BYI: DRIVING A TRUCK THROUGH GUIDANCE RANGE

Potential for a big FQ2 but the Street looks aggressive on March and June. FY2010 Guidance range of $2.30-2.55 is not at risk.

 

 

Judging from the stock trajectory this year, most investors correctly believe that the Street’s $0.58 EPS estimate for FQ2 2010 is an easy number to beat.  We’re 18% above the “consensus” at $0.66.  However, not unlike our commentary on IGT & WMS, the Dec quarter should be the last layup quarter for BYI in FY2010.  We’re only $0.03 (1%) below the Street for FY2010 but 8% below for the back half of 2010.  Part of the issue may be that the Street is too lazy to isolate the quarters in terms of new shipments and just makes the simplified assumption of a continued recovery in replacement demand as the year progresses.

 

FQ2 2010 Details:

  • EPS of $0.66 vs the Street at $0.58 and $0.59 last year
  • Gaming equipment revenue of $87.6MM
    • 5.3k new unit sold, 4k to NA and 1.3k to international markets
    • Parts & conversion kit sales of $8.6MM
    • Gross margin of 49%
  • Gaming operations revenue of $72.4MM and margins of 72%
  • Systems revenue of $61.5MM and margins of 75%
  • Casino revenues of $9.1MM and gross margins of 58%
  • Other: SG&A $53.6MM, R&D: $21.3MM, Net interest expense: $2.4MM

 

 

FQ1 EARNINGS CALL “YOUTUBE”

 

Earnings

  • “Estimating fully diluted earnings per share of $2.30 to $2.55 for our fiscal year.” 
  • “Our 26% operating margin is the highest in the industry and we believe has the potential to increase to 28% to 30% over the next few years.” 

 

Gaming Equipment

  • “We continue to expect margin on our game sales will be in the high-40s over the next several quarters and we believe moving it into the low-50s is achievable within the next two years”
  • “We are selling more conversion kits and Gavin and his team continue to drive down the box cost. So that's one reason why we are cautiously optimistic that we keep it in the high 40s and eventually get up to the low 50s, as we sell more video and keep driving supply chain efficiencies.”
  • “I believe that Bally is underrepresented in North America and even more so internationally. 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. We are excited about new opportunities for us in markets like Italy, Singapore, Australia and potentially, Brazil.”
  • “Domestically, we are focused on expansion opportunities in Illinois, Ohio, Kansas, Iowa, Maryland and Massachusetts. We are also engaged in expanding our already strong position in Mexico as it moves to Class III gaming and we are excited about opportunities in the Italian VLT market. We plan to reenter the Australian market in the next few weeks at a time when it is repositioning itself for large-scale replacements.”
  • “In Mexico, we now have over 70 casino sites running and over 14,000 games connected to Bally systems and the upcoming Class II to Class III migration there opens up very good opportunities for us. And we are negotiating significant agreements for both games and systems in Italy.”

 

Gaming Operations

  • “Our current order backlog for our newer premium product is the strongest we have seen in the past 12 months.”
  • Re: Mexico impact of Class III:  “We will sell more units down there because we haven't done a lot of that in the past. But we don't expect to see a big drop in our Gaming Operations business either.”

 

Systems

  • “We expect systems margins to get back to the 70s in the near future”
  • “For fiscal year 2010, which we expect to be in a range of $220 million to $230 million. Of this total, we expect maintenance revenues to be in the range of $58 million to $62 million.”
  • “I would say that in terms of overall visibility of the number given a considerable majority of it, we have pretty certain visibility to us.”
  • “When we think about systems margins after those adjustments, meaning that the cost of sales of services will now be charged against systems margins, we would still see systems margins to be in the low 70s% for the balance of the year. I'm not saying we won't have variances out of that, where it could be higher or lower but that would be the target range, low 70s.”

 

Other:

  • “While we do expect SG&A to rise in the second quarter, the successful resolution of our legal matters and the elimination of all previously-reported material weaknesses in our internal controls should enable us to effectively manage our legal and accounting spend in future periods.”
  • “We are using our excess working capital to prudently assist our customers in selected financing transactions, pursuing acquisition opportunities and repurchasing stock”
  • “I think 36% is a good proxy for an effective tax rate for the year.”

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