The restart of the nation’s casino industry isn’t the automatic elixir that will revive gaming equipment manufacturers after COVID-19 put a financial beat down on the sector over the last two months.
For slot machine makers, recovery is going to require additional time.
More than a dozen states and tribal governments are allowing casinos – closed since mid-March due to the coronavirus pandemic – to reopen under strict social distancing guidelines and health and safety protocols.
Translation: Casino floors will have fewer slot machines operating in order to increase the distance between players. That may not be good news for revenue sharing machines, ones in which manufacturers split the gaming profits with casinos.
On the sales side, it will be months before slot floor managers authorize new equipment – both slot machines and casino management systems. After two months of burning through millions of dollars in order to keep empty properties in working order, casino operators are now facing tight capital expenditure budgets. During recent first-quarter earnings announcements, executives from both MGM Resorts and Boyd Gaming noted reduced spending as the companies shore up liquidity.
SunTrust Robinson gaming analyst Barry Jonas said casino operators are “entering a period of unparalleled stress” on earnings and balance sheets. In a research note earlier this month, Jonas said there was “limited visibility” on casino re-opening timelines and pointed out that casinos could be forced to close again should the virus experience a relapse.
“Even once casinos are opened, we expect social distancing limitations (will imply) roughly 50% less guest capacity, while 50% to 66% of slot machines may be turned off or removed from the floor,” Jonas wrote. “We also have heard concern that social distancing measures could be a catalyst to rationalize slot machine counts even once demand has normalized.”
A Station Casino employee wipes down a slot machine at Red Rock Resort in Las Vegas/ Photo via Station Casinos
For gaming equipment providers, that’s not a hopeful sign. Leased games and revenue sharing machines – especially those with lower performance metrics – could be targeted when slot floor managers turn off games for social distancing requirements, and operators might seek price concessions on leased games still on casino floors.
For a comparison, Jonas looked at slot machine sales during the recession 12 years ago.
“While operators also experienced meaningful stress to balance sheets during the recession, we think the current crisis represents completely uncharted territory,” Jonas wrote. His estimates of a 57% decline in U.S. gaming revenues in 2020 were “significantly more Draconian” than the overall 9% decline experienced in 2008 and 2009.
“We think gaming tech suppliers will lag behind operators in a recovery and could see severe hits to revenues in the near-term, with some uncertainty beyond that,” Jonas said.
He did suggest that certain suppliers had some bright sports.
Both AGS and Everi Holdings, for example, benefit from exposure to tribal casinos, which are expected to rebound quicker than destination markets. Everi also has its healthy financial services business and customer loyalty systems division, which will benefit from a recovery in the regional markets.
AGS has also increased its iGaming presence, offering its slot machine content to seven online operators in New Jersey and Pennsylvania, including Rush Street Interactive, Caesars Entertainment, Golden Nugget, Kindred Group, Mohegan Sun, Resorts World, and Parx Casino.
For International Game Technology, government lottery systems and equipment account for roughly 50% of the company’s estimated cash flow. Scientific Games draws 30% of its cash flow from the lottery side, and both companies will see a business boost from social gaming, sports betting technology, and iGaming.
Social distance spacing for slot machines at Harrah’s Ak-Chin in Arizona/Photo via Las Vegas Review-Journal
Macquarie Securities gaming analyst Chad Beynon noted that both iGaming and the limited sports betting options available through mobile applications have flourished in the two months casinos have been closed, primarily in Pennsylvania and New Jersey.
In Pennsylvania, iGaming revenues in April grew 73% over March and have been up double digits each month since its July 2019 launch. New Jersey saw April’s iGaming revenues grow 119% in April. Beynon said the growth was directly reflective of the casino shutdown but was also a positive sign for the activity going forward in a post-pandemic environment, especially when the major sports leagues return.
“We believe sports betting will directionally mirror legacy casino trends, while iGaming should continue its steady march upwards aided by increased demand from consumers staying indoors,” Beynon said.
But, he added, the competition “will be fierce.” Sports betting and daily fantasy sports giant FanDuel has spent $400 million in marketing activities in New Jersey since its launch in 2018.
“We remain positive on the long-term opportunities and highlight that COVID-19 social distancing measures could be a boon to iGaming as consumers seek sources of entertainment that can be consumed from home,” Beynon told investors.
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgaming.com. Follow @howardstutz on Twitter.
