----> continued from part 1
An update on Anchor Gaming (SLOT 47): part 2:
II) Anchor Gaming's business in FY1999: some bumps in the road uphill
SLOT has consistently turned in outstanding results from 1990 -1998: revenue CAGR 44%, net income CAGR 66%, EPS CAGR 49%. Operating margins climbed to over 50%, net margins to 29%, return on asset and on equity 34% (no debt, but plenty of cash on hand). Insiders own about 40% of the outstanding shares. SLOT's share price rose from 25 to 95 in two years, but cam down to 33 early this year, to recover to the present 45. What went "wrong" is that in FY1999, SLOT's earnings and EPS will not grow, or might even fall 5%, as compared to FY98. We should now bear in mind two things: first, FY98 EPS increased 98% over FY97. Second, net profit margin continues to be excellent in FY99, ie above 25%. Therefore it is better to view SLOT's present performance as a break on a highly profitable level, not comparable with the fate of, let's say, drilling companies or semiconducter equipment companies, which turn in outstanding results for a couple of years and losses during the next cycle. The reason for SLOT's continued outstanding profitability (the company still earns 25cents on each dollar of revenue) lies in SLOT's business concept of having diverse businesses with a high level of RECURRENT earnings:
1) the most important business-segment, gaming machines (ca 50% revenue and 75% of income) is built on recurring revenues: instead of selling gaming machines to casinos they install the machines for free, but take 20% of the profit ( i.e. each time the machine is played 20% goes to Anchor Gaming). Of course SLOT has its own service team ensuring that the machines function perfectly. Three factors hampered growth this year: the growing maturity of many existing games, resulting in less average play per machine; competing successful new games (such as "Elvis", "Monopoly"), were stronger than SLOT's own new machines (such as "Cash-Ball 1", which disappointed); and an increasing unwillingness by some casino-owners to share profit 80/20. These three factors led to a decrease in number of Anchor Gaming's stand-alone gaming machines (which means loss of market share, part of which was taken by PWRH's games). Anchor Gaming's management team is confident that its soon-to- be-released new games (an upgraded, more user-friendly "Cash-Ball 2", and new games, such as "Casino Bowling") should take back market share. (The casino owner has to go with the wish of the customer and must place the "hot" games; if not, the customer goes to the casino next door). On the other hand, Anchor Gaming's 50/50 joint-venture with IGT (the 800pound gorilla of gaming machines) is continuing to flourish: there are over 6000 Wheel of Fortune machines installed and connected to a WAP (wide area progressive) system, and new Anchor games will be introduced into the WAP's. Furthermore, Anchor gaming is in the final stage of releasing the so-called "conversion kits" to casinos. Based on the foundation of a patented technology (owned by Anchor Gaming) conversion kits aim at upgrading old "single event" machines into more profitable "multi-coin, multi event" machines, (including new "look" features). Not only will SLOT upgrade the machines -again- for free (and take a certain percentage of the profit, each time the upgraded machine is played), but, thought its joint-venture with IGT, Anchor Gaming will all of a sudden have access to IGT's greater than 70% market share in gaming machines, many of which are single event machines. In other words, instead of having 5 plus percentage of market share, SLOT will gain access to potentially 70% of all gaming machines, -on a recurrent revenue base.
---->continued on part3 |
