Bally Technologies Sales Up Thanks To New Machines

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Back in 1978, "Grease" was a hit movie, and Michael Jackson had just begun work on his landmark "Off The Wall" album.

Thirty-four years later, both the movie and the performer have reached iconic status in the entertainment world.

How do we know this? Because they both have slot machines named after them, just like Elvis and the Flintstones.

The "Grease" and "Michael Jackson King of Pop" machines were introduced about a year ago byBally Technologies ( BYI ), which makes slots, video machines, casino-management and server-based systems for the global gaming industry.

Around 1,500 Grease and Michael Jackson machines have been placed in casinos and other venues over the past year.

Each of the machines features video images, graphics and various other pyrotechnics. Their popularity among slot players is a big reason Bally has seen its gaming business rebound the past few quarters.

"Grease and Michael Jackson are probably the two best-performing games over the last year," said Vishnu Lekraj, an analyst at Morningstar. "They have outperformed almost every other game on the casino floor."

Slot machines are part of Bally's Gaming Operations business, which supplies local-area and wide-area progressive (WAP) games that let large numbers of slot players compete for huge progressive jackpots.

Bally's expects further growth from this segment as it continues an aggressive rollout of new products tied to popular sports and entertainment brands.

New Titles

"Bally's pipeline of new WAP titles due for release remains strong, with upcoming titles including Nascar, Pawn Stars, Beach Boys, Hot Shots and Cash Wizard Tiki Majic," JPMorgan analyst Joseph Greff noted in a recent report.

In addition to its Gaming Operations business, Bally also operates a Gaming Equipment business, which sells advanced video and mechanical-reel gaming devices.

A third business unit, Gaming Systems, supplies products and applications designed to help clients analyze and manage their gaming, accounting, promotional, back-office and customer relationship systems.

Much of Bally's focus in recent years has been on growing its Gaming Systems unit, Lekraj says. This had a negative effect on its core gaming business.

"They were concentrating so much on the systems business that they neglected gaming," he said.

But over the past few quarters, Bally has worked hard to bolster its lineup of gaming products.

"They've redoubled their efforts in gaming, and it's paying off," Lekraj said. "They've made improvements to their boxes, improved their graphics and improved the overall playing experience."

The company's Gaming Operations business delivered $101.2 million in revenue during the fiscal first quarter, which ended in September. That was up 19% from the prior year and represented 43% of total revenue.

Gaming Product sales grew 28% to $82.7 million, while Gaming Systems sales rose 12% to $51.3 million. Overall revenue for the quarter climbed 21% to $235.2 million, topping Wall Street estimates for $231.8 million.

Earnings rose 71% to 77 cents a share, the highest gain in years and above views of 70 cents.

The company also increased its fiscal 2013 EPS guidance to a range of $3.05 to $3.35 from prior guidance of $2.95 to $3.30.

"Bally's guidance anticipates continued year-over-year growth in game sales, gaming operations and system revenues," Greff noted. "It further anticipates an increase in the placement of its premium games, particularly WAP with its early successes in Grease and Michael Jackson."

Bally reported its Q1 results on Oct. 25. A day later, its stock price touched a five-year high of 51.16.

The firm has now run off five straight quarters of double-digit sales and earnings growth. This compares favorably to the recent financial performances of rivalsInternational Game Technology ( IGT ) andWMS Industries ( WMS ).

Financially, Bally continues to rebound from an industry slump that began in 2008 with the financial crisis and ensuing recession.

The company reported lower sales each year from fiscal 2009 to fiscal 2011. It also logged lower earnings in fiscal 2010 and 2011. It returned to growth mode in fiscal 2012, which ended in June, posting a 35% year-over-year gain in earnings and a 16% rise in sales.

Bally and other gaming stocks still face the same head winds that have lingered for years.

Many consumers are still wary of spending money on trips to Las Vegas and other gambling meccas. Even when they do head to a casino, they don't spend as much as they did during last decade's peak years.

"The macro environment remains a concern for the gambling industry," analyst Lekraj said. "There hasn't been a lot of growth, and the revenue yield per machine has fallen over the last couple of quarters."

International Markets

One way Bally can reduce its exposure to weakness in the U.S. is to grow its presence in international markets, which still account for less than 20% of total revenue.

International sales as a percentage of the total have actually declined over the last couple of quarters.

That's partly because Bally has put much of its focus on the domestic market, and partly because it has run into regulatory and trade issues in markets such as Argentina and Europe.

But the company remains optimistic about its opportunity overseas.

"The big upside for us is getting our product development and management process even more in tune with the international markets," Chief Executive Richard Haddrill said on a Q1 conference call. "Over the next six to nine months, we've got some great product rollouts specifically for international markets. We're very bullish on international over the next year or two."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BYI , IGT , WMS

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