Gamblers’ winnings’ hurt Venetian performance

David Strow

Friday, April 20, 2001 | 11:19 a.m.

The parent company of the Venetian reported a significant decline in profitability today for the quarter ending March 31, despite a record performance from its 3,036-room hotel on the Las Vegas Strip.

Las Vegas Sands Inc. reported net income of $4.7 million for the quarter, down from $16.6 million in the year-ago quarter. Cash flow dipped 20 percent to $47.5 million, while net revenues were off 8 percent to $143.6 million.

Unusually good luck by players at the Venetian's tables was to blame, company officials said. The company reported that room rates and revenues and table game drop reached record highs.

"Had it not been for the low hold percentage, they probably would have recorded record (cash flow) for the quarter," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "This quarter's performance ... really emphasizes that their model of splitting their business between the casino and rooms paid off handsomely for them."

Table game hold during the quarter was 12.7 percent, compared to 24 percent in the year-ago quarter. As a result, casino revenues dipped 30 percent to $60.1 million, despite a 5 percent increase in the amount wagered on table games and a 11 percent increase in daily win per slot machine.

The standout of the quarter, however, was the Venetian's hotel. Hotel revenues surged ahead 27 percent to $59.6 million, as average occupancy reached 99.6 percent for the quarter. The hotel recorded an average daily room rate of $220, up 22 percent from the year-ago quarter.

"Their ability to target premier trade show delegates during the weekdays, and capture strong weekend business, has enabled them to record ADRs never seen before in Vegas," Zarnett said. "I've never seen a rate of $220 in a quarter."

The Venetian fills many of its hotel rooms with delegates attending conventions and events at its enclosed conference center, the Venetian Congress Center -- and at owner Sheldon Adelson's massive, attached Sands Expo Center.

The strong hotel performance should continue, said Las Vegas Sands President William Weidner.

"Based upon current booking trends and information, we remain comfortable that our group room business trends remain strong," Weidner said.

Food and beverage revenue was essentially unchanged from the year-ago quarter at $18.8 million, while cash flow from the Grand Canal Shops rose 8 percent to $4.7 million.

Las Vegas Sands is wholly owned by Adelson, but must report earnings publicly due to its publicly traded debt.

Also sounding bullish tones on the outlook for Las Vegas in coming months were MGM MIRAGE and International Game Technology, which held conference calls with investors Thursday after reporting strong quarters.

MGM MIRAGE has been the focus of some of the most intense scrutiny, since it is more heavily weighted in Las Vegas than any other gaming company -- and could be vulnerable if the Strip slows down, as many analysts expect.

"We hear that a lot, that Las Vegas in general and MGM MIRAGE in particular is more vulnerable to a downturn than ever before, because price points are up," said Jim Murren, president and chief financial officer of MGM MIRAGE. "For the second half of the year, we have no idea, except for the fact we'll do better than the rest of the city, since we have the best assets in town."

Part of those improved results could come from cost savings. MGM MIRAGE said it has now achieved $117 million in annual cost savings from merging MGM Grand and Mirage Resorts, and sold $242 million in Mirage assets since the merger. Sold in the first quarter was Rembrandt's "Portrait of a Man in a Red Doublet," which fetched $12 million at auction at Christie's. The painting used to hang in Steve Wynn's Bellagio office.

The company also said it had reduced Mirage Resorts' payroll by 1,300 full-time equivalent employees since the merger. Full-time equivalents do not equate directly into jobs cut, but instead measure payroll expenses. The reduction amounts to about 5 percent of Mirage Resorts' total payroll.

Alan Feldman, spokesman for MGM MIRAGE, said later that cuts came across all job classifications, and that many were the result of attrition.

Currently, it appears the MGM Grand and New York-New York will book more room nights in the second quarter, though room rates will remain relatively flat, said John Redmond, chief executive of MGM Grand Resorts.

And at the Mirage properties "there's no indication the summer will be anything but good and solid," said Bobby Baldwin, chief executive of Mirage Resorts.

The high-end business is critical for MGM MIRAGE, since it controls a majority of that business in Las Vegas. So far, recessionary fears haven't impacted that business, said MGM MIRAGE Chairman Terry Lanni -- though there has been a severe impact at the low-end Primm properties, which saw cash flow decline more than 40 percent for the quarter.

"We see a very strong market both nationally and internationally (on the high-end)," Lanni said. "We haven't seen any fall off at the high end whatsoever. If anything we think it's going to be better than it has been."

One of the strongest drivers has been demand from China. Lanni said MGM MIRAGE will open four new marketing offices in China next month.

"We're having better relations with the PRC (People's Republic of China) than our government is," Lanni said. "The Far East is still very good."

Moreover, convention business is holding even with last year's levels.

"If it gets choppy or tougher (in the national economy), we have seen in the past where people weren't canceling conventions, but they were sending less people and those people were spending less money when they got here," Lanni said. "It looks good now, but we'll see what happens in the future."

Tom Baker, president and chief executive of IGT, sounded similar bullish views during his company's conference call. Unlike MGM MIRAGE, IGT hasn't had to contend with investor pessimism -- its stock has risen about 160 percent in the past 12 months, driven by extremely strong sales.

IGT continued that pattern Thursday when it reported a 116 percent increase in net income and 59 percent increase in revenues for the March 31 quarter. Baker said that will continue to get stronger, driven by sales of newer slot machines to replace the older slot machine inventory in casinos.

"The replacement market is continuing to be the most significant driver to our product sales," Baker said. "The replacement market is increasing, and we think it will continue to increase. We estimate that a minimum of 50,000 (replacement slot machine sales) per year ... is very real."

Over the first six months of the fiscal year, IGT had shipped 31,500 slots to U.S. customers, up from 16,000 in the year-ago period.

Baker said demand should also remain strong for IGT's participation slots, which are leased to casinos in exchange for a share of slot machine revenues. Though he wouldn't directly say that earnings estimates should be raised, he didn't discourage it.

"We've seen strong growth ... (demand) for new games is stronger than we originally expected, and erosion of existing games is occurring much more slowly," Baker said. "We're pretty happy with the way the business is running, and we think it will continue to be strong."

Meanwhile, there was debate on how investors should view the big jump in earnings reported by Harrah's Entertainment Inc., which beat analyst expectations Tuesday.

UBS Warburg gaming analyst Robin Farley, who has been among the most pessimistic on Wall Street about the outlook for the gaming sector, noted that the vast majority of earnings growth came because of a rebound at the Rio and the reversal of losses at Harrah's New Orleans and National Airlines. After factoring out these three items and eliminating revenues from recently acquired Players International, Farley said Harrah's would have reported a decline of 3 cents in earnings per share.

"The company does stand to benefit this year from having last year's losses added back in the next three quarters," Farley wrote. "However, our new (cash flow) estimate of $920 million (in 2001) ... still has (Harrah's) trading at a premium to the gaming group."

But in a research note, Merrill Lynch gaming analyst David Anders argued the higher premium was justified because of lower interest rates and "solid growth prospects." He raised his 12-month price target from $40 to $44, which represents a 29 percent premium over current levels.

"We believe that Harrah's long-awaited turnaround is finally coming to fruition," Anders wrote. "Harrah's appears to have successfully resolved these nagging issues, while continuing to generate very solid same-store (sales) growth. Looking ahead, we believe investors will continue to reward the company for solid same-store growth and excellent growth opportunities."