rhymes with rally
Howard Stutz, Las Vegas Gaming Wire
VEGAS, Nev. - Poor earnings, decreased slot machine
sales and a plunging stock price made Bally Technologies
the gaming equipment sector's version of Rodney Dangerfield
for the past three years.
No matter what it tried, the
Las Vegas-based slot machine manufacturer got "no respect"
from Wall Street.
Now, Bally Technologies is
once again the industry's darling, viewed by gaming analysts
and investors as a company that has returned from the doldrums
financially and is ready to grab some of the worldwide slot
machine market share -- estimated to be in the high 60 percent
range -- now controlled by industry giant International
An annual survey of the slot
machine industry, conducted recently by the Goldman Sachs
investment firm, found that casino slot floor managers universally
regard Bally's new gaming machines as some of the better
products coming into the market. Recent sales announcements
of the company's systems technology, which provide accounting
and bonusing features for casinos, have given that revenue
stream a boost.
Bally Technologies also recently
completed a nearly two-year endeavor to restate the company's
earnings since 2005. While the company's net loss increased
from 2005 to 2006, revenues grew more than 11 percent over
the same period, a trend Bally executives are predicting
will continue well into the current fiscal year.
Meanwhile, investors have come
home to roost as Bally's stock price, which lingered below
$10 a share almost two years ago, has climbed back to a
respectable low $20 a share range since mid-February.
On the downside, Bally Technologies
and IGT have nearly a dozen different federal antitrust
lawsuits pending in which the companies have sued and countersued
each other over purported patent infringements. Also, a
new replacement cycle, where casinos nationwide are expected
to change out older slot machines with newer games, is at
least 18 months to two years away.
Neveretheless, gaming analysts
are again singing Bally's praises.
"After a couple of troubling
years, Bally appears to be re-emerging with a better range
of products that can cater to the needs in mechanical reel
and video spinning reels," Goldman Sachs gaming analyst
Steven Kent said in the company's seventh annual slot survey,
which was released in early March.
"Management has done a
great job of getting the company back on track," Kent
said. "We note that Bally is still behind on filing
its financial reports due to accounting problems that date
back almost two years. But, putting those issues aside,
Bally appears to have the momentum for the next year, which
may help it bridge the gap to the next replacement cycle."
Nollenberger Capital Partners
gaming analyst David Barteld recently upgraded his rating
of Bally's stock to a Buy from a Neutral rating, saying
the company had brought new products to the casinos quicker
than he previously anticipated.
"With the successful management
and operational restructuring behind us, the valuation metrics
on Bally shares are likely to return to more normalized
levels," Barteld said in a note to investors. "While
management acknowledges that profitability levels remain
below historic levels, improvement is being made and successful
placement of new games has ramped up significantly faster
then we expected in the company's turnaround efforts."
Even gaming analyst Joel Simkins
of Prudential Equity Group, who doesn't officially cover
Bally Technologies but recently met with management, came
away impressed with the strides the slot maker has achieved
in the past few years.
Simkins said casino operators
have praised Bally's games and have shown a willingness
to pay an additional cost for the machines.
"Rather than discounting
its products like it had in the past, (Bally Technologies)
has been raising prices and now that its games are performing
well and volumes have resurged, (the company) is focused
on taking cost out of its manufacturing process," Simkins
The comments from analysts
and customers boost the spirits of Bally Technologies Chief
Executive Officer Richard Haddrill, who has spent most of
his tenure alleviating concerns and dire predictions about
the company's future.
Haddrill, who headed gaming
equipment maker Powerhouse Technologies for three years
prior to its purchase by Anchor Gaming in 1999, joined the
Bally's board of directors in 2003 when the company was
known as Alliance Gaming.
He became CEO within a year
and the company hit a transition period. In 2004, Alliance
sold its slot machine route operation, a casino in Sparks
and purchased a Reno-based systems and technology business.
Last year, the company renamed
itself Bally Technologies. The move reflected the company's
original name in the 1970s, its reliance on the technology-intensive
systems division and the hope that a fresh title would wash
away the financial problems associated with Alliance.
"Our customers have been
saying good things to the investment community even before
they were talking to the analysts," Haddrill said.
"We have so many new products hitting the market right
now that we see a tremendous opportunity to grow our market
share both in the games and systems side. Our revenues have
increased tremendously and it's a trend we see continuing."
Bally Technologies said its
revenues were $483.1 million in 2005 and $547.1 million
in 2006. Haddrill predicted the company's revenues would
exceed $670 million in 2007.
The finances, however, have
not always been so positive.
During his tenure, Haddrill
has worked with three different chief financial officers,
announced the company needed to restate two years worth
of earnings, and saw the company's stock price head south.
Some investors, he said, won't reinvest until all the company's
financial reports are filed with the U.S. Securities and
Haddrill has also had to deflect
rumors the company was about to be sold. Many gaming analysts
have predicted some type of consolidation would hit the
manufacturing side of the gaming industry. In February,
reports surfaced on Wall Street that Bally Technologies
was merging with rival slot maker Aristocrat Technologies,
but they were quickly dashed.
"It's a distraction, but
it's become part of the business," Haddrill said of
buyout rumors. "I think the talks are more intense
now that private equity has entered the gaming space. There's
more buzz because of private equity, but manufacturers aren't
a real estate play."
Haddrill and gaming analysts
credit the company's slot machines with the turnaround.
The slot survey cited the company's
five-reel mechanical games and new platforms for video games,
which include high-tech surround sound and colorful graphics.
Kent commented that slot managers said they would dedicate
17 percent of a new casino floor to Bally machines, a marked
increase from the 2006 survey.
Bally has struck several sales
deals for its systems division recently, including a contract
with the Chickasaw Nation to provide Bally slot and casino
management systems and bonusing technology for more than
8,000 gaming machines in 17 locations in southeastern Oklahoma.
Deutsche Bank gaming analyst
Bill Lerner said Bally Technologies could continue to turn
around its financials once server-based gaming -- new slot
machine technology under development throughout the manufacturing
industry -- is ready for unveiling, possibly by late 2008
or early 2009.
Lerner said the company's server-based
gaming plans could lead it to a ranking as the industry's
No. 2 slot maker behind IGT.
"Assuming Bally can continue
to execute on its re-emergence, is effective in its cost
structure improvement and resolves the legal issues, we
believe that Bally can bring net income margins into the
16 percent to 20 percent range," Lerner said, equaling
the earnings ratio of its competition. "While still
a few years away, normalized net income margins during the
upcoming server-based gaming and expansion cycles could
result in $2-plus annual earnings per share."
Lerner went as far to predict
that Bally Technologies could see its annual revenues reach
$965 million in two years.