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Dynamic Supply Side

A new CEO at Scientific Games is only one of the exciting developments with the slot-makers

Dynamic Supply Side

For investors, the supplier side of the gaming industry has gotten smaller in recent years as IGT and Scientific Games (SGMS) led consolidations that saw the disappearance of such prominent public companies as Bally, WMS and GTECH.

However, the space may become more interesting now that IGT and Sci Games have settled in to who they are, and as other companies emerge.

The new IGT and Sci Games stories start with lotteries.

Their historic investors knew them as slot companies, and they’ve had to learn the lottery component. Interestingly, lotteries give IGT and SGMS recurring revenue, just like the slot leasing business that for years attracted investors.

The recurring revenues of lotteries are, in fact, more stable than slot leases. The business is locked in by multi-year contracts and is not subject to the constant shifts of an installed base of machines.

And given that lotteries provide IGT with two-thirds of its revenue and SGMS with one-third of its revenue, that’s a lot of stability.

Each company, of course, has its unique story. For IGT, it’s cash flow and the stability of leadership, as longtime CEO Marco Sala continues to lead the overall operation and American and Interactive CEO Renato Ascoli brings his experience and unified leadership to the Americas.

For SGMS, the story is new leadership, as Kevin Sheehan takes over for much-admired Gavin Isaacs as CEO. Though we have a lot to learn about Sheehan, he does offer the experience of having turned around an even more indebted company, Norwegian Cruise Lines.

But the story might get more interesting than just the Big Two. Here are some quick thoughts on several companies that might go public or become more liquid for U.S. investors:

Ainsworth, which trades on the Australia Stock Exchange, is about to undergo a transformation as founder Len Ainsworth’s 53 percent ownership is bought by Novomatic.

Novomatic is a giant, privately held Austrian-based company with big ambitions for North America. Ainsworth has those same ambitions.

Now, Ainsworth provides Novomatic with the public vehicle by which to pursue those ambitions, and Novomatic provides Ainsworth with the resources to pursue its ambitions.

AGS. The former American Gaming Systems is another ambitious competitor starting to gain material market share as it enters Class III, expands into new markets and continues its push into the proprietary table game and shuffler businesses.

Led by former Shuffle Master COO David Lopez, AGS has a young management team that learned its stuff in SHFL’s entrepreneurial environment.

What’s important about AGS is its owner, Apollo Global Management.

As a private equity firm, Apollo can be expected to someday monetize its investment in AGS. Apollo has been helping AGS grow so that monetization will be more lucrative when it happens.

Apollo may choose to sell AGS on that day. Or it might decide to take AGS public, giving stock investors another company to play.

Aristocrat has been the hot supplier of the past couple of years, as CEO Jamie Odell’s strategy of focusing on the core business, emphasizing game content and pushing harder in North America is paying off handsomely.

Aristocrat stock is fairly liquid on the Australia Stock Exchange. The company has long held to the idea that it lists only there. However, as North America becomes increasingly important, and more and more decision-makers are located in Las Vegas, it would not be overly surprising to see a dual listing in the U.S. someday.

Interblock. A few years ago, Interblock was just another of those little European electronic table game companies.

No more. The sleek black-and-red Interblock machines are showing up increasingly in American casinos.

Electronic table ganes—or ETGs as they are now commonly called—comprise a growing segment of gaming floors in the U.S. as they have been in Europe, and more recently in Asia.

Under the leadership of CEO John Connelly, Interblock intends to raise its profile considerably.

Las Vegas Gaming Growth

While so much attention has been given to gaming trends in Macau, it is worthwhile to note that there is a trend in the U.S., and it is up.

That was evidenced in July when a favorable calendar and a resurgent Las Vegas drove gaming revenues to their best year-over-year comparison since February.

July had one more Saturday and Sunday this year than last, but favorable calendar or not, the fact is U.S. casinos have grown revenues fairly steadily this year, up in every month but March and May.

Here are some stats as recorded in Fantini’s National Revenue Report:

Overall, gaming revenues jumped 4.09 percent to $3.64 billion in July, and a healthy 2.26 percent on a same-store basis. That beat year-to-date gains of 1.66 percent and 0.17 percent, showing an acceleration of growth. Indeed, same-store growth in July actually pushed that measure into positive territory for the year, as it had been down 0.28 percent through June.

If someone wanted to look at the glass half-empty, it would be by factoring out the Las Vegas Strip.

National gaming revenues sans Nevada actually declined in July, slipping 0.27 percent to $2.979 billion.

And even the Strip was considerably less robust than its walloping 16.77 percent gain made it appear. Gamblers played lucky on the Strip, and high-rolling Asians returned.

Factor out lucky-for-the-casinos blackjack and baccarat, and the Strip actually grew revenues a more pedestrian 4.75 percent. That is much closer to the 4.4 percent win of slot machines, a more reliable measure of domestic play.

Further, the Las Vegas locals market declined 4.67 percent.

 In other words, regional and locals play in U.S. casinos could be interpreted to actually have been weaker in July normalizing for the calendar and subtracting the Las Vegas Strip.

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