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The Macau Metro Monitor, August 4th, 2010


CEO Murren said on Bloomberg that MGM plans to build multiple properties in Macau and more properties in Asia over time. "We are starting to assert ourselves in Macau," added Murren.  Aggressive new terms have been negotiated with junket consolidators and the company has just raised US$950m for refinancing of existing debt and added liquidity.



SJM CEO Shu Fai So said they had already expressed their interest in the Cotai development project to the local government.  SJM has not received any official notification from the government with regards to the land grant application but So believes a announcement will come shortly.  So also said that if China does not tighten its macroeconomics policy any further this year, GGR will grow at least 30% YoY.


As expected, WMS made the quarter and provided revenue guidance slightly below the Street but in-line with us. The only surprise to us was higher R&D guidance which may not be a bad thing.



The quarter was largely in line with our expectations, not the highest quality we’ve seen, but not bad given the environment.  Top line guidance for FY2011 was also healthy with our $834 million estimate toward the lower end of the guidance range of $830-850 million.  The only material surprise is management’s R&D push in FY2011 which will cost them an additional $0.10 to $0.12 in diluted EPS.  Implied guidance for FY2011 appears to be around $2 in EPS.


The news of the R&D acceleration initially brought about a high level of consternation on our part.  Is this catch up/maintenance R&D spend?  However, taking management at its word, we don’t believe that to be the case but we will do some serious digging.  CEO Brian Gamache indicated that they had showed customers some forward looking products that were in test and the response was positive enough that management decided to pull the development forward.  This is the definition of investing in the business and is the right long-term move if it is incremental and not maintenance.


While we don’t think investors get as excited about share repurchases – a bear market and credit crisis will do that –, in this case, they should.  Free cash flow is accelerating and the company announced a $300m share repurchase.  WMS is in a positive net cash position so share repurchases will be more accretive than if they had to borrow. 


WMS generated $51 million in operating cash flow, a number that will grow substantially next year due to net income growth and a stable customer financing environment.  After ratcheting up the use of its balance sheet to finance customer slot purchases in FY2010, WMS indicated that the company does not expect to be any more aggressive in this area.  A relatively constant accounts receivable balance will boost working capital and cash flow generation in FY2011 relative to FY2010.  Higher investment spend will eat into the operating cash increase somewhat but this is due primarily to Italy.  For now, the only comment we will make is that $40m seems like a high number for the 2.0-2.5k machines we were projecting.  Could management be expecting a larger market for them in Italy?  We will find out.



Quarter details

Product sales of $135MM were $4MM above our estimate with weaker new unit sales revenue offset by stronger used gaming machine sales.  Gross profit margins were 20 bps above our estimate.

  • New unit sales of 7,076 were in-line with our estimate (with NA shipments weaker than expected offset by stronger international shipments) and pricing was 3% lower
  • For the first time ever, WMS had the highest ship share in a quarter, overtaking IGT
  • Replacement sales were materially weaker than we expected; however, strength in new and expansion unit sales somewhat offset this.
    • WMS shipped units to Sugarhouse this quarter, receiving mid-high 20’s ship share
    • Our best guess is WMS’s share of the North American market was 27% this quarter
  • We believe that the increase in used gaming machines sold is reflective of the cost sensitive environment as more and more casinos are purchasing used games for some portion of their “new floors”
  • WMS should recognize shipments to PENN's Cecil County facility and Cosmo next quarter.  WMS got around the 90 day acceptance clause in Maryland by selling through a distributor.

Gaming operations revenues of $78MM were $2MM below our estimate and gross margins of $63.5MM were $3MM below our estimate.

  • WMS’s install base was 150 units less than we expected due to a higher than estimated removal of standalone games, partly offset by higher WAP & LAP placements.  We assumed that the standalone base was approaching a more stable level.
  • Average revenue per day was below our estimate as were margins – partly because we didn’t take into account last year’s favorable jackpot expense
  • Other gaming operations revenues were $2.4MM higher than our estimate

Other stuff:

  • R&D, SG&A and D&A were $2.7MM below our estimate

Don't Do Dogma

“And remember, no matter where you go, there you are.”



I’ve learned, un-learned, a re-learned this lesson in trading markets many times in the last decade  - Don’t Do Dogma. The larger your risk management and research team becomes, the harder it gets to adhere to that discipline. The more research edge you have, the more confident you tend to become. This breeds confirmation bias and risk.


A disciplined risk management approach to allocating capital is a process best learned by doing. I don’t learn much when my team is right on the research - I work with winners who wakeup expecting to be right. I learn the most when our positioning to express that research is wrong.


This gets to the heart of a structural problem with our industry. There is a huge difference between being right on the research and right on your timing, sizing, and positioning. Our industry pays a “star” premium for conviction in best research “ideas”, but pays much less for the risk managed expression of those ideas. This is good. It provides a tremendous opportunity for us to evolve our profession.


“No matter where you go” this morning, “there you are.” I have my coffee and my notebook, and markets are trading for and against my positioning. Without a repeatable risk management plan, I’m not sure what you do when you login every morning. Different strokes for different folks, I guess, but when it comes to grinding through the morning’s macro data, my research process has a very low standard deviation.


Conversely, as you may have noticed, my decision making process has a very high standard deviation. Sometimes I make too many Hedgeye Virtual Portfolio and Asset Allocation moves, sometimes I make too few. I learned this playing hockey more than anything else, but there is a time to be moving your feet, and there is a time to wait in the weeds – goals get scored when your timing is right.


Yesterday the US stock market was down, so I took that as an opportunity to cover some shorts and buy some longs. Because our macro research is bearish on both the US Dollar and the SP500 doesn’t mean I have to be bearish at every time and price on everything USA (we’re long XLU, Utilities).


In modern day risk management, it’s critical to contextualize both time and price within the framework of different investment durations. That’s why we have developed the TRADE, TREND, and TAIL process. It helps us communicate our research findings in a way that isn’t Duration Dogmatic.


The SP500 has only had 1 up day in the last 6 trading days. That 1 up day was of consequence however, because it took out the immediate term TRADE line of resistance of 1117. Whenever resistance becomes support on any of our 3 core investment durations (TRADE, TREND, and TAIL), I start moving my feet.


The setup for this morning is the same as it was as I was changing my positioning into yesterday’s close. Inactive investors dogmatically call this “trading” – I call it proactively managing risk. You trade today in order to set yourself up for tomorrow.


We went through this on our Macro Monthly Strategy conference call yesterday (if you’d like the slides and replay, please email ), but it’s worth repeating – the Bear Market Macro lines for the US Dollar Index and SP500 are $84.32 and 1144, respectively. These are my intermediate term TREND lines of resistance. These back-test with the highest success rate of any duration in my model.


Bearish TREND doesn’t always mean bearish TRADE. To the contrary, bearish TREND often insulates bullish trading inasmuch as bullish TREND formations can perpetuate bearish immediate term trading. Bull and bear markets get both overbought and oversold.


If the US stock market gets banged up today, there are no rules saying that this bullish immediate term TRADE support line of 1117 in the SP500 can’t become resistance again - and quickly, with no downside support to 1089. Don’t get frustrated with how short term that sounds. Embrace it. Managing risk doesn’t occur in a baby blue Tiffany box.


The conclusion of all this is always on the tape. Yesterday I invested 6% of the Cash position in our Asset Allocation model, taking Cash down from 79% to 73% by adding a long position in International Equities - Indonesia (IDX) – and adding another 3% to our long position in the Chinese Yuan (CYB).


The risk in all of this is that 1117 doesn’t hold, because that means anything I covered or bought yesterday will have likely been executed on too early. In real life investing, being too early means being wrong. Don’t Do Dogma – that’s for marketing presentations about investing.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Do Dogma - tiff

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


Our notes from the earnings call.



“WMS’ fiscal 2010 fourth quarter operating performance including record top- and bottom-line results, improved margins, and growth in other key performance metrics were achieved despite a still-sluggish replacement market and lower spend-per-visit by casino patrons in many markets."

- Brian R. Gamache, Chairman and Chief Executive Officer



  • “Our anticipated fiscal 2011 growth also reflects the benefit of further success in those markets we entered in fiscal 2010; our expected VLT shipments to Maryland and Illinois and a modest expectation for initial VLT placements with concessionaires in Italy; along with the commercialization of our proprietary WAGE-NET networked-enabled applications and the start-up of our online gaming business in the UK.”
  • FY2011 Guidance:
    • Revenue: $830-850MM, +8% to 11% YoY growth
    • New Unit Shipments: 25.8 to 26.6k
    • ASP: $15.7-16.1k
    • Average installed participation base: 10.7-10.9k
    • Daily revenue per machine: $77-79
    • Operating margin: 22.5-23.0%
    • R&D as a % of revenue: 15% or 20% YoY
  • 1Q2011 Guidance:
    • Revenue: $174-179MM, +5% to 8% YoY growth
    • Operating margin: 17.5-18.0% 
  • "Announced plans to increase investments in internal, organic growth initiatives of more than $50 million and a new $300-million, three-year stock repurchase authorization. Under the new authorization, the Company expects share repurchase activity will exceed prior-year annual levels, depending upon market conditions."
    • "An incremental year-over-year increase of approximately $40 million in gaming operations equipment to support what the Company expects will be a leased VLT market in Italy, an expansion of operating lease arrangements with customers globally, and the conversion of a portion of the existing installed participation base from Bluebird to Bluebird2 gaming machines."


  • Expect continued ship share gains and growth in FY2011
  • PENN's Cecil County, MD - they had 29% ship share
  • Launched Lord of the Rings on June 30th - and is being met with high praise so far
  • ROI improved to 15% in 2010
  • Expect that replacement sales will only improve modestly in the US, their growth will come from:
    • penetration of new markets for them: Washington and other Class II markets
    • Mexico & New South Whales growth
  • Bluebird xD- initial feedback is very strong, but the initial margins are a bit lower then they expected
  • Backlog remains robust
  • Launched Helios cabinets, which is margin neutral. Allows WMS to enter incremental markets
  • ASP increase due to modest list price increases and xD penetration, offset by growing mix of lower priced units like Helios
  • Players can extend their gaming experience online for Lord of the Rings.  At home account sign ups are exceeding that of Star Trek in its early life cycle.
  • Assume a modest increase in WAP units in FY2011
  • In Italy - they will have leased games over a 9 year term. They are close to announcing their first deal and negotiating a second deal.
  • Wagenet testing should conclude in the Dec Q and begin collecting revenues.  Portal applications have increased win per day by 20%.
  • UK internet gaming will also launch but contribution will be modest
  • Expect roughly flat growth in new units
  • Expect FY 2011 quarterly revenue trends will be consistent with past seasonality
  • Unit guidance doesn't include any new markets like MA/Ohio/AZ/Greece/Brazil etc where there is regulatory uncertainty
  • FY2011 Product gross margins: 52-55%; however, in 1Q2011, margins will have a sequential and YoY decline due to the launch of new platforms and low seasonal volume.
  • FY2011 Game operations margins: 79-81%
  • R&D will have unusually high growth - normally they would expect R&D to be 14% of revenue
  • Opening an R&D center in India
  • For FY2011, they expect to have more leverage on SG&A - lower % of revenues than in 2010
  • D&A will pick up in 2011 with increased spend
  • Tax rate will be in the range of 36-37% for FY2011
  • Provided a great amount of extended payment term sales.  Do not believe that this demand will diminish but shouldn't be a drag on cash flow either.
  • Inventory increase was due to CPU NexGen chips


  • Domestic shipshare?
    • Guess it's in the 30% range
  • Lord of the Rings rollout.
    • Have about 150 out in the field and several hundred more coming.  Win per day is not quite Wizard of Oz, but still really good.
  • $40MM capital investment in Italy VLT?
    • Correct. This year they spend $40MM vs. $80MM in FY2011.
  • Impact on Dynamix?
    • No impact on them
  • Some Class II business impacted ASPs a bit in the quarter
  • Replacements are an industry-wide issue, not a WMS issue. They did think that they would see more of an uptick in replacement demand.
  • Extended financing - not seeing as many customers approaching them but still seeing it
  • Average life of a WMS participation game - pre refresh?
    • Depreciate it over 3 years and top box over 1 year
    • Refresh content every 6 months but hope to maintain the floor share for 5-7 years
  • Yield difference between BB2 and BB1?
    • BB1 was launched in 2003
    • Expect to see a 20% performance improvement in BB2.
  • What is xD expected to do for them?
    • Because it's a different niche than BB, they expect that it will help them gain share.  Think that 25-30% of their annual shipments should be xD and pricing is 25% higher.
  • Sold about 1/3 sales from box sales - for international, 33-35% of total sales is normal and this Q (40%) was a bit unusual.
  • IL should be a Feb/March event, with Q4 ramp up. More of a FY2012 opportunity for them. Expect to have similar ship share in that market nationwide. Think that the total market will be ~25k units, even without Chicago.
    • Expect it to be primarily a for sale market for them
  • Number of logins so far for Lord of the Rings are ahead of expectations - trending ahead of Star Trek in the same point of the life cycle.  Star Trek has over 1MM logins now.
  • Online gaming in the US?
    • Think it's when not if, and think it's a huge opportunity for them to distribute their content.  They are entering UK to better understand the business and the opportunity.
  • Investing at double the rate of R&D than their competitors. Think that investing in their business is their best use of cash right now.


Here is a look at guidance ahead of earnings tomorrow



  • To maintain or sequentially improve two-year average company same-store sales, Jack in the Box will need to post -7.2% or better for 3Q
  • Per Factset, the Street is expecting a company same-store sales number of -8%, which would imply a sequential deceleration of 40 bps.  It is worth noting that on four of the past five quarters, the Street’s Factset estimate has been between 0.9% and 1.8% overly-aggressive.


  • Same-store sales are expected to decrease by 7-9% for Jack in the Box in 3Q, and decrease by 6.5% to 8.5% for the full-year
  • Same-store sales are expected to increase 2-4% for Qdoba in 3Q, and increase by 1% to 3% for the full-year
  • Diluted EPS full-year guidance is $1.85 to $2.05
  • Commodity outlook for the year is for a decrease in cost of ~1% (Commodity costs are expected to increase by about 2% in 3Q and 3% in 4Q)
  • Beef costs are anticipated to be flat for the full-year with low double digit increases in 3Q and 4Q
  • Sequentially increasing beef costs are expected to be offset by declining chicken and bakery costs of ~6% for the balance of the year
  • Capex is expected to be $125 to $135 million for fiscal 2010
  • “We plan to increase our ad spend in the back half of the year (FY10)”
  • Gains related to franchising activity should be higher for 3Q10 than they were for 3Q09
  • Full year gains in the sale of approximately 200 Jack in the Box restaurants are expected to total between $60 and $70 million with total proceeds of $85 to $90 million


  • “44% of our restaurants are located in the 10 states with the highest unemployment, while only 2% are in the states with the lowest unemployment
  • “3 for $3” promotion was launched in late April and it is margin friendly while offering a great “value proposition” for guests
  • Jack in the Box added a raspberry flavor to its smoothie and real ice cream shakes – will be interesting to hear how smoothies are performing with MCD’s big push…
  • California is outperforming the Texas market; both improved in 2Q but Texas remains the more challenged market for JACK.

Howard Penney

Managing Director


Including slots, the market grew 70%, slightly higher than the 67% we reported yesterday, which was due to stronger slot revenue and Fx rounding in the data we received. 



VIP hold percentage was very high in July, which helped drive VIP revenue up 87% YoY.  VIP turnover (Rolling Chip) increased “only” 55% while Mass revenue climbed 39%, in-line with the growth rate this year.  Of course, the comp was more difficult than in the prior months but was still easy on an absolute basis.  Mass revenue fell 5% last year and VIP turnover increased 9%, contributing to an overall table revenue increase of 3% in July of 2009.  Slots set a monthly record of HK$701 million in July 2010.


We discussed market share in our note yesterday and the shifts were confirmed today.  WYNN and LVS lost a lot of share, 280bps and 260bps, respectively, from June.  The good news is that the decline was not in Mass where both companies increased share sequentially:  LVS to a normal 26.7% and WYNN to a recent high of 11.0%.  Rather, both lost share in VIP turnover and VIP revenue - hold % played a big role.  Both LVS and WYNN have held very well, above the market, but their hold percentages fell sequentially while the market played luckier in July than June.  On a YoY basis, WYNN table revenue increased 74%, slightly higher than the market while LVS grew 51%.  On the Mass side, WYNN and LVS grew 44% and 27%, respectively, versus the market at 39%.  WYNN obviously benefited from the April opening of Encore.


In terms of market share, SJM, MPEL, and Galaxy were the big winners.  MPEL was probably the standout relative to expectations.  Total table market share went up 150bps sequentially and Mass revenue increased 91% YoY.  MGM’s table revenue actually declined 5% YoY, due to lower hold, and total table market share slipped 50bps sequentially.







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