With the Big Three already reporting, here are some observations, some of which we will expound upon in more detail in later posts.
NA replacements for the industry seem closer to 10,000 than our 7,500 estimate but that doesn’t mean replacement demand is necessarily spiking
- December is usually the seasonally slowest quarter for replacements but seasonality didn’t seem to hold up this year
- It appears that some operators, having under-ordered all year decided to go the “use it or lose it” path and spent their previously allocated budgets rather than losing them.
- Anecdotally, almost all the manufacturers stated that they weren’t seeing a big pick up in replacement orders yet despite positive sentiment. Seems like operators are taking a cautious approach to utilizing their budgets.
New and expansion shipments in the December quarter were lower than our estimate. We crossed checked our numbers with several suppliers and don’t yet have a great explanation as to why, since our original estimates weren’t far off of their estimates. So what happened? We don’t know exactly but here are some preliminary thoughts:
- Our estimate included shipments of some participation units
- The 1,700 units shipped to Alabama’s County Crossing almost all participation/lease
- Generally 8% of total shipments are participation or lease
- We estimate roughly 1,000 quarterly shipments into Washington State (replacements) & Florida (conversion to Class III) - these units may be accounted for in replacement demand by operators
- There is always the issue of timing. We generally assume that large openings & expansions ship one quarter in advance while smaller ones can go either way depending on timing of opening. Looking back at last quarter it does appear that close to 1,000 units that we accounted for in the 4Q09 were actually shipped in 3Q09. It’s also likely that perhaps 1,000 units that we accounted for in this quarter won’t be recognized until next quarter
- Not all the units that go into a new facility or expansion are actually new units, many casinos have some used machines or machines relocated from other facilities to the extent they operate more than one casino. (River City is a good example)
- Many facilities open with less units than what they announce to name a few (Parx Casino, River City, Choctow Durant expansion)
All 3 manufactures reported lower conversion kit sales, why is that?
- One of our takeaways at G2E was that while manufacturers weren’t explicitly discounting they were throwing more in – like more themes with each title
- Perhaps content is just better and therefore lasting longer on the floors… we did walk away thinking that all the manufacturers had stepped up their game
All three manufacturers have learned to manage expenses to meet guidance and there’s nothing like lower tax rates to save the day. Tax rates were low across the board. IGT and WMS reported SG&A and R&D that was below trend and expectation. BYI posted a very high product gross margin and also lower R&D than we thought. Revenues were light for each of the Big Three.