As we expected, BYI lost ship share in North America but quarter was in-line with pre-announcement.
BYI reported FQ3 largely in line with our expectations. Equipment revenues were weak, due to lower ASP's that were a result of larger than expected shipments to international markets (which also have some recurring revenue components - i.e. Mexico). North American shipments were weak as we suspected, and as a result, BYI lost ship share in the NA. Lost ship share should be temporary due to the introduction of a new cabinet and many new titles will ship over the next 2 quarters. Equipment weakness was somewhat offset by strong margins which the company attributed to manufacturing efficiencies and lower material costs. We suspect a higher mix of conversion kit sales helped a bit as well. Gaming operations was surprisingly strong, especially given the impact of Alabama. As expected, systems sales were weak but margins were strong due to the skew away from hardware sales.
We may have more color post the call. For now, below are our notes from the conference call.
CONF CALL
- Recurring revenue was 47% for the quarter compared to 45%
- Fewer game sales should be deferred going forward, given the change in software accounting rules
- North American ship share was 15% for the quarter
- Partly blamed IGT's discounting
- Expect effective tax rate between 34-36% due to higher income levels in lower tax rate jurisdictions
- Expect to record a $18-20MM gain on the sale of Rainbow
- Well-positioned to accelerate share repurchases under the new $150MM plan
- Leverage ratio is well under 1x
- Continue to use working capital prudently to help operators finance purchases
- Remain optimistic that a replacement uptick will occur in the near future
- NA replacements: 2,236 were replacement sales
- Alpha 2 release timing seems to have impacted their ship share
- International sales were driven by strong sales to Asia and Latin America
- We suspect Mexico was very strong - they also earn recurring revenue there
- Italy: 57k games should be deployed over the next 12-18 months. Have executed contracts with 2 distributors for 3,600 games and systems
- Excited about Class III shipments to Mexico and re-entry into Australia
- Gaming operations negatively impacted their revenues in Jan & Feb
- Early indications that Cash Spin will surpass other popular Bally games
- Most successful launch in their entire history
- Expecting excellent net new placements in gaming operations this year
- Expanding their position in Mexico
- Trial units in Australia are performing well
- Systems was negatively impacted by delays in several projects (MBS)
- During the quarter they signed a corporate wide agreement with ISLE (switched from IGT)
- Have won every Table View contract they have competed for in PA
- Expect wide implementation of iVIEW DM this year and will release multiple applications to run on iVIEW
- There will be opportunities in Canada in the near future
- Will give more thoughts on FY2011 on the next call
Q&A
- Don't plan on discounting, it's not a great strategy and short-sighted
- Launch of Alpha 2 ProSeries cabinet - exact timing?
- Ship a few by end of June quarter. Book of business for June Q is better than last quarter
- Think that by next year most of their shipments will be Alpha 2
- ASPs will be higher too and help margins
- Gaming operations saw in increase in centrally determined games despite removal of Alabama
- Saw growth in Washington
- Also saw growth in premium products
- What was the Alabama impact (2-3 cents/ quarter)
- less in the 3Q since all the games were not offline the entire Q
- Country Crossing was removed - the ones that are operating are in the system
- In Italy some of those units are for sale, some are for participation.. there are also system recurring revenues. The daily rates are lower than normal but they are locked for a long period of time allowing them to recoup their investment handsomely. They also get small daily system hook up fees.
- Added more daily fee than participation games to their premium games
- Canada: Expect 4-6 of the provinces make systems procurements over the next two years. They are also going to make large VLT purchases anywhere from 6-14k games per province
- WAP / LAP breakout: Have million dollar link and quarter million link coming out - so 2 over the next 12 months. 985 WAP/ 25 LAP
- $6.5MM of maintenance capex in the quarter