MGM MIRAGE profit slips on casino weakness

Wednesday, April 16, 2003 | 11:38 a.m.

First-quarter profit fell at MGM MIRAGE, in part due to lower casino revenue as the company failed to win as much from gamblers at the tables than expected. Still, the company today reported gains in non-gambling revenue as customers spent more money on food, shopping and entertainment.

The results indicate that the company -- the largest Strip operator and a bellweather for Las Vegas' tourism engine -- is healthy considering recent global tourism disruptions, analysts said today.

"While we are not under the belief that the Strip is back to peak levels, we do believe that the Strip is performing well given the considerable challenges in the domestic travel market," said casino analyst Joe Greff of Fulcrum Global Partners.

The company earned $61 million, or 40 cents per share, in the first quarter of this year compared to $84 million, or 52 cents, in the prior year's quarter.

Analysts expected the company to earn 39 cents per share. MGM MIRAGE officials told investors today that the company expects second quarter earnings of between 25 cents and 35 cents per share, after one-time adjustments.

While the Iraq war and the Asian virus known as Severe Acute Respiratory Syndrome have made some tourists reluctant to travel, company executives today blamed the economy for business levels that haven't yet recovered or remain fairly flat with activity before the Sept. 11 terrorist attacks.

"We are seeing people come into our buildings about the same level as in the past," said Terry Lanni, chief executive officer of MGM MIRAGE. "But they're not spending the money like they were before. They're literally not gambling as much at the tables."

The company's convention business also looks weaker than normal over the next couple of months, though that may be caused by travelers increasingly booking trips at the last minute and may not accurately reflect future business, Lanni said.

Meanwhile, officials said the company is focused on both upgrading its properties to withstand future competition and cutting operating costs.

This month the company will break ground on a $375 million "spa tower" of luxury rooms at Bellagio, the company's premier Strip resort. In August, it also will begin a $110 million upgrade of existing Bellagio rooms that will include adding marble entryways, new bathrooms, Internet access and flat-screen televisions.

The company aims to consolidate several areas of its operations to reduce costs. This month, it opened a call center for show and restaurant reservations near McCarran Airport that allows the company to better cross-sell services as well as save on labor costs.

Overall, the company's domestic high-roller business remains about 20 percent lower than levels reached before Sept. 11, 2001, while international high-end play has leveled off to pre-attack levels, Lanni said.

The virus hasn't meaningfully affected the company because it has spread at a time when Asian travelers aren't travelling to Las Vegas in large numbers, he said. That will change as June approaches, when the company will host a baccarat tournament that is popular with Asian gamblers, he added.

On the other hand, the company's slot business was strong during the quarter, boosted by the recent rollout of the company's "Players Club" program as well as the installation of thousands of "cashless" machines.

The machines are outfitted to dispense and accept paper vouchers in addition to coins, which reduces labor costs and boosts revenue as players are able to gamble more rapidly without inserting money.

Including one-time expenses, the company's net income was $51 million, or 33 cents per share, compared with $82 million, or 51 cents per share, for the year-ago quarter.

First quarter expenses include pre-opening and start-up expenses of $7.4 million, including $4.2 million related to Borgata, a luxury resort jointly owned with Boyd Gaming Corp. that is expected to open this summer, and $1.7 million for the rollout of the company's "Players Club" slot club loyalty card. It also includes $4.7 million in asset impairments and demolition costs associated with the closure of the Rick Springfield "EFX" show and about $1.4 million in other write-downs at the company's MGM Grand resort.

While some of the company's other major properties performed better than anticipated, Bellagio fell short of expectations, some analysts said today.

"Although we suspected that Bellagio could be weak owing to a challenging table environment, we were surprised to see (cash flow) decline 21 percent by $68 million," Merrill Lynch analyst David Anders wrote in a research note today.

Net revenue in the first quarter grew 1 percent from the year-ago quarter, driven by strong hotel and non-gaming business but offset by lower gambling revenue. Cash flow -- a key indicator of casino performance -- was down 8 percent primarily because of increased labor, property taxes and insurance costs, the company said.

Casino revenue declined by 4 percent in the quarter, and table games volume, including baccarat, was down 1 percent from the year ago quarter. Slot revenue was up 4 percent.

Bellagio's slot revenue jumped 10 percent in the quarter -- the property's fourth straight quarter of double-digit year-over-year revenue growth. Slot revenue at New York-New York was up 19 percent.

Non-casino revenue was up 8 percent.