benefit as a result of the mid-month launch, but I would expect to see some sequential improvement and then see trends move higher for the balance of the year.  My expectation mirrors TAST’s recent comments about its Burger King comparable sales trends.  Earlier this week, TAST said that it expects its Burger King same-store sales to turn positive following a -5% result in October.  Even this -5% number already showed marginal improvement from TAST’s reported -6.1% comparable sales growth result in 3Q09.



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As expected, MGM beats the quarter.  Outlook was bullish, too bad Bobby slipped on the call



MGM reported strong numbers this quarter.  Most of the beat was driven by better hold and therefore EBITDA at MGM Grand and the Mirage, with some offset from weak hold and EBITDA at the Bellagio.  

"We continue to show sequential improvement in our operating results over the course of 2009...We continue to earn occupancy through our superior assets and focus on the customer, resulting in increased market share.  We expect CityCenter to grow our business significantly and we are extremely excited to open this tremendous asset"





  • It's not a stretch to say that in the 3rd quarter "our results were monumental" for the company
  • Exceeded even their own expectations for profits in the quarter
  • Continue to focus on efficiency without sacrificing guest service
  • Outperformed their competitors in all markets where they operate
  • Added market share in conventions, hotels, and gaming in Vegas and Macau
  • Bellagio had it's best baccarat drop but held low on tables
  • Don't "buy" occupancy
  • Bellagio's RevPAR decreased less than other luxury properties in the market
  • Confirmed 550k rooms in the 3rd quarter, putting them on a more "normal" pace
  • Returned to normal booking levels and are confident that next year will be even better
  • Believe that they are building market share coming out of a recession
  • Think that CityCenter will add volume to their surrounding properties 
  • "Have created an icon, a must-see property"
  • They are laser focused on the market, while others may be distracted with other markets and corporate transactions
  • Lead volume was up 9% vs last year. Meaning that corporations are trying to secure meeting space (Pharma, insurance and auto)
    • Oct was a big month for them
  • Conversion rates on booking inquiries are also increasing
  • Cancellations have slowed down dramatically and while they aren't back to normal yet, they are close.  90% of cancellations are for 2009, while 2010 & 2011 cancellations are minimal (isn't that obvious though)
  • Room nights booked forward are back to levels of pre-recession
    • But they have more supply going forward too, no?
  • Continue to produce sequential improvements
  • FTE's are 12% lower y-o-y and 17% lower than 2007
    • compares to 14% in 1H09
  • MGM Macau property level EBITDA of $73MM, $24MM was their share of operating results
  • Capitalized interest was $76MM in the quarter
  • Seeing a return to normalcy in their bank agreement
    • Provides them with their normal historical capital markets access
    • Have enough capacity on R/C to sustain them through 2010
  • $1.4BN of TTM EBITDA vs a $900MM covenant
  • Expect a lower y-o-y RevPAR decline in the 4Q
  • 4Q09 guidance
    • $10MM stock comp expense
    • $34-35MM of corporate
    • Pre-opening higher
    • $170-180MM of D&A
    • $250-260MM of gross interest expense
    • $40MM of capitalized interest expense
  • CityCenter details:
    • 12,000 employees, 3,100 came from other MGM properties
    • At Aria continue to see a steady pace of room bookings.  Pricing continues to be at a premium to Bellagio
    • Advertising and PR budget is $20MM for opening days
    • Expect to spend $27MM in TV media and print ad placements
    • 47% of retail SQFT open in Dec and over 80% by July 
    • Seen 50% increase in traffic at the retail site and 6 new units have entered into contract since the price reduction.  A number of buyers actually upgraded their unit
    • Closing at Mandarin in Jan and Vdara in March
    • $740MM left to fund, $7.5BN funded, $180 of sponsor funds left to be contributed



  • Think that visitation this year will be 35.4MM and 38.1MM in 2010
    • Project that there will be 54.4MM available room nights in the market, 5% increase over 2009
    • Think that their market share will increase next year and well as being able to maintain their occupancy
    • Think that occupancy will be 89% citywide and they will be north of 90%
    • Think table and slot win will be up double digits and that MGM will get more than their fair share
  • How much did hold benefit profits in Macau
    • Hold was about 3%
    • Extended reach to more junket operators
    • New management introduced
    • Did a lousy job before so easy comps too
    • Also construction projects around their property (One Central, L'Arc, Encore) are wrapping up/ have been completed and will get a right turn lane
  • CityCenter advertising dollars? How does that compare to Bellagio opening in '98?
    • $20MM upfront is about standard, $27MM is a little heavy - but thinks it's in the company's best interest
    • BOBBY SLIP UP "we are forecasted to have about 1.2 billion in revenues" 
      • I suppose Greff and most of the Street will need to lower their projections now
    • Want to take advantage of being the only new property opening up
  • Amendment #7 is the "exclamation" to the end of the amendment process with their bank group. Gives them back some of the flexibility they had before
  • Now that that facility has been paired back from $7BN to $5.5BN it's more manageable - facility doesn't go current until Oct 2010.  Expect they will start working on a new facility in 1H2010
  • Income stream from MGM hospitality
    • Have nine properties in contract
    • Just signed a new project in Egypt 48 hours ago
    • Make 10-15MM a year though these development deals
    • Have 30 deals in various stages (many in LOI or negotiation stage)
    • Think that they will make 100-200MM of EBITDA in the next 5 years...
  • Seeing similar banquet pickup a la - LVS
  • Have $244MM whole in CityCenter expected to be funded with condo proceeds, and believe that they will get more proceeds than that
  • Will be paying bills on CityCenter well into 2010, so from a condo closing timing standpoint should match up well
  • A lot of the rooms being added to the market are at the high end ... so can they fill them and maintain rates at their other high end properties
    • Indications on pricing are good for next year
    • A lot of the conventions and conferences they are booking are at higher rates
    • Expect continued robust occupancy next year
  • Rooms booked for next year - every quarter for 2010 improves, and lead times have expanded - seeing more rooms booked out 60 days +
  • Hooks on the convention side: have the most "value attractive" markets, many dates/ spaces desired in the past as now available, have more amenities than other markets
  • Taking share from other markets and competitors in Vegas
  • Convention rates are as much as $60 better than leisure pricing so as they get more convention business their ADRs should increase
  • Their hold % was just slightly higher than the top end of their range in Las Vegas
    • they down play the impact but the reality is 100bps above the high end could be several hundred bps better than last year
  • Forward room nights aren't same store.  Convention room nights are most at MGM Grand, also Aria doesn't have that many rooms
  • Murren says that he never said that RevPAR will be up 5-10% in 2010 - but visitation will be up 5-10%
  • Very interested in doing a Macau listing - and are working on it - will hopefully occur in 1H2010. But won't have impact on the NJ issue
  • Goal of $600MM of cost savings and how we can see what they have achieved, how much is permanent?  Jay Sugarman's addition to the board.  Normal run rate for other Capex?
    • Have taken out a little over $700MM of cost savings, 85% of those costs are reflected in the numbers already - they started some of this as early as '07 those programs are largely complete
    • FTE's was down 12% despite same occupancies
    • Believe that when things recover their margins will exceed those seen in the "early 2000's" (peak markets)
    • Jay Sugarman's addition was partly driven by growing HC costs, spend $400MM a year on healthcare
    • Have high capex this year as they prepare all their properties for CityCenter opening - $200MM (normal maintenance run rate) and should in that range next year
    • Will spend $10-15MM more on technology next year
  • Residential $200MM write-down was MGM's 50% share of the pain resulting from the 30% price reduction and their portion was a little greater
  • $2.44BN is still MGM's share of their investment in CityCenter
  • MGM has fully funded through their commitment to CityCenter - to be funded by DW's LOC

Europe on the Tracks

Research Edge Position: Long Germany (EWG); Short UK (EWU), Short British Pound (FXB)


The announcements this morning from the BOE and ECB on rates was in line with our expectations:  both held steady at 0.5% and 1.0%, respectively. Yet divergence came with the BOE agreeing to boost its bond purchasing program 25 Billion Pounds to 200 Billion Pounds, whereas ECB President Jean-Claude Trichet signaled that emergency liquidity measures will be withdrawn.


To the former point, the BOE’s move to boost liquidity confirms more of the same—as the economy has underperformed expectations based on its stimulus measures, the government has thrown more money at the issue. Further, this comes after the government’s decision yesterday to bailout RBS and Lloyds for a second time to the tune of 31.3 Billion Pounds.  Certainly, today’s decision reflects disappointment with the country’s Q3 GDP number, registering -0.4% versus expectations of +0.2%, an underperformance compared with the likes of Germany and France that returned to modest growth in Q2. We continue to hold that the inability of government leaders to set a course of action to realize economic growth, along with ballooning debt through newly printed money will hinder fundamentals and market performance.


Returning to Trichet, who made headlines this week because of his “Black List” that includes members of the ECB committee that speak out in front of rate decisions, his mantra may be less is more. We interpret his statement today to reduce or withdraw former emergency liquidity measures as bullish on the margin. The Euro responded favorably, rising on expectations of a more stabilized economic environment.  In fact, with muted inflation concerns in Germany and France over the intermediate term, Trichet will have breathing room to diagnose regional health, including underperforming countries, to lead rate policy.


Despite our bearish outlook on the UK, one data point out this week was notably positive (and certainly surprised us), namely the October UK Services PMI number that registered 56.9, up from 55.3 in the previous month, according to Chartered Institute of Purchasing and Supply. This week we also had our eye on Eurozone Manufacturing and Services PMI (Reuters), which showed a slowing over the last two months in particular—including declines in Germany in Services and Manufacturing and an unchanged level in the Eurozone composite number at 53.0—making the UK’s push in Services (which account for ~40% of the economy) all the more impressive. (See chart below). However, we don’t expect as large of an increase next month in UK PMI as we forecast fundamentals to slow in 2010.


We’re currently long Germany and short the UK in our virtual portfolio as a pair trade. While the performance spread between the DAX and FTSE has narrowed in the last weeks, we’re comfortable with the TRADE.


Matthew Hedrick



Europe on the Tracks - UK PMI SERVICES 1



MSSR reported 3Q09 earnings after the close yesterday and same-store sales trends continue to be ugly.  Management seems to take some comfort in the fact that traffic trends improved sequentially from Q2, but with traffic still down 14.2% in the quarter relative to -16.7% in Q2, there is little to get excited about.  And, same-store sales growth actually got worse, -18.8% (from -17.3% in Q2) as increased value initiatives put pressure on average check, which was down 4.6% in the quarter relative to -0.6% in Q2. 


MSSR did join the list of restaurant companies that experienced less bad trends in October.  In response to a question, management stated, “Yes, actually we saw some deterioration month-over-month in the third quarter, July, August, September, which resulted in the 18.8% on the comp sales side.  But what we've actually seen in October is an improvement.  We're going to be at 13.9% on a comp basis – sales comp basis for P10.  More importantly, as we've said, we've seen some improvement in the overall traffic.  We're at a 10.4% year-over-year comp on traffic for October.”


In this challenging environment, most restaurant operators are talking about value and increased promotional strategies to drive traffic.  At the same time, management teams do their best to assure investors (and themselves) that they are approaching value in a way that will not be detrimental to their concepts’ long-term brand image.  This does not seem to be the case at McCormick and Schmick’s. 


Though not a newly announced change in strategy yesterday; management is not being promotional as much as deliberately acting to change the brand. Management even used the term “rebranding” in reference to its latest efforts to increase frequency at its bars and is attempting to broaden its target audience.  Management stated yesterday on its earnings call, “Over the past couple of quarters, I have outlined a broad strategy to evolve our concept with the primary goals of broadening our connection to a younger audience, increasing our brand relevance and improving our overall satisfaction ratings with our guests. This strategy involves rebranding our bar experience, expanding our culinary offerings and synergizing our marketing efforts. I am pleased to say we made good progress in all of these areas in the third quarter.”


Management is in the process of upgrading its audio-visual package to drive additional traffic during key sporting events and is offering significantly lower prices points on its menu such as 10 items under $10 at lunch.  These initiatives may help traffic in the near-term, but they seem to highlight a fundamental change in brand image.  With the 10 items under $10 lunch program already accounting for 34% of McCormick and Schmick’s lunch entrees, the value band offerings representing 8.4% of entree sales and the new $19.95 positioning on the culinary side running at about 11% of entree sales, it may be difficult to remove these offerings when economic conditions improve as they now make up a sizeable portion of sales.


These new offerings are in line with management’s communicated strategy “to broaden its guest space.” I just wonder if, over time, these initiatives will lead the concept into the casual dining “sea of sameness,” which as we have seen is not a much better segment to be in right now.



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