BYI lowering of guidance wasn’t a complete surprise and smart move in light of the Rainbow sale announcement. This doesn’t really change our long term outlook but does highlight the near term risk we were concerned about.
BYI lowered its EPS range for FY2010 to $2.15 to $2.25 ($0.15 to $0.25 below original guidance) due to:
“1) slower than expected deployment of capital by customers thus far in calendar 2010; 2) the interruption of gaming in Alabama (discussed below); and 3) lower-than-anticipated win per unit in Gaming Operations in the third quarter. Despite lower revenues than previously anticipated, gross-margin percents are expected to be within the normal ranges. The Company now anticipates the range of systems revenues to be $217-$223 million for fiscal year 2010 versus the previous $220-$230 million.”
So basically the guide down of $0.15-$0.25 cents breaks down as follows:
- Alabama: $0.04-$0.05 cents for 2H2010
- Systems: $0.03 to $0.06 cents from systems. $3MM-7MM of revenues which is most likely higher margin upgrade product since new systems openings are more or less known and the slippage of Marina Bay Sands will still fall into 2010.
- The two items above explain $0.07 to $0.11 cents of the guide down leaving the balance to lower unit sales and lower win per day results in gaming operations. Our guess is that the vast majority is from lower unit sales.
While no one likes to see lower guidance, the reality is this doesn’t change the outlook for the future but rather highlights the near term risk we’ve written about. Not surprisingly, BYI was very positive about their outlook as well:
“While we are disappointed with the pace of customer capital deployment so far in calendar year 2010, we remain confident in our longer-term prospects. We have just begun delivering our new wheel-based recurring revenue product including Cash Spin, which won “Best Slot Product” at last year’s Global Gaming Expo (G2E). Pre-orders for Cash Spin have been the strongest of any product in the Company’s history. And, this summer, we will be releasing our new ALPHA 2 platform and Pro Series™ Upright gaming cabinet, which have received very positive feedback.”
Other positives mentioned on the call included:
- Color on Italy: BYI revealed that they would be receiving several systems contracts and placing over 3,000 gaming devices on some sort of participation basis
- New participation product looks strong:
- 900 Fireballs installed in just over 10 months
- Expect to have over 500 Cash Spin games shipped by June 30, 2010 and have commitments for over 1,300 new wheel products (including Cash Spin)
In addition to pre-announcing the EPS miss, BYI also announced several other material events:
- Sale of Rainbow Casino: BYI announced they signed a definitive agreement for the sale of its Rainbow Casino in Vicksburg, MS to Isle of Capri Casinos for approximately $80MM. Rainbow will be classified as an asset held for sale, and its results will be classified as discontinued operations in the March 31, 2010 financial statements. The sale is expected to close in by June 30, 2010.
- We estimate that Rainbow did about $12MM of EBITDA in FY2009 and about $19.5MM in FY08. Rainbow did $39.6MM of revenues in FY09 and $17.7MM for the 1H2010. We came up with the same EPS impact from the sale of Rainbow as BYI’s mentioned on the call ($0.10-$0.11)
- BYI thinks that it will clear approximately $60MM of net cash proceeds from the sale, and if all those proceeds were used to buyback stock then the transaction will be EPS neutral to slightly accretive.
- Enterprise-wide contract with ISLE for a new system: BYI announced that it entered into a enterprise-wide contract to replace a competitor’s system with a full suite of Bally systems and server-based gaming solutions in 10 of its properties over the next few years. Isle’s remaining properties already use Bally systems.
- We estimate that this contract could be worth approx. $0.30 share for the installation and up to $0.07 a year in recurring EPS several years down the line once the conversion is complete. To come up with our numbers we estimated that 10-11,000 of ISLE's machines are not already connected to a BYI's system (we need to confirm this assumption).
- Credit agreement amendment: BYI’s is working to amend its credit agreement to increase the Company’s allowable leverage ratio and remove the current limitations on restricted payments, including share repurchases, as long as the Company remains below certain leverage ratios. At BYI’s current leverage ratio (less than 1x), there would be no restrictions under the proposed amendment. The amendment is expected to be completed by mid-April.
- As a reminder, BYI’s completed their current facility on October 1, 2009, in the midst of the financial crisis. Therefore, the terms weren’t exactly “favorable”. BYI Maximum Consolidated Leverage is currently 2.25x dropping to 2.0x in the quarter ending June 30, 2010.
- Accelerated share buyback and new $150MM share repurchase plan: "Combined with approximately $80 million of cash on the Company’s balance sheet at March 31, 2010, net cash expected from the Rainbow sale, availability under the Company’s $75 million revolving credit facility, and the free cash flow generated from operations, the Company expects that this amendment will allow it to accelerate purchases under its current share repurchase program and have increased liquidity for other corporate purposes.”
- Again we are not sure how fast the buyback will occur, but given how under leveraged BYI is, this would certainly be accretive.
- Alabama: “As of March 31, 2010, the Company had approximately $5 million in development financing advanced; 1,750 recurring-revenue games in four locations with a net book value of approximately $7 million; and $1 million in uncollected receivables. Depending on the evolving circumstances in Alabama, all or a portion of these assets may be considered impaired possibly as early as the finalization of the Company’s March 31, 2010 financial statements.”
- No real surprise here… potential write-downs here are much more of an issue for IGT.