Let the good times roll

October 29, 2004 - A flurry of quarterly financial reports released in the past two weeks for major casino operators and gaming equipment manufacturers show record revenues, profits or both for some operators. Those numbers correspond to a record year for visitor volumes.

While many Las Vegas casinos enjoyed their best quarters ever, the results for some game makers showed missed targets on earnings projections despite increased revenues, as expenditures to meet the almost insatiable national and international demand took their toll on the bottom line.

Although the immediate prospects seem to offer more of the same in the present quarter, some publicly traded gaming companies offered softer outlooks based on a variety of factors, ranging from concerns about the general economy to increased costs and debt from specific maneuvers such as mergers.

"The operators in Las Vegas trended very well and a majority beat Wall Street expectations," says Brian Gordon, a principal for local market research firm Applied Analysis. "However, some are providing conservative guidance [for their next results]."

Among the giant operators, MGM Mirage's third quarter saw revenues rise $59 million, or 6 percent, from the same quarter last year to top out at 1.04 billion, while operating income over the same period increased 40 percent to $222.4 million and net income shot up $79.7 million, or a whopping 169 percent, to $126.9 million. Diluted earnings per share (EPS) were 54 cents, twice the 27 cents in the third quarter 2003.

The principal drivers in MGM Mirage's rosy third was a 10 percent gain in revenue per available room (REVPAR) for its Las Vegas resorts over the same quarter last year, drawing $134 per room, with occupancy rates up a point to 93 percent. In addition, despite lower table hold, the company's gaming revenues rose five percent to $541 million.

Still, the company provided soft guidance based in part on increasing costs from debt related to the acquisition of Mandalay Resort Group, according to Gordon.

At Harrah's Entertainment, third quarter revenues clocked out at a record $1.31 billion, a $270 million, or 26 percent, jump from the previous third quarter, while operating income mirrored the pace at $257.8 million, a $54.6 million, or 26.9 percent, increase and net income hit $118.8 million for diluted EPS at $1.06, gaining 19.4 percent and 17.8 percent, respectively, from the previous period.

Although Harrah's operations are less concentrated than MGM Mirage's, the company benefited from the same Las Vegas boom, as its Southern Nevada properties all had record revenues, income and cash flow. Just as decisive, the three Horseshoe properties acquired last year contributed $217.9 million in revenues and $55.7 million in cash flow for their operating quarter in the Harrah's empire.

Harrah's will increase its market share in Las Vegas should its proposed purchase of Caesars Entertainment be approved and that benefit was foreshadowed in Caesars third quarter performance.

The company reported net revenues of $1.12 billion in the third, up $46 million, or 4.3 percent, while operating income was $167 million, a $10 million or 6.4 percent expansion, and net income was $58 million and 18 cents per diluted share, a 20 percent increase.

Like everyone else, Caesars benefited from the glory that is Vegas, where cash flow generated totaled $92 million but its two Atlantic City properties outperformed the local scene with $107 million in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). In addition the company posted an $87 million gain from its earlier sale of the Las Vegas Hilton.

But the local operators had the most blazing results, reflecting the continuing growth dynamic in the valley. Station Casinos had revenues of $257.7 million in the third quarter 2004, a 14 percent increase over the previous year, while operating income grew $10.8 million, or 19.7 percent, to $65.6 million and net income rose to $29.1 million, a $9.3 million, or astounding 47 percent, leap. Continue >>

"They are rolling along with the growth of the valley," says Gordon. "Total employment is up 5 percent over the prior year and unemployment is under 4 percent, well below the national average. Southern Nevada continues to boom and Stations benefits."

The other local player, Boyd Gaming, didn't fare too badly either, with revenues of $522.5 million reflecting a $212 million, or an amazing 68 percent increase, from the third quarter 2003, thereby generating third quarter operating income of $89.7 million and net income of $35.5 million, representing monumental increases of 148 percent ($53.5 million) and 361 percent($27.8 million) respectively.

Much of Boyd's success came off the continuing spectacular run at its joint venture Borgata Casino in Atlantic City, which had net revenues of $186 million. The casino was the top performer in the jurisdiction in almost every category, with gaming turning in $169 million of the total revenues.

Meanwhile, some game makers had a slightly different quarter. Alliance Gaming, which manufacturers Bally games and systems among others, reported an operating loss of $6.4 million compared to a $21.9 million operating income in the prior quarter, a $28.3 million turnaround, even though total revenues grew $15.7 million, or 16 percent, to $116.9 million over the same period.

Weaker sales and margins on sales coupled with increased competition, while increasing research and development cost to stay viable in a growing absolute market and reported poor integration with acquisition Sierra Design Group all combined to hurt the company. Alliance discontinued providing guidance until the company got its bearings.

In contrast, WMS Industries did the opposite, turning a fiscal year first quarter 2003 loss of $1.9 million into net income of $2.4 million, while revenues skyrocketed 61 percent to $75.1 million in the quarter, based primarily on a $22.8 million rise in machine sales.

"Revenues continue to be on the rise [for manufacturers]," Gordon says. "The industry is in growth mode and there must be investments [to prepare]. It costs money to build for the future."

The generally good news should persist, with features such as the scheduled opening of Wynn Resorts in April, the addition of new casinos and jurisdictions, and even the fall of New Year's Eve on Friday this year, allowing for full weekend holidays adding fuel to the optimism, according to Gordon.

The analyst also sounded the alarm, however, over general economic news such as the relentlessly weak national job market and the third continuous month in which consumer confidence dipped.

"As we move into the final quarter of the [calendar] year, one concern out there is if any of [these negative factors] impact travel and leisure decisions," he notes. "The gaming industry has benefited from a fairly strong economy. It will be interesting to see how it progresses in 2005."

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Article ©: S. Mihailovich, Las Vegas Business Press