BYI IN-LINE (WITH THE WHISPER)

Sure, equipment sales were awful but the most important takeaway may actually be positive.

The BYI quarter and guidance was pretty much in-line with our expectations – obviously lowered following the IGT and WMS releases.  The segments were off, however, but in a positive way.  Low international shipments drove a pretty big miss in equipment sales.  Systems beat slightly but the big upside surprise was in gaming operations.  Given the recurring nature of gaming operations revenues vis-à-vis equipment sales, this surprise was a positive one.

Assuming the forward numbers are reasonable, the stock looks pretty cheap, particularly given the 3-5 yeah outlook we see for new markets.  Of course, if the domestic casino markets do not recover and replacements continue to suffer, the slot market recovery will be delayed.  Under this scenario, the casino operators will be in even worse shape.

Here are the details of the quarter:

  • BYI reported equipment sales revenues of $63.5MM and gross margin of $31.6MM, missing our estimate by $7MM and $4MM, respectively
    • Interestingly, the miss versus our numbers was on the international shipments.  Actual international units shipped was 1,225; our estimate was 2,000 units.
    • After IGT and WMS reported, and it became obvious that our initial estimate for replacement units in the quarter were too high, so we took down our NA unit estimate to 2,450. 
    • ASP’s were much better than we expected – out of the top 3, BYI was the only manufacturer to report strong ASP growth
    • Our best estimate (until ALL reports) is that the total shipments to NA in the quarter were approximately 16k, which pegs BYI’s ship share at 16%, up from 13.5% last quarter.  Per usual, Konami’s March quarter market share was inflated.
  • Systems is always a crap-shoot.  Revenues were $0.6MM below our estimate, while gross margins were $1.4MM better. Next quarter will be weak because of timing, but full year guidance looks fine.
  • Gaming operations revenues of $77.4MM and gross margins of $54.1MM, were very solid – beating our estimates by $4MM on both revenue and gross margin.
    • The beat came from better than expected net placement of premium rental & daily fee products
    • Yield also increased due to the mix shift towards premium pay products. Most of the legacy units have a daily fee of $50/day while some of the new products that BYI is releasing have a daily fee of $75/day.  The margins on these products are very high since there is no jackpot funding.
  • Other stuff:
    • SG&A, R&D and D&A were all low… but that was expected
    • The other expense of $2.1MM was FX related and on an after-tax basis, cost BYI 2 cents per share
    • The tax rate of 37.8% was above their normal range of 35-36.5%.  It cost them about 2 cents in the quarter.
    • It would have been nice to see an actual decrease in the share count given that they spent $47MM on buybacks in the quarter.
  • Thoughts on the guidance:
    • Given where stock prices are and the 8 week visibility window on replacements, we think the low end of BYI’s guidance assumes 50,000 industry replacement units, delays and low ship share in IL, some delays in Italy, and very little traction in Australia… the latter 3 are all back-end loaded.
    • While the Street was up at $2.48 for FY2011, we think that the whisper was in-line with the new guidance.