ANOTHER SO/SO SUPPLIER EARNINGS RELEASE

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

Other

  • 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