Scientific Games must have been less than thrilled with Credit Suisse analyst Ben Combes‘ report on their third quarter. It was headlined, “Solid Quarter, But Leverage Concerns Keep Us on the Sidelines.” Cash flow of $344 million beat the Wall Street consensus forecast, and maintenance- and service-derived revenues were up. Lottery cash flow of 
$99 million also beat expectations. It will be a year before the Brazil lottery contract is incepted, with upfront payments spread out over an eight-year period. In addition to new lottery contracts in Florida, Italy and Turkey, Scientific was able to pay down $55 million in debt (still leaving the company heavily leveraged). Overall, gambling revenue was up 1.5%, social-gaming revenue was up 9% and lottery revenues rose 6.5%. R&D expenses were curbed 5% and “other” fell 64.5%. So it’s not like Scientific isn’t trying to save money, especially when it’s carrying $9 billion in debt.
J.P. Morgan analyst Joseph Greff also advocated neutrality re: SGMS. He cited that in the U.S./Canada “installed base declined 547 units sequentially, the third straight quarter of declines, and we could envision 
further reductions on the horizon given ongoing industry consolidation/right-sizing of slot floors.” He added, in a variation on a familiar theme, “Offsetting lower Gaming Ops was better Machine sales, which has a decent outlook given openings of new properties and markets (e.g., IL VGTs). Scientific also reversed a year/year loss of $352 million into an $18 million profit. CFO Michael Quartieri said, “We believe there are a number of avenues for further growth driven by share gains and new market opportunities. We remain firmly committed to maximize cash flows and delever our balance sheet.” That would please the Street.
* Golden Entertainment met Wall Street’s expectations almost to the dollar, posting $43 million in cash flow. $243 million in revenues easily beat the Street’s consensus. “Notably, GDEN announced it has no major capital investments planned at The Strat in 2020, and has put its plans 
for adding group meeting space on hold for the time – a decision we view favorably,” wrote J.P. Morgan analyst Daniel Politzer. “In 2020, GDEN should begin harvesting cash flow at the property, operating without any disruption during what is shaping up to be a strong year of citywide events on the LV Strip (Con/Agg, NFL Draft, Raiders in 2H20). Room mix should also benefit from a revamped casino floor and retail marketing campaign.” It was thought that Golden might expand its slot routes into Pennsylvania “depending on legislation.”
At The Strat, Golden is expecting to reach 15% return on investment (the industry’s preferred target) within the foreseeable future. Nevada casinos came in a bit under projection, a rare miss in an above-average quarter. However, while Golden derives 90% of its income from the Silver State, strong wages, housing prices and a favorable labor market are expected to redound to Golden’s good. The Strat is $90 million into a $110 million capex investment that will see 573 rooms renovated, a new tap house, plus a revamped lounge and sports book. Convention space expansion has been scrapped “a positive, in our view, given what we view as more favorable uses of capital—debt reduction or share repurchases.” Politzer opted to be “conservative” in his outlook, citing “uncertainty at The Strat,” which represents 20% of Golden’s casino-derived cash flow.
* Bad news for Macao resorts with heavy exposure to VIP play (I’m looking at you, Wynn Resorts): VIP play is expected to recede to one-third of the total market by 2022. Already VIP baccarat was down 22.5% in 
3Q19. High-roller play has already gone from 70% of revenues in 2011 to 41% last year. Sheldon Adelson was wise to position his Macanese casinos around mass-market play. “In the long run, continued improvements in transportation infrastructure, continued growth of the premium consuming class in China and new capacity will support long-term growth in mass,” wrote Sanford Bernstein analysts. The upside is that casinos will have to spend less money on junkets and on the cultivation of VIP players.
* With resort fees being what they are, is it any wonder that rooms represent the biggest chunk (31%) of MGM Resorts International‘s revenue? Gambling still has a slight lead on food and beverage, but it’s shrinking. Between the profusion of high-restaurants and the company’s investment in nightclubs that doesn’t come entirely as a surprise. Those $250 bottles of vodka really add up.
* In another tribal success story, the Agua Caliente Band of Cahuilla Indians broke ground on a third casino, this time in Cathedral City, California. Renderings depict a low-profile structure, in keeping with its surroundings. The tribe also owns casinos in Palm Springs and Rancho Mirage. Tribal Chairman Jeff Grubbe said the new casino would be positioned for locals play. Grubbe is looking to fast-track construction of a relatively small casino: 500 slots and eight tables. Thanks to a $5.5 million check from the Cahuilla, there will also be a brand-new fire station right across the street. Mayor Mark Carnevale was in a celebratory mood, saying “it’s my pleasure to proclaim that the years of empty dirt lots in downtown Cathedral City are over.”
* Internet poker went live in Pennsylvania this week, thanks to a partnership between PokerStars and Mount Airy Casino. Without shared liquidity with neighboring states, however, it’s unclear how much of a revenue boost this will be. Is it worth the $10 million entry fee? Hollywood Casino, Parx Casino, and PlaySugarHouse.com have gone online sans poker.
* A minority shareholder in Empire Resorts complains that the company is “undervalued.” Ha! That’s a good one. Also, Empire was hoping that sports betting would throw sinking Resorts World Catskills a lifeline, but chances for legalization in the New York state lege appear poor.
