BYI met consensus EPS but top line was soft.  We thought they would’ve done better.   BYI did maintain previous guidance, albeit a very wide range, but seemed more cautious on the current Q.



IGT and WMS beat but the quarters were of low quality.  Both provided somewhat disappointing guidance – IGT didn’t raise despite the beat and WMS provided FQ3 (March) guidance below Street consensus.  BYI was a little different because the company only met consensus but missed our expectations.   However, their quarter was also low quality.  Revenues missed but an very high gross margin on product sales and a low tax rate allowed them to make the EPS number. 


BYI reiterated its FY2010 EPS guidance range of $2.30-2.55, although given our view on new/expanded casino openings over the next two quarters, we’re guessing the Street may have to come down off of its $2.44 estimate.  The Street’s $0.65 estimate for the March quarter may be even more at risk – BYI hinted as much during their call.


BYI is down 7% since IGT reported last Thursday night so some of the disappointment may be in the stock already.  Even though the important part of the long-term thesis remains new markets and normalizing replacement demand – both very much intact – we’d prefer to see more conservative near-term estimates for BYI and the rest of the sector.


So what did we learn from the release?


Game sales

  • Similar to WMS (but not IGT) replacements orders were better than expected while new and expansion units were disappointing (we will have another note out shortly elaborating on this issue)
  • Calendar Q4 slot orders for the industry may have been a “catch up” quarter given it’s the last quarter of the fiscal year for most operators and orders from the rest of 2009 were paltry
  • Unlike IGT and WMS, BYI’s international shipments where surprisingly good.  We suspect that a couple hundred shipments to Mexico helped
  • ASP’s were disappointing, but this could be because the units shipped to Mexico are at a lower ASP
  • Margins were very impressive due to reductions in material costs and mix shift towards more video shipments which have slightly higher margins than mechanical reel machines. Conversions kits, while down sequentially where also likely a higher % of the "other mix"


Game Operations

  • Placements were below expectations although we agree with management that the timing of new game introductions hurt them this quarter
  • Win-per-unit was also disappointing.  We thought that blaming it on the weather was kind of weak… Robert you’re better than that



  • No real revelations on systems
  • SG&A was a little higher than our estimate, but the Dec Q did include $3MM of G2E related expenses
  •  R&D expenses, similar to IGT and WMS, were below expectations
  • BYI’s tax rate was lower, although that’s mostly due to the strong performance of lower tax international jurisdictions(which represented a higher share of profits) as well as higher shipments to Nevada, which also has a lower tax rate.  If international shipments stay strong the lower tax rate could continue in 2H FY2010

When One Door Closes

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”   
-Alexander Graham Bell
I expected much more from yesterday.  It’s not that I like to revel in the agony of others, I just like good theatre. Yesterday the “Super Bowl of Politics” was one of those days where you knew what was going to happen and it happened as planned, but I was hoping for some fireworks.  
With the market up 62% from the March 2009 low, the door on the financial crisis is closed.  Yet politicians and policy makers are looking at the closed door.  
Act I - Tim Geithner continued to use his fear-factor strategy to defend his actions and employed the age old theory of “If the facts don't fit the theory, change the facts.”  The real tell on how he fared during the day was when the camera focused on him during the State of the Union - he looked beaten.    The Treasury secretary did what he needed to do to ensure job security once he leaves Washington.   
Caroline Baum of Bloomberg news made a great point that firing Geithner might be good for both President Obama and  the Treasury secretary, stating, “Obama would be seen as an ally of the people and Geithner would be free to claim his just reward:  that plum offer from Goldman Sachs.  The circle would be squared.  Obama would have his man on the inside.”
Act II - We then moved to the "exceptionally low" for an "extended period" stage.  I’m YOUTUBING myself on this one.  I have written many times that the Fed was going to change the language in its policy statement in January.  The Fed did not, and I was wrong.  
Can you learn from your mistakes?  Yes, you can. Ben Bernanke is just another Washington insider that is fighting for his job; of course he is not going to change the language in the policy statement if his job is on the line.
It gets better.  Two days before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet, it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition, the recession is over as the U.S. economy will have posted two straight quarters of GDP growth.  
Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government. Knowing this, do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the Fed is trying to tell us something.  
What are the markets doing with this information?  As of 5 am, stocks around the world are rallying and the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day.  Another door has opened, but Ben is looking at the closed one!
Act III - The State of the Union was a non-event, too.  I love America and last night was a very important part of our Democracy.  I wanted to listen to the President, who is known for being a great orator, deliver a great speech.  The likelihood of the speech including something shocking was low, but that’s ok.  More importantly, I could care less if the RIGHT or LEFT approves of what he was saying - we know what each stands for.  
Is it just me or was it nauseating to see Nancy Pelosi and Joe Biden shaking their heads and jumping up and down every five minutes. Personally, I think his speech would have been far more effective if all of the partisan politicians would just shut up and let the President speak.  Now that would be good theatre!
Yesterday, the Financials (XLF) was the best performing sector by a moon shot, outperforming the S&P 500 by 190 bps.  The outperformance was even more telling knowing that the President has the bankers in his sights and said so last night.
I’m going to give the President the benefit of the doubt that he is looking through the door that has opened for him.  We will know for sure if and when he begins cleaning house and gets rid of some of the dead wood lying around.
Function in disaster; finish in style
Howard Penney
Managing Director


XLV – SPDR Healthcare
— We bought back our bullish intermediate term view on Healthcare on 1/22/10.
EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

CYB - WisdomTree Dreyfus Chinese Yuan
— The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


GLD – SPDR Gold Shares
We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.

IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
EWJ - iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.  Knowing this do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the FED is trying to tell us something. 


A day before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition the recession is over as the US economy will have posted two straight quarters of GDP growth. 


What are the markets doing with this information?  As of 5am, stocks around the world are rallying the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day. 


Yesterday, the S&P 500 US equities finished higher on accelerating volume.  Early in the day a negative tone was set by tightening concerns that drove a fourth consecutive downturn in China stocks.  Last night China was up slightly, while the rest of Asia rebounded nicely.


On the MACRO front yesterday, new home sales fell 7.6% month-over-month to a seasonally adjusted annualized pace of 342,000, compared with consensus estimate of 366,000.  The median home price in December declined by 3.6% year-over-year, while the months' supply of new homes for sale rose to 8.1 from 7.6, but remained below the 12.4 months seen in early 2009. 


Yesterday, news flow also helped fuel a continued bounce in the dollar, which was up 0.31% yesterday and 1.04% year-to-date.  The VIX has seen a three day correction declining 5.74% yesterday, following a nearly 3.38% decline Tuesday.   


After being the worst performing sector on Tuesday, the Financials (XLF) outperformed the S&P 500 by 190bps on Wednesday.  Yesterday’s outperformance was driven by the BKX, which was up 2.9%.  Within the banking sector the regional names were the best performers. 


The RECOVERY trade got hammered again for the second day in a row.  Yesterday the Materials sector was the worst performing sector, declining 0.98%.  No surprise that the tightening concerns out of China, sovereign credit concerns and the accompanying bounce in the dollar are putting pressure on the RECOVERY trade. 


The CRB declined 1.8% yesterday and now declined 5 out of the last 6 days.  Since the beginning of last week the CRB has declined 5%.


Howard Penney

Managing Director


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  • Game sales reflected continued sluggish replacement sales
  • The second quarter is seasonally the weakest quarter of the year.  Frigid weather in Dec also negatively impacted results - by $1MM
  • Last's year's SG&A included a $3MM insurance proceeds offset and this quarter included $3MM of G2E spend
  • Expect effective tax rate of 34-36% due to higher income in lower tax jurisdictions
  • Repurchased 114k shares in the 3Q2010 quarter
  • Estimate that they retained game ship share in the low 20's
  • North America - 2,253 were replacement sales
  • They are pleased with their low 20's % shipshare
  • Anticipate releasing their new alpha platform in the 3Q
  • Game sale margin reflect's cost initiatives
  • Majority of game sales in NA were video
  • The increase in conversion sales benefiting margins, and margins should remain above 50% in the next 2 quarters
  • International unit - got 22% of the units shipped to Resorts World Singapore
  • International opportunities for BYI over the next 12 months:
    • Italy shipments will begin in the summer on both a sale and participation basis
    • Mexico, Singapore and Australia reintroduction in 2011
  • Game operations- the horrible weather in Dec exasperated the normal seasonal weakness
  • Premium products continued to perform well - especially the Digital Series
  • Very excited about the Spinning Wheel game (end of 3Q) and Dual Cinevision game will lauch in the March Q and their backlog for these games continues to improve
  • Initial Mexican placements (Class III) have been very good with material increases in win per day
  • The current volume of systems business continues.  However, there are still a higher than normal postponement of technology decisions
  • Sands, SJM and Galaxy are all now BYI customers. SJM is switching to BYI system at Lisboa. Galaxy World will be the first casino to go live with iView DM
  • iView DM continues to perform well at Pechanga
  • Elite bonusing suite server is in place in several casinos and will launch applications like iSpin on it in the June & Sept Qs
  • While they continue to sense more optimism from their clients they expect that to build throughout the calendar year
  • 4Q is expected to be stronger than Q3
  • Expect that international will grow to 30% of their business in several years
  • Potential to increase their operating margin to 28-30% over the next few years



  • Have 17 games on the V32 cabinet
  • NY Lottery extension. BYI has just over 50% of the devices in the state of NY which was set to expire at the end of this year until this extension.  Will benefit them when Acqueduct opens (expects early 2011)
  • Cash from operations?  $50MM for the 6 months ended Dec 31 - lower y-o-y due to working capital
  • Capex? $6.5MM for the six months ended (corporate) plus $22MM on game operation capital expenditures
  • Uses of FCF? Will likely use more cash to repurchase stock and finance customer purchases. There are also a number of opportunities to acquire and invest in businesses.  Have no near term plans to issue a dividend.
  • Video shipments were over 60% of shipments in the Q.  Alpha 2 platform and more titles will help them continue to make traction in video
  • Canada RFP's?
    • One of their objectives is to insure interoperability 
    • Each province is independent, but they are coordinating to establish industry standards
    • Expect revenue from there to be recognized over several years
  • How do they view systems contract revenues funneling in?
    • Takes 3-6 months to make a decision for any facility and then it can take another 6 months for a facility to open
  • S6000 replacements with Classics Series as BYI will stop supporting that platform in March 2010
  • Pricing benefit of Alpha 2 and timing? Expect pricing to ramp over a 12 month period from the release date this summer.  Should help margins and ASPs (so does simply getting more video share since that has higher margins than reels)
  • This quarter's ASP's were depressed due to a large international shipment of a "stripped down" cabinet
  • Conversion kit sales were actually lower than last quarter
  • iView DM is set for trail at the Bellagio? There is no iView DM trial at Bellagio. There are 2 large customers that will start trialing it soon and several are going live shortly
  • Delay in systems / technology changes since implementation takes longer as do approvals.  Also capital budgets aren't as fixed as most people think - they are tweaked on a monthly basis.
  • Decline in WAP games? Haven't released a lot of product on WAP platform in a while.  They just recently launched some new products and have a few more in the pipeline
  • Financing to operators was beginning to decline at WMS?  Their DSO's are still below their competitors... Seeing about the same financing opportunities as they did 6 months ago. Expect DSO's to increase slightly and then level off
  • iView DMs at Pechanga are at 550, balance will go live in a few months. Feedback has been very positive.  So far all they have done at Pechanga is a technical proof and now they are getting ready to launch applications
  • Aria? Games at Aria are doing very well. Think that they will get DM on the floor in the next 90 days. 
  • Gaming ops detail? Fireball and 7777 Digital Towers growing well. Number of the premium titles increased by 59 units q-o-q. Win per unit was also up from the prior year
  • Did the system get installed in Kashada? Yes in Sept Q


While we don’t have a specific stock call on RCL into tomorrow’s earnings, we thought we’d “Youtube” RCL’s commentary last quarter and CCL’s commentary from their earnings call last month.




  • “The booking environment remains fairly consistent and relatively stable.”
  • “We are also seeing more pronounced seasonality than is the norm and we are giving the upside that we enjoyed in the third quarter back in the fourth.”
  • “The recent news have been full of reports that the economy is rebounding or is about to be rebounding but we have not seen any evidence of that in our bookings to date.”
  • “We have seen some early signs of a possibly expanding booking curve but it is still quite contracted by normal standards. We also have several new products in emerging markets and since these products tend to be shorter in duration and closer to the guest’s home, they also tend to have a closer in booking pattern.”
  • “Looking out to the summer of 2010, we are encouraged by the early peak season demand. On the other hand, we continue to see slow demand for Mexican Riviera cruises and demand out of Spain and the State of Florida is weaker due to their more difficult economies.”
  • “For the fourth quarter of this year and the first two quarters of 2010, our cumulative booked load factors are still running behind this same time last year but we are seeing a rapid recovery and with new bookings running more than 40% ahead of last year since mid-September, we expect to see higher book load factors in all quarters before year-end.”
  • “Peak season was better than we expected but it now appears that the traditionally weaker fourth quarter will be worse than we had previously thought. Our holiday sailings have required more discounting than we anticipated and our low season Caribbean cruises are being hurt by Florida’s weaker economy.”
  • “In aggregate, our forecast range is still quite wide but we do believe we have better yields -- we will have better yields in the first quarter of 2010 than we did in 2009, driven by the performance of our newest vessels and avoidance of the type of dramatic discounting we experienced last year.”
  • “Overall for 2009 we expect to source 40% of our company’s total business from outside the United States and then more than 40% in 2010. Although the winter season is upon us, we still have limited visibility to the performance of our products that depends more on sourcing of non-U.S. customers. It does appear that Rhapsody of the Seas in Australia/New Zealand will enjoy improved year-over year performance. For our products in Asia, Dubai, Brazil, and Panama, it is too early to tell.”
  • “For the first quarter and the full year, we are expecting both will have higher yields in the corresponding period in ’09”
  • “Bookings that we are experiencing today would be proportionately equal to slightly higher on a capacity adjusted basis to what we were seeing back in ’07 and ’08. I would lean toward higher because we have more of a load factor deficit than we did back in ’07 and ’08, given the contracted booking window.”
  • Oasis Commentary: “Bookings remain strong and she continues to command the lead pricing in the category.”
  • “It’s been fairly steady. It’s better than it was at the beginning of the year but I want to be very reluctant to say that we saw a dramatic shift in the way the consumer is spending money on board.”



  • “Ticket prices came in $0.01 better on slightly stronger-than-anticipated closing pricing.”
  • “Net onboard and other yields in our European brands were down less than in our North American brands, a trend similar to the experience in net ticket revenue yields. For the first time this year, we saw an increase in two of the onboard revenue categories: Shops and photo. The rest of the major categories were down, but for the most part, it was an improving trend from the prior two quarters.”
  • “ With continued strength and booking patterns during the last 13 weeks, occupancies on a capacity adjusted basis for the first nine months of 2010 are now at approximately the same levels as last year. Booking volumes during this past quarter for North American and European brands covering the first three quarters of 2010 are each up over 40% versus the easier comparisons to last year. But these bookings are also strong on an absolute basis. Actually, on absolute basis, these are the strongest bookings we have seen in our history.”
  • “We have seen more demand and have been able to move pricing higher in certain trades. Our U.S. premium brands are showing increasing pricing strength, which is a significant reversal from 2009. This also suggests that with the strengthening of the U.S. economy and the rise in the equity markets that the higher-end customer is feeling better about taking their vacations, and the superior value of cruise vacations is driving a lot of business our way.”
  • “Breaking the recent 13-week booking pattern down by markets for North American brands, other than for Mexican Riviera cruises, pricing for all other itineraries are up year-over-year, with particular strength in Europe cruises for spring and summer of 2010. Also, long and exotic cruise pricing is nicely up year over year, a nice reversal from last year.”
  • “Given the continuing strength in bookings, which has resulted in occupancies catching up with last year, we are now expecting North American brand revenue yields will be higher by 2% to 3% for the entire year 2010.” 
  • “With the recent strength of European brand bookings, we are expecting European yields for all of 2010 to be slightly lower on a local currency basis and higher on a current dollar basis.”
  • 2010 guidance: “I think if you look at our first quarter guidance, we were down in the 3% to 4% range. I think that the catch up -- by the time we catch up with all that in the second, we will gradually improve yields year-over-year. Second quarter will be better obviously than the first quarter. The third quarter will be better than the second quarter”
  • “In terms of bookings for 2010 in terms of  percent of the cabins that are currently filled is very consistent with our historical figures from '05, '06 and '07. Yes, they may be below the historically-strong numbers of '08, but they really are now back to the '05, '06, '07 levels.”
  • “Historically, in the fourth quarter, we do see a reduction in the overall booking curve, but this quarter, we didn't see as big of a reduction as we normally, so you can say we saw a little bit of an improvement in the booking curve as well.”
  • “Our projections for next year include relatively flat onboard for 2010, holding at these levels in the third and fourth quarter.”
  • “Everywhere is doing better with two glaring exceptions: The Mexican Riviera and Brazil. Other than that, I think, generally, Caribbean, Europe, Australia, Asia, they're all doing a little bit better.”
  • “I think, if there's been any leading indicator to wave, it's been how fourth quarter bookings have been, and they've been very encouraging. So we're pretty optimistic about wave.”

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%