Gaming Industry: Performance Review, Summer 2015

Gaming Industry: Performance Review, Summer 2015

With the latest round of quarterly financial reports, it is clear that the recent gaming slowdown in Macau is affecting the bottom line for a number of gaming companies with operations in China. However, increased stability may be on the horizon in the largest gaming market in the world. Additionally, performances elsewhere are helping to offset the evolving market abroad.

Las Vegas Sands (LVS), Wynn Resorts (WYNN) and MGM Resorts International (MGM) all experienced net revenue declines of more than 30 percent at their Macau properties during the first quarter of 2015 compared to 2014. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for their Macau operations reflected those revenue drops, with each falling by 38 percent or more compared to a year earlier.

The struggles in Macau affected overall performance for the three companies, with each of them experiencing double-digit drops in company-wide net revenues for the quarter and declines in quarterly earnings.

The headwinds in Macau can be traced to the continued fall of gaming revenue, which has suffered amid an ongoing anti-corruption investigation by the government. After setting a record in annual gaming revenue in 2013 and reaching a single-month high in February 2014, gaming revenue declined for 12 consecutive months through May 2015. Nine of those months saw double-digit drops compared to the prior year, and five of the past six months have seen gaming revenue declines of 30 percent or more compared to a year earlier.

Some of the recent gaming revenue slowdown can also be traced to a partial smoking ban that took effect in October 2014. The ban affected smoking on casino floors but allowed smoking lounges on the properties. The Macau government is contemplating a full ban on indoor smoking, which could further affect gaming revenue performance.

The fall in Macau gaming revenues contrasts with some positive news in the Nevada gaming market. The latest statewide totals available reflected the best April performance since 2007 with $897.9 million in gaming revenue, a 5.4percent rise over April 2014. The improvement at Las Vegas Strip casinos was even better, climbing 7.8 percent over the previous year. Expectations for May remain positive, thanks in large part to the heavy tourist traffic generated by the boxing match between Floyd Mayweather and Manny Pacquiao at MGM Grand.

Sands Opens Year on Down Note

Las Vegas Sands started 2015 with significant drops in company-wide financial performance that coincided with heavy declines in revenue and earnings at its Macao properties. Consolidated net revenue for the company fell to $3.0 billion, a 24.9percent drop-off in the first quarter of 2015 compared to the $4.0 billion generated in the first quarter of 2014. Company adjusted EBITDA also reported a marked decline, falling $429 million (29.0 percent) to $1.1 billion.

Most of that revenue contraction was attributed to the company’s four Macao properties, which saw a 35.3-percent decline in net revenue. The Marina Bay Sands in Singapore performed better than the Macao casinos but still reported $50.6 million (-6.1 percent) less in net revenue. Adjusted EBITDA fell in step with revenues, with earnings down at the Macao properties by $412.1 million (-43.8 percent) and in Singapore by $19.9 million (-4.6 percent).

On the domestic front, net revenue at Sands’ properties in Las Vegas fell $6.3 million (-1.6 percent) from the previous year, while Sands Bethlehem in Pennsylvania reported an improvement of $10.5 million (+9.0 percent). Adjusted EBITDA was down $5.5 million (-7.0 percent) in Las Vegas but up $3.4 million (+12.7 percent) in Bethlehem.

MGM China Overshadows US Growth

A relatively weak performance by its MGM China division again hurt the quarterly numbers for MGM Resorts International. The company’s international arm saw net revenue decline $311.4 million in the first quarter, down 33.1 percent from a year earlier. Among MGM’s wholly owned domestic operations, 10 of the 13 properties, including six in Las Vegas, reported rising net revenue in the quarter. That performance pushed domestic net revenue up a modest $7.7 million (+0.5 percent). The domestic and China operations combined for a company-wide net revenue decline of $298.2 million (-11.3 percent).

Profitability for the quarter showed similar trends. Overall, the company’s adjusted EBITDA was down $14.0 million, a drop of 2.0 percent from the fourth quarter in 2014. Earnings at MGM’s domestic properties declined $13.0 million (-3.2 percent), while MGM China reported an adjusted EBITDA of $148.5 million, a $92.3 million drop-off (-38.3 percent).

Wynn Earnings Down in Macau

Like other companies with Macau casinos, Wynn Resorts experienced weaker first-quarter financial performance because of heavy declines overseas. Net revenue for the company dropped $421.4 million compared to the first quarter in 2014, a fall of 27.8 percent. That loss was attributed to Macau operations, where net revenues saw an even steeper decline of 37.7 percent, or $427.3 million. The company’s Las Vegas properties increased net revenue by $6.0 million (+1.6 percent), but that did little to stem the company-wide decline.

Those performances carried over in company profitability. Wynn Resorts’ adjusted EBITDA was $323.0 million, down by $171.6 million (34.7 percent) from the $494.6 million in first quarter 2014. Macau’s adjusted EBITDA fell by $172.0 million, a 44.7-percent drop from the $384.3 million from the previous year. The company’s Las Vegas operations held steady with $110.7 million in earnings, a $389,000 (+0.4 percent) increase in adjusted EBITDA.

Caesars Rebounds Amid Bankruptcy

Caesars Entertainment Corporation (CZR) began the year with its largest subsidiary, Caesars Entertainment Operating Company, filing for Chapter 11 bankruptcy protection. With CEOC excluded from the company financial picture, the remaining units posted strong gains in net revenue and profits in the first quarter.

The remaining subsidiaries of Caesars Entertainment, including Caesars Interactive Entertainment and Caesars Entertainment Resort Properties, posted a combined net revenue of $1.1 billion. That reflected an increase of $190 million (+21.0 percent) from the first quarter of 2014. Adjusted EBITDA showed even better results, rising $81.0 million to $301.0 million for the quarter, a 36.8-percent improvement.

Changes Hitting North End of Strip

Before the start of the Great Recession, significant changes were underway at the north end of the Las Vegas Strip. Two large resort projects, Fontainebleau and Echelon Place, were changing the skyline while other development plans were in the works. The recession changed all of that, halting construction on the two new resorts and extinguishing any other building plans for the immediate future. Now, with the recession in the rearview mirror and signs of steady recovery in the Las Vegas market, changes are once again coming to the northern part of the Strip.

The biggest may be Resorts World Las Vegas, the $4 billion Chinese-themed megaresort under construction by Malaysia-based Genting Group. The 3,000-room hotel and casino broke ground in May at the site of the unfinished Echelon Place. Genting Group purchased the property in 2013 from Boyd Gaming, which had stopped construction on Echelon Place in the middle of the recession in 2008. The site was previously home to the iconic Stardust, which was imploded in 2007.

When the first phase of Resorts World opens in 2018, it will be the first new Las Vegas megaresort in a nearly decade. It could eventually grow to more than 6,000 rooms.

Across Las Vegas Boulevard, another iconic casino will make way for new development. The Riviera closed in May after 60 years as a Strip mainstay. The resort was purchased by the Las Vegas Convention and Visitors Authority, which will demolish the building to make room for its expansion of the Las Vegas Convention Center.

The expansion project is part of the $2.3 billion Las Vegas Global Business District, which will add a trade center and transportation hub to the additional 750,000 square feet of convention and exhibit space.

As if May wasn’t busy enough, the month also saw the North American debut of the Rock in Rio music festival on the 40-acre North Strip site at the corner of Las Vegas Boulevard and Sahara Avenue. More than 172,000 people attended the festival, where music stars such as Taylor Swift, Bruno Mars and Metallica headlined more than 120 acts over two weekends. The festival will return in 2017 and 2019.

Those changes joined last year’s opening of SLS Las Vegas at the previous Sahara property as pieces of the ongoing transformation at the northern tip of the Las Vegas Strip.

Brian Gordon is a principal with the Nevada-based advisory services firm, Applied Analysis. Gordon has extensive gaming and leisure experience from an accounting, finance and operational perspective.