Wynn Macau may have indeed missed whisper expectations but those expectations were probably too high due to bad modeling. We don’t see any signs of accelerating commissions or promotional activity.
We thought Wynn Macau’s $216MM EBITDA was a solid number above our estimate of $211MM. Unfortunately for WYNN, whisper expectations were probably too high. At least one analyst had recently gone to $235MM and some on the buy side were talking $250MM.
So what went wrong? Nothing actually. The problem was in the expectations where bad modeling likely drove unreasonable estimates. Our guess is that these bullish analysts/investors simply projected the Q1 margin of 30.7% and assumed it would go higher based on the addition of Encore and its concentration of higher margin direct play. Holding everything else constant, a higher mix of direct play should drive margins higher. However, the mix change was only slight sequentially and mix change doesn’t occur in a vacuum. The key here is that commissions, rebate rates, and promotional activity – all metrics that analysts will blame for the whisper miss – did not accelerate in Q2. Wynn Macau actually beat our margin estimate driven by lower casino expenses.
Here are some details to back up our contention that you can’t just stick in EBITDA margin on net revenues:
- Based on our calculations, direct play only increased 100bps as a % of total RC over last quarter as junket growth was also strong. For those analysts that actually take the time to model direct play they may have assumed it would be higher. According to our database, direct RC did increase 15% sequentially compared to a 6.5% sequential increase in Junket RC at the property.
- We calculate the VIP rebate rate on was only 0.93%, thus Wynn does not appear to be buying this business. As a result, the net VIP win was $1MM above our estimate.
- While we won’t know the exact commission rate until Wynn Macau files, we estimate that the commission rate was about 40%. Many analysts/investors will blame whisper miss on higher commissions but this does not appear to be the case. Higher hold rates typically come with higher rebates and commissions – so despite having a slightly higher mix of direct play this quarter- those modeling high hold should have modeled a higher commission rate. Last quarter’s commission rate was 39.1% - lower than normal for Wynn given the low hold in the quarter. Wynn’s commission rate for 2009 was 42% as a point of reference.
- Slot handle growth of 43% YoY was a nice reversal of sluggish growth over the last year for Wynn but hold % was low – 4.5% (which is not unusual given the high limit additions which typically have higher payouts) – this also negatively affected the sequential margin
- Wynn Macau’s $714.4MM of revenues was actually $5MM below our number but lower casino expenses more than made up the difference
- Most of the revenue difference was due to lower room occupancy, which was offset by lower promotional spending
- VIP gross win of $709MM was $10MM below our estimate, RC was $800MM below our estimate, while hold percentage was 7 bps above our 3.15% estimate
- High hold on VIP play, which we knew about and analysts should’ve known about, boosted revenues by $80MM and EBITDA by $15MM
- High hold on Mass boosted revenues by $5MM and EBITDA by $3MM. Mass drop only grew by 14% which was a little disappointing
- Implied fixed costs increased from $79.0MM to $84.5MM