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Best of Howard Stutz

Gaming Guru

Howard Stutz

Slot makers continue to struggle

18 April 2011

LAS VEGAS, Nevada -- If you want to understand the tough going for slot machine manufacturers, just ask the people running the companies.

Bally Technologies and WMS Industries reduced their quarterly earnings forecasts. In separate statements, the companies said casino operators are not buying new slot machines and gaming equipment. Capital expenditures are at historically low levels.

"Short-term market conditions remain difficult, with the timing of large systems implementations becoming more challenging to predict," Bally Chief Executive Officer Richard Haddrill said.

WMS CEO Brian Gamache painted a bleaker picture.

"Based on recent customer capital budgets and unit demand trends, we don't expect meaningful improvements in the industry environment over the remainder of 2011 or, at this point, for 2012," Gamache said.

This is not good news in Nevada. Slot machine and gambling equipment production is the Silver State's version of Michigan's auto industry.

In a study for the Association of Gaming Equipment Manufacturers, financial research firm Applied Analysis found $5.7 billion in economic impact -- approximately 47 percent of the sector's total of $12.1 billion in 2009 -- was generated by 25 casino suppliers with operations in Nevada. Nearly half of the industry's employees -- an estimated 14,000 -- are based in Nevada.

"Compared to the operating side of the gaming industry, gaming equipment manufacturing is a smaller share of the overall puzzle," Applied Analysis principal Brian Gordon said. "But it's a vital component and a key piece of that puzzle, especially in Nevada."

It's assumed that the manufacturers' figures will be down when the 2010 numbers are released next month as part of the American Gaming Association's annual State of the State report.

Slot machine sales have been on a downward trend going on three years.

The replacement market -- new slot machines purchased to change older games -- was already on life support before the Bally and WMS announcements.

Consider an older slot machine as an automobile with 100,000 miles. You won't purchase a new car until you do all you can to keep the old vehicle running. That's how the casinos view their games.

The equipment sector has pegged its hopes on casino expansion into new or existing markets such as Texas, Massachusetts or Florida. Those prospects, however, are quickly fading.

One analyst said the outlook for new slot machine sales this year, already a paltry 9,500 games, has declined an additional 20 percent, which means slot machine makers will have to rely heavily on replacement sales.

"We do not think this bodes well for the future for the equipment manufacturers," Janney Montgomery Scott gaming analyst Brian McGill told investors April 11.

A few hours after McGill released his research note, WMS threw in the towel on the company's results for the quarter ended March, saying revenues and earnings per share would be below projections.

"Without a significant amount of new and expansion units shipping, the industry is in a dogfight for market share on replacements," McGill said.

The prereleased Bally and WMS earnings foreshadow a gloomy forecast for Thursday's quarterly earnings report by slot machine giant International Game Technology.

"Consensus earnings-per-share growth for WMS and IGT are at risk for the rest of 2011 and 2012," McGill said.

There is clearly a negative investor sentiment toward slot machine manufacturers. There are also two trains of thought. Short-term investors are abandoning the sector. Long-term investors believe they can find some value hanging with the manufacturers for the long haul.

"It is no secret that replacement activity has been challenging in the March quarter," Credit Suisse gaming analyst Joel Simkins said. "We have heard from industry contacts of an uptick in recent periods and improved demand from tribal casinos."

For the big three -- IGT, WMS and Bally -- competition is coming from other fronts.

Konami Gaming, the American subsidiary of the Japanese-based Konami Corp., has quietly gained market share, while smaller companies such as AC Coin, Multimedia and Aruze continue to chip away at the bigger suppliers.
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