MPEL should beat the Street slightly, and 2010 numbers look like they need to go higher



MPEL is reporting next Wednesday before the market open, and they should report a solid quarter. We think MPEL will beat the street's estimate of $91MM of EBITDA by $4MM. This should be the first quarter where neither property has 'hold' issues, so there should be a good read through on what normal operating costs and business leverage look like. If CoD can keep ramping and if Altira stabilizes, then MPEL should handily beat Street numbers and will likely prove to be the cheapest way to play Macau out of all the US listed companies.


For those of you that like the details on our assumptions, please see below.


City of Dreams

  • Net revenue of $347MM 
  • EBITDA of $68MM 
  • RC volume of $10.4BN and 2.9% hold 
  • Mass win of $103MM 
  • Slot win of $24MM
  • Net casino revenues of $335MM, $30MM of non-gaming revenues and $18MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $213MM, $11MM of non-gaming related costs, and $55MM of fixed costs (fixed costs were $53MM last quarter)


  • Net revenue of $198MM 
  • EBITDA of $20MM 
  • RC volume of $9.8BN and 2.8% hold 
  • Mass win of $13MM 
  • Net casino revenues of $200MM, $9MM of non-gaming revenues and $10MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $153MM, $3MM of non-gaming related costs, and $23MM of fixed costs

Mocha Slots

  • Net revenue of $27MM 
  • EBITDA loss of $7MM


  • Net interest expense of $19MM (compared to guidance of $20MM)
  • D&A of $75MM, including amortization of the gaming concession and land use rights (in line with guidance)
  • Pre-opening expenses of $5MM

4Q09 YouTUBE

  • “Going forward into 2010, I believe our business is in its best shape yet. We are on a solid positive trajectory with significantly improved mass market trends at City of Dreams and a return to strong rolling chip levels under a more profitable commission environment at Altira.”
  • "I’m confident that 2010 will be a great year for us particular given the positive economic outlook in China, the strong political support from both the Macau SAR and the central government and also the geographic advantage that Macau enjoys."
  • “Rolling chip levels have since rebounded and in January, Altira Macau generated 30 billion of turnover exceeding the average monthly load of 25 billion during 2009. Altira Macau earned over US$10 million dollar of EBITDA in the month of January 2010, our best monthly performance of this property since October 2008.”
  • “Now on to City of Dreams, mass market table drop was essentially flat between October and the seasonally weaker November last year. Drop volume improved by 14% sequentially into December breaking a US $150 million for the first time. The performance of our mass market business steps up again in January of this year. Mass table drop increased 11% sequentially from December to over 170 million for the month and mass table revenue increased 20% sequentially to approximately US $31 million. This is translated into improved profitability at City of Dreams. We generated over US$30 million in EBITDA in January of this year.”
  • “We expect to see continued improvement as occupancy at Grand Hyatt approaches to 90% plus levels, which we consistently achieve at Crown and Hard Rock.”
  • “If we normalize fourth quarter EBITDA using 2.85%, the midpoint of the commonly expected VIP home range, we would have reported US$56 million of adjusted EBITDA.”
  • “Guidance on non-operating line items for the first quarter of 2010. Depreciation and amortization cost is expected to be approximately US$75m. Net interest expense in the first quarter is expected to be approximately US$20m. Pre-opening expense will be approximately US$5 million, related entirely to the ongoing pre-production of our House of Dancing Water Theater show which will open to the public in about six months from now.”
  • “City of Dreams has got about 20% of its business being done direct.”


New home sales exploded in March, beginning what we think will be a major buying push that will run through the next few months as the lagged data around the homebuyer tax credit comes trickling through. Remember, we're now just one week away from the expiration on the tax credit. The March data released this morning came in at 411k (seasonally adjusted annualized rate) vs. consensus for 330k and last month's print of 308k (the lowest level in 12 months).






Inventory fell to 6.7 months from 8.6 months last month (downwardly revised from 9.2 months). While inventory is down significantly off its 1H09 highs in the 11-12 months range, it is still above its normalized range of 4 months.




As was the case with yesterday's existing home sales print, this March print is a lagging indicator as it reflects deals closed two to three months ago (Jan/Feb). In our view, the relevant benchmark is how it compares with August 2009's print of 408k. Against that measure, it's flat. The original tax credit expired in November, 2009, putting August 3 months ahead of that expiration. The current credit (for closing) expires June 30 (April 30 for signing), which means 3 months ahead equals March.


To reiterate our message from yesterday, we continue to expect a pull-forward of activity not unlike what we saw going into last November. However, in the real world of non-lagged data, this means buying activity will have to be wrapped up in the next 7 days. The NAR has indicated that the tax credit has done its job and that a further round of stimulus won't be necessary. We think the jury is still out on that, and we remain rather skeptical. Our view is that this pull forward of activity is setting the stage for a much weaker-than-usual summer housing environment where inventory could back up into the 1H09 levels of the 11-12 months.


Here's a chart showing sales levels in historical context.




And this chart shows inventory levels in historical context.





Joshua Steiner, CFA


Allison Kaptur



Below I have attached a note that doesn’t come to you this morning with a smile from Washington, DC. I’d like to thank one of our rising star healthcare analysts, Christian Drake, for the V-spotting picture of Hospital Services inflation.


Healthcare inflation, of course, isn’t weighted in the CPI in a way that would make a difference to Ben Bernanke’s conflicted and compromised view of “reported” core inflation. Things like “owners equivalent” rent depress the reported inflation numbers at the same time as local government’s inflate your property taxes. How do you like them apples?


Virtually every inflation chart we look at currently emphasizes our Q2 call for Inflation’s V-Bottom.



Keith R. McCullough
Chief Executive Officer


V-spotting - obama

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R3: Earnings Creep


April 23, 2010





Earnings season across the retail , apparel, and footwear space is hard to define. At the moment we’re in a period which one may describe as the “Creep”- essentially the build up into the bulk of earnings, and usually the period where the Street looks to take direction for the results on the horizon. With that said, there were a few interesting callouts from the past day or two:


-Decker’s management (and results) were about as bullish as we can remember as it pertains to the Teva Brand. After about five years of efforts to reposition the brand as an outdoor lifestyle product beyond the traditional open-toe sandal, results are beginning to take hold. Sales for the resurgent brand were up 21%, with the company noting that Teva is gaining share as well as traction with a younger demographic. Recall that the big challenge for the brand has been to create credible closed-toe offering, something that is now working in both Spring and Fall (as indicated by the backlog commentary).


-COLM’s backlog was up a strong 19% for the Fall. Importantly, management noted that part of the strength can be attributed to the company’s focus on innovation via the Omni-Heat platform. While the technology is still not proven from a retail sell through standpoint given its impending Fall launch, the company expects to support the product with an extensive integrated marketing effort. Plans call for in-store graphics and fixtures, print and online campaigns, as well as the company’s first new television commercials in two years.


-After indicating that sales momentum was “absolutely encouraging” in March, Sherwin Williams management went on to note that trends have continued into April. Interestingly, there is a bit of a catch-22 with the strengthening of the topline across the industry. Management noted that tight supplies of raw materials in the wake of improved sales will likely keep pressure on costs at least until the back half of the year.


-J Crew’s creative director was on Oprah on Wednesday, with the most interesting part of the segment revealing that Oprah herself is long some good old JCG in her PA. Even better will be the boost she gives the quarter as a result of loyal viewers heading out to purchase J Crew wares as seen on TV. It almost sounds like a conflict of interest on Oprah’s part. In all seriousness, it will be interesting to see if the show has any impact in light of Oprah’s history of having a positive sales impact on other brands in the past. Payless and Deckers are two that come to mind. 


-While the consumer electronics industry and retailers alike are excited about the prospects for 3D TV (and the ability to charge more), another technology is also getting a boost. South Korea’s LG, is ramping up production and investment in OLED- a technology that offers the ability to offer very high contrast ratios, deep black levels, all in a very, very thin profile. The technology is not backlit, which allows for such features. Currently, the technology is expensive to produce and is only available in smaller screen sizes. LG’s investment should pave the way for faster adoption over the next 3 years.


Eric Levine






 R3: Earnings Creep - Calendar





Adidas Preannnounces Large Upside - Adidas Group said its preliminary results for the first quarter showed a 4% gain in sales and significant improvement in profitability. The better-than-expected results prompted Adidas to lift its full-year profit outlook to €2.05 - €2.30, up from its previous guidance of €1.90 - €2.15. Guidance was raised due to better than expected sales and margin with increased gross margin and operating expense leverage.


Largest Hong Kong Listed Clothier Sees Sales Declines Due to European Weakness- Esprit Holdings Ltd. said fiscal nine-month sales fell 1.8% as households in Europe, where it makes 84% of revenue, curbed spending. Consumer confidence in Europe remained weak in the first quarter. February retail sales in the 16-nation Euro region declined 0.6% from January, when they decreased 0.2%, the European Union’s statistics office in Luxembourg said April 8. Sales in Asia rose 5.8% and gained 8.4%. Espirit is pushing expansion in China where it says margins are similar to those in Europe. The company has bought out partner China Resources Enterprises Ltd.’s stake in their Chinese textile venture. <>


UA Hires Senior VP of Apparel - Under Armour announced that Henry Stafford will join the company as senior vice president, apparel in June 2010. Stafford has extensive experience in the apparel industry, which includes top positions with American Eagle Outfitters and Old Navy. <>


Sears to Operate Edwin Watts Golf Shop in Shops - Sears Holdings Corp. signed an agreement with Edwin Watts Golf Shops LLC to operate 12 golf shops inside Sears stores. The shops, ranging from 2,700 to 3,000 square feet, will be located near Sears electronics, tools and sporting goods department. <>


Should Nike Drop Ben Roethlisberger? - This much is clear. However long Nike's contract with Pittsburgh Steelers quarterback Ben Roethlisberger is, the allegations against him (even if they won't be prosecuted), will assure us that Nike will never use him in a commercial again. Why doesn't Nike drop Ben now? The short answer seems to be that Nike doesn't sever contracts with athletes who haven’t committed a crime or haven't been found to use performance enhancing drugs. And without Roethlisberger being charged or convicted of sexual assault, he fits the bill of still staying under the Nike athlete roster. In July 2007 when Michael Vick was charged in a dogfighting scheme, Nike suspended his contract without pay. But it wasn’t until after he pleaded guilty, that Nike terminated its contract with him. <>


Brazil the Next Hot Spot for Luxury Brands? - Brazil might not offer luxury brands the same potential in terms of size as Russia, India or China, but it provides more near-term opportunities for expansion. Events such as the 2014 World Cup and the 2016 Summer Olympics, both to be held in Rio de Janeiro, could significantly boost local markets and justify additional openings. Although it is Latin America’s biggest economy, Brazil is often overlooked because its population of 192 mm is lower than that of China and India, which both top the one billion mark. Luxury retail distribution is extremely limited, with more than one-third of the companies in a sample of 15 leading luxury brands having no direct retail presence in the country. More than three-quarters of luxury stores are located in the financial hub of São Paulo, mainly in upscale malls.  Brands with no retail presence in the country, such as Prada, Fendi and Burberry, have the option of entering via São Paulo and expanding from there. <>


China Imposes Nylon Tariff - China imposed punitive tariffs on nylon imported from the U.S. and other countries on Thursday, alleging the goods damaged its domestic industry. The Ministry of Commerce said China will impose antidumping tariffs ranging from 4% to 96.5% on nylon-6 imported from the U.S., the European Union, Russia and Taiwan, according to state media reports. Antidumping tariffs are applied when imported goods are sold for less than fair market value or below the cost of manufacture.  Nylon-6, also called polycaprolactam, is used to make products such as hosiery and knit apparel. The nylon tariffs will be in place for five years, extending temporary duties China established last fall. According to the International Trade Commission, in 2009 the U.S. exported $189.6 mm of polycaprolactam chips, which includes nylon 6.  <>


Vietnam's Textile Industry Harmed by Rising Cotton Prices - Vietnam Textile and Apparel Association reports that cotton price is estimated at USD$1.9-$1.92 per kg now, a 35% increase from January, and up to 50% jump in comparison with the same period last year. The price of imported cotton has been soaring since the beginning of the month. The local textile and garment production which relies heavily on imported cotton is threatened by the surge of cotton price. Furthermore, it makes worse situation for those Vietnamese enterprises signed contracts with international partners before the price increase, leading to further profit reduction. <>


BOOT Grows Sales 32% - Sales in the workboot market jumped 38% to $26.3 million, while outdoor market sales increased 15% to $7.9 million. “We’re very pleased with our strong sales and earnings growth in the first quarter of 2010, driven by increased demand across our different channels and markets,” said Joseph Schneider, president and CEO of LaCrosse, in a written statement. “We saw very strong demand from various branches of the U.S. government due to the continued strengthening of our customer relationships throughout the government channel and our strong execution in exceeding their delivery timetables. We also saw much stronger at-once demand from our wholesale channel partners during the first quarter, reflecting the improved consumer spending environment and success of our core products.”  <>


R3: Earnings Creep - BOOT SIGMA


Rocky Brands Reports Unimpressive Margins, Impressive Sales-Inventory Growth Spread - Net sales rose 12%, wholesale revenues advanced 5% and retail sales declined 5.8%. “Our first-quarter results were above internal and external projections driven by higher sales in our wholesale and military segments combined with improved operating expense leverage,” said Mike Brooks, Rocky chairman and CEO, in a written statement. "With regard to our bottom line, the seasonality of our business makes it difficult to realize positive earnings during the first quarter, which is typically our lowest volume sales quarter.” Nelsonville, Ohio-based Rocky also said Thursday that its Dickies footwear licensing partnership with Williamson-Dickie Manufacturing Co. will end effective Jan. 1, 2011. <>


R3: Earnings Creep - RCKY SIGMA


Tommy Hilfiger Finds a Better Way to Get and Engage Interested Customers - The fashion apparel brand and retailer has long known the value of e-mail marketing, but it has found a new cost-per-lead advertising system of acquiring e-mail addresses a better way to quickly engage prospective customers interested in its brand.  <>


UK Outdoor Footwear Brand Hi-Tec Grows Big - British outdoor and sports brand Hi-Tec is highlighting its growing strength and performance within the athletic and outdoor footwear markets. According to a company release, Hi-Tec’s Athletic footwear sales rose by 63% and Hi-Tec’s Outdoor footwear sales rose by 48% against the comp period in 2009. <>


Luxury Perfume Grows Most in 3 Years at L'Oreal - L’Oreal SA, the world’s largest cosmetics maker, said sales growth accelerated to the fastest pace in almost three years as shoppers spent more on luxury perfume and distributors stopped cutting inventories. <>


Remington Arms Hires New Agency to Contemporize the Brands Image - Campbell-Ewald has added Remington Arms and its subsidiaries and affiliates under the Freedom Group of Cos. following a review. The IPG agency takes over from Brothers & Co., and will handle advertising, media, digital marketing, social-media outreach and product development.

New work is slated to break in the fall, backing the company's waterfowl hunting firearms. The company spends about $1.5 million annually on ads, per Nielsen.  <>


Clogs Hit the Junior Footwear Market - Clogs are hitting the juniors market for fall '10 with styles ranging from the classic wooden platform in neutral leather to freshened-up looks in bright knit. <>


R3: Earnings Creep - Clogs Image



As we prepare for PNK's Q1 earnings on Tuesday, we've put together some forward looking commentary from the Q4 conference call and subsequent investor presentations.




Business update from Barclay’s conference on 3/26/2010:

  • The fourth quarter to be honest for us, we thought was very disappointing. The first quarter is actually so far been pretty promising. If you look at the month of February, we had the only two boats of the state that were up on a gaming revenue basis…That I will tell you, as a whole, our markets are feeling much better today than they were even a quarter ago.”
  • “Our prior marketing team, I should say, had put a lot of marketing efforts out there that really weren’t moving the needle in terms of gaming revenues, but were pretty costly in terms of what we were doing. We have since fired our head of marketing, we have a new person that’s in there right now. Pretty pleased with the results we’ve seen so far. I think on top of that, we also have a lot of cost savings, which we never really had to do a year ago, because we never really felt the effects of the recession until last quarter, and I think between both of those things, you’ll see much better margins versus the fourth quarter of last year. But as a whole, the marketing environment is much improved. The customer is starting to feel a little bit better. We are hesitant to call bottom until we have a couple more months of data under our belts, but I’ll tell you, our February numbers, we thought were pretty darn good in the face of what was a very, very difficult comp last year."
  • “We are selling Argentina…. We have already taken first-round bids, for what it’s worth on Argentina.”
  • “I think for Atlantic City that process is going to probably take a while. I don’t actually think we got chosen a listing agent. We were deciding between four different companies… but that’s the process that easily can take a year before you see any – before you hear any news on the sale of that land fortunately”
  • “That department costs us in the ballpark of three to 3.5 million bucks a year in EBITDA. Well, some of those savings will be offset as we fly commercial a little more, so the net savings are probably in the ballpark of 2.5 million savings on the EBITDA line. And a little more than that in the EPS line because of depreciation and what-not on the plane.”“
  • On River City:  That property really is hitting it out of the ballpark I think.”
  • “Couple of things happened to Belterra in the quarter. They had increased competition from several boats in the area, which increased the marketing costs in order to -- they increased marketing costs in order to offset that increased competition,that was number one. Number two, they did increase marketing cost perhaps to a level that they should not have, realizing that after, of course, after having spent the money. It all comes down…to spending marketing dollars in an efficient manner. And that's what we're trying to focus on here… So we're focusing on those process -- we have for the last two months, focused on those processes. We're in the process of implementing them right now and hopefully, we'll see some results.”
  • “The theme that John has mentioned here, it goes throughout not just at Belterra, but at other places as well. We actually spent, in absolute dollars, more money in marketing even though revenues were down. So as a result, all that falls down to the bottom line and hence, the variation that you saw in the quarter.”

Q4 CC and Earnings Release                                                                                                                                   

  • “We think River City should prove to be one of our most impressive and profitable casinos. “
  • Regarding corporate expense, you mentioned at the outset of the call that there was $5 million [charge] included in corporate expense this quarter, excluding that, it was $9.1 million. Is that a good run rate? And how will that change with the opening of River City?
    • “That is not a good run rate for us on the corporate expenses. I would hope that our corporate expenses will be down. I can't give you what a corporate run rate would be. But with the actions that we've been taking, we should be down now. This first quarter may not be down because there'll be some expenses in there that we have not been able to eliminate during the first quarter… River City should not impact our corporate run rate at all.
  • Capex for 2010: “typical 35-ish or so maintenance, potentially up to 40 of maintenance, a couple of other minor expansion projects from property to property, completion of River City, of course, and pursuit of the other two big ones.” 
  • Baton Rouge update from Barclay’s conference on 3/26/2010:
    • “Construction process tends to be relatively light-spend at the beginning…you can go a full year without spending much more than 25 or 50 million bucks on any construction project, given that … you’re literally just getting a foundation out of the ground.” 
    • “In theory be open up – be open sometime in that first half of 2012.”
    • “What we’ve been hearing from people is that the two existing boats are of such shoddy quality over in Baton Rouge that people in that town purposely go an hour and a half or two hours out of their way to Biloxi to go and gamble. And I think if you were to go and open up a quality facility in that town we would hopefully get a lot of those people to actually stay in town. We do have a great location.




From Q4 Earnings Release and Conference Call

  • “We are concentrating on operating efficiency and in particular, effective marketing. We're restructuring our corporate and property marketing. Corporate marketing will focus on strategy and analytics. Property marketing will concentrate on strategy, customer relations and execution.”
  • “We hired two highly-experienced general managers, one of whom was GM at Mandalay Bay, which, like Lumiere Place, features a Four Seasons Hotel. We're consolidating our three Las Vegas corporate offices into one. We've reduced our corporate staff and continuing to reduce staffing levels throughout the company. We've instituted a new compensation program that rewards executives for increasing long-term cash flow, as well as EBITDA.”
  • “Chief Operating Officer, as well as others in the company, are devoting a lot of attention, particularly to the marketing, which represents a pretty large percentage of our total costs.”
  • “Couple of things happened to Belterra in the quarter. They had increased competition from several boats in the area, which increased the marketing costs in order to -- they increased marketing costs in order to offset that increased competition,that was number one. Number two, they did increase marketing cost perhaps to a level that they should not have, realizing that after, of course, after having spent the money. It all comes down, Felicia, to spending marketing dollars in an efficient manner. And that's what we're trying to focus on here, efficiency on what you're attempting to do and efficiency later on the analysis of what you did do and how you can do it better in the future.”
  • “Are seeing somewhat of a shift in the corporate strategy toward more of an operating focus or an asset-efficiency focus, while pursuing a couple of growth projects that you have left. Is that a context in which we should think about your CEO search as thinking about more of an operating guy than a development guy?”
    • “The answer to that is yes.”


This note is not really about the "package" but we need to grab your attention. IGT’s Q was pretty much how we thought, not high quality but better than feared. We do have our issues but for now they shouldn’t matter.



The good news: IGT meets formal expectations but beats the whisper number and only cuts the top end of guidance by $0.02. Sure the $0.77-0.85 guidance for the year with only two quarters remaining is big enough to fit the ego of casino CEO, but it didn’t come down as much as feared. IGT also mentioned that it was close to signing two casinos for Server Based Gaming (SBG) and as we’ve discussed, we think one of those is Cosmopolitan.


So where do we go from here? The long-term is so promising for the slot suppliers that we think institutions will want to own this stock now that the dreaded quarter is out of the way and guidance has come down. Replacements look a little better than we thought and while we are not quite ready to call a replacement recovery, investors will flock to IGT (more so than the other names) when they believe we are in a sustainable acceleration. We think WMS is a better intermediate and long-term way to play the slots and we have a lot of concerns with IGT, but over the very near-term IGT may have more juice.


Here are our thoughts on the quarter:


Product sales were stronger than we expected due to more units shipped:

  • In North America, IGT shipped 4,100 replacement units, up 37% sequentially and 128% y-o-y. There is usually a seasonal pickup between the December quarter and the March quarter. It does appear that things are improving on the replacement front – although we will have to wait for WMS and BYI to report to confirm that hunch. Our best guess is that roughly 11,500 replacement units shipped in the March quarter. June is also typically a stronger seasonal quarter than March for replacements.
  • Better than expected unit shipments to North America were offset by lower than expected ASP pricing, due to discounting through the Dynamix package offer. Despite the confusion on the call about Dynamix, it’s quite simple – IGT is effectively discounting to keep floor share in the hopes of securing the replacements order for those legacy units when they eventually come off the floor. Not only has IGT been supporting legacy platforms which were supposed to be phased out but they are also giving away 2 conversion kits with the purchase of a new AVP unit. So for an $18,000 box you get a $24,000 value…a nice 33% discount. This offer will be out there through May so expect another quarter of pricing with a $14K handle. We'll have to see how the competition responds.
  • International shipments benefited from the shipment of 2,200 units to Japan. Apparently IGT went out of Japan with a bang or somewhat of a hit game in the beginning of the quarter. International shipments also included the recognition of 600 units shipped to Marina Bay Sands and Resorts World International in the December quarter.
  • Excluding low priced units shipped to Japan and the UK, International ASP’s were quite strong at $16.3K.
  • IGT has a backlog of 3,200 for sale games.

However, margins were disappointing:

  • Given that IGT has given away 8k conversion kits with the sale of 4k regular priced AVP units, it should be no surprise that margins were weak in North America – despite cost reductions. Conversion kits typically sell for around $3K and have over 90% margins. IGT accounted for the cost of the kits in product sales, with no corresponding revenues.
  • International margins were negatively impacted by a $1.9MM inventory write down.
  • Margin guidance of 48-50% is also “low” given the costs cuts and the fact that IGT’s product sales includes systems business (in addition to conversion kits, used parts and games, and license fees) which at least for Bally’s carries a 65-75% margin…. What gives?

Gaming operations revenues and margins were better than we expected, despite the install base being a lot lower (even aside from the whole Alabama issue):

  • Even adjusting for the Alabama units (which we didn’t subtract from the install base but excluded from revenues), the install base decreased 900 units sequentially.  According to IGT, this is just a timing issue of removing some games while their backlog units are installed.
  • IGT’s participation backlog was 2,153. Although IGT didn’t confirm it, we’re fairly confident that 1,000 units of that backlog are MegaJackpot games going to Sun International in South Africa (which IGT announced on April 5th).   Apparently only 400 of these installs are incremental – so we suspect that some of the international units that came out could be from South Africa. It will be interesting to see how much of this backlog results in net unit placements for IGT – hopefully it will at least replace the 900 units lost this Q.
  • Yields were better than we expected, due to seasonality, better performance, and the removal of the pesky low yielding Alabama games. IGT claims that the removal of the Alabama games only benefited yields by 30 cents, but according to our math it was a lot more than that. While 2,500 games were removed at the end of the quarter, those games didn’t come offline until February 4th and if those 57 offline days cost them $5MM - that implies a win per day of $35…. You can do the math too.
  • Margins were also a lot better – which again shouldn’t be surprising since IGT’s jackpot (WAP aka % coin in) games are being replaced with 80/20 and premium fixed fee games (a la BYI’s) which despite having lower win per days, have much higher margins. IGT was silent on margin guidance for gaming operations on the call but if we are right, margins will continue to be “high”.

So what about Alabama?

  • As IGT plainly stated in their press release (which didn’t stop at least one person from asking the question anyway), 2,500 Alabama units were removed from install base since IGT doesn’t know when those units will come back online and isn’t collecting any revenues on those machines.
  • Since there will be no referendum in November on the legality of the electronic bingo games in question, the issue has been kicked back to the judiciary system. No date has been set for a hearing as of yet.
  • IGT still has another 1,200 units in Alabama at tribal casinos which are not impacted by the current fiasco.

SG&A was materially below guidance:

  • I guess $95-100MM SG&A guidance is a good run rate when IGT makes its unit sales volume targets.
  • A large portion (but less than 50%) of IGT’s SG&A is tied to commissions and variable rate compensation plans. So until units pick up we will take a leap of faith and say that SG&A will be below their ‘target’ range
  • Another contributing factor to the decline in SG&A are lower legal fees. For those you who didn’t follow it closely, IGT has always been litigious – or as they like to say – defensive of their patents. The largest of the BYI/IGT lawsuits was resolved in late Oct 2009 when the US Court of Appeals for the Federal Circuit affirmed a Nevada court’s ruling that IGT’s Wheel patents were invalid.  While there are still open legal cases between IGT and BYI, the activity on those cases has been low of late. Below are the issues that are still outstanding – we suspect that the parties will quietly settle and these two cases will go away.
    • Bally’s antitrust and unfair competition suit against IGT, but no date has been set in this trial
    • IGT’s “bonusing” lawsuit against BYI claiming that certain BYI’s bonusing programs infringe on IGT patents.  IGT’s motion for a permanent injunction against Bally’s infringing products was denied.  A trial to determine the amount of damages incurred by IGT as a result of Bally's infringement has not yet been scheduled.

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