As expected, BYI missed the Street slightly and provided lower than consensus FY2011 guidance. However, we don't think the Q or guidance was too far off from the whispers.
MANAGEMENT COMMENTARY:
- Increased game operations revenue was helped by Cash Spin
- Repurchased $62MM of their stock since April 1st
- EPS was negatively impacted by 2 cents of FX and 2 cents related to discrete
- For systems, $2.1MM less revenues reported in the quarter under the new accounting standards
- Estimate NA ship share of 18% in the quarter
- With the introduction of the new Pro Series cabinet, they expect that their margins will be initially impacted, but over time their margins will exceed legacy margins
- Margins on gaming operations were negatively impacted by jackpot expense
- For FY2011: Effective tax rate between 35-36.5%
- Expect to net $60-65MM on Rainbow, post taxes
- Have $88MM remaining under their shareholder buyback plan
- Leverage is well under 1x
- Product sales, NA sales: 2,605, of which 2,264 were replacement sales. ASP increase was due primarily to product mix. Pro-Series Alpha II Cabinet feedback continues to be very positive, but timing of the release has impacted their share
- Focused on improving their low denomination game performance
- Executed agreements with 2 concessionaires in Italy for the placement of 3,600 games. Expect to place games/collect revenues in early 2011. Expect to get more contracts.
- Will launch in Australia in early 2011
- Gaming operations: Launch of Cash Spin has been "phenomenal," having placed 750 units and have commitments for 750 units. Next month it will be available as an application on iPhone. Margins on gaming operations were in the mid point of their range - but they had higher than usual jackpot expense.
- Refreshed their WAP product and it's growing well. Net installed WAP base grew by 20 units.
- Engaged in expanding their already strong position in Mexico as that market transitions into Class III
- Do not expect a pick up in replacements for the rest of calendar 2010, but believe that replacement demand will modestly pick up in 2011
- Systems business: International revenues comprised 40% of total systems revenues. Maintenance revenues were $15.1MM. Approximately 70% of 2010 systems revenues came from existing customers.
- More than 610 casino sites that are either using or getting installations of BYI slot/table tracking systems
- Signed their systems first contract with a New Zealand customer. They expect to sign additional contracts in the region over the next few months.
- Galaxy Starworld went live with iVIEW DM across 90% of their floor
- FQ12011 will be weak for them in systems due to timing of installations, however, systems revenues should hit a record of $220-235MM in FY2011
- Expect revenues in each of their 3 business will increase YoY, but with a back end loaded year (IL/Italy/Australia etc). About 40% of revenues in 1H2011, with 2Q being better than 1Q.
Q&A
- Cash Spin impact?
- Budgeted a higher churn, but Cash Spin placement was 2.5-3x better - meaning that most of the units placed were incremental
- Diluted share count at the end of the quarter - 57,582; for the year, 57,675.
- Does the guidance contemplate buyback? Yes.
- Quantify Italy and IL impact:
- IT: will be a mix of recurring revenue and sale, expect to start shipping units in 1H2011
- IL: in the hands of the regulators, anticipate some IL late in their fiscal year
- Think that their ship share will get to above 20% again next year
- How are the Alpha II Pro Series trials performing
- There is the slant and V22 upright cabinet: had some technical issues on the slant that were fixed, but the V22's have only been out there for 2 weeks
- Pricing premium - $2,500 to $4,000 - probably won't get the full premium in the beginning
- Why the wide range of guidance?
- Replacement sales
- Acceptance of Alpha II
- New markets: Italy/ IL/ Australia
- Does Alabama come back?
- Have no more Alabama units - they have written it all down.
- Its also possible that Acqueduct opens - but it's unlikely
- Did ship 1/3 of their order to Sugar house in the June quarter, balance will be in the September quarter
- MD order are all on lease / 8% revenue share and not in the quarter
- At these prices, they view their stock as an attractive investment, given their view of 2011 & 2012
- Fireballs are doing well, but they are cannibalizing their existing base
- Italy and IL are not the sole cause for the gap of their guidance range. IL isn't as material to 2011 as Italy right now.
- Sense is that if there isn't a double dip that customers will start spending more on replacements next year
- Mexico update?
- They are in the hands of the partners. They supply their partners with the conversion kits. Properties in the North have already been converted to Class III; the South still has some Class II which should be converted in a few months.
- Mix of conversions and new Class III product has been 2/3 conversions
- Why the dip in international sales?
- There was a large shipment to Mexico and Singapore last quarter
- Acqueduct - They are used to delays in New York - so they are hopeful that a facility can open in 6 months, but it's prudent not to count those. They would expect to get 50% - which is under contract. However, if they open with a temp facility it will be in 2 stages.
- Impact of the incremental jackpot expense was about 2 cents in the quarter
- $1.93 EPS in FY2010 excludes Rainbow results and gains
- They have been doing less financing then their competitors. Their DSO's were actually down.
- Think that their share in March was more of an aberration than this quarter being a huge improvement in ship share. It will take them 9-12 months to build a library for Alpha II.
- Big release of the iVIEW applications is occurring now, and the impact should be seen through the sale of the DM units. Unclear how much they will be able to sell the applications for. There could be some upside from that. Race game and cash wheel have gotten good feedback.
