More On Luck and Gaming Company Earnings

I’ve written a few posts in the past about the role of luck in the quarterly earnings variation for both WYNN and LVS (no positions in either.).   $LVS is actually now providing their own version of “hold adjusted property EBITDA” (see page 20)  which is a fancy way of saying “this is what the results would look like if we normalized them for deviations from our expected “luck.”  Here’s what the slide looks like (click to enlarge):

There was actually an interesting exchange about this on the conference call, where the Goldman Sachs analyst, Steve Kent, wondered if the growing variations indicated anything about changing player behavior.  Kent’s point was, I think, that growing variations might signal more big-action players: bigger bets = bigger variance.   I don’t think that the numbers are statistically significant, but I haven’t run the statistics on them.   $LVS management replied, in part “There could be a multiple reasons for that. You could have more players playing. That will give you wider variation on the hold,”  which isn’t exactly true.   Kent’s point was that if you get 1000 gamblers betting $1000, or 1 gambler betting $ 1MM, the latter scenario has a lot more variance, and he was (I think) wondering if higher variance signified an increasing reliance on a smaller number of big-betting VIP customers.

I’ll cut & paste the related exchange below for you to enjoy and ponder:

Steven E. Kent – Goldman Sachs Group Inc., Research Division

I looked at your slides, actually Slide 20, and I looked at your hold adjusted property EBITDA and I appreciate that you’re starting to show that. And if you look at the quarterly spread between the reported and the hold adjusted, it’s getting wider over the past 5 quarters, going from $36 million to now in this quarter $88 million of difference. And sometimes it was positive, sometimes it was negative. But I sort of thought that as you got more and more used to your customer base and as the volumes increase that this would start to smooth out. So I wanted to know whether there was a customer profile or the way they’re playing that is changing and should we expect even more volatility as you get bigger, which would go against, I guess, the law of large numbers that they should start to smooth out?

Robert G. Goldstein

Steve, it’s Rob. I think you’re absolutely right. It’s a big spread this quarter, but it will probably be the other way next quarter because volatility is diminished as we have volume and the volume keeps increasing as you can see. We had a bad run in Singapore. It will self-correct and I don’t think we have any trepidation or whatsoever that in the end of the day, this company has very low volatility. Despite this quarter’s swing when you look at this company, at the end of the year, it’s a nonevent.

Steven E. Kent – Goldman Sachs Group Inc., Research Division

Bob, is it starting to correct already?

Robert G. Goldstein

I can’t — let me give you some numbers. Let me break out July for you. I just don’t think it’s something that you gotta waste a lot of time on. I think at the end of the day, we will be where we need to be. We look at our business day in and day out based on volume. We’re more interested in volume than the hold percentage because we have some very good days and very bad days. This quarter had some bad days, but I don’t think it’s something I’m going to spend a whole lot of time on. We’re handling — no one’s ever done — years ago at Caesars Palace, this was a big thing every quarter 4 guys will win or 3 guys would lose. This company has so many thousand of people gambling so much money. I think when the year’s over, it would be a nonevent for you and everyone in this room.

Sheldon Gary Adelson

Steve, this is Sheldon. I’d like to point something out. Up until this quarter, we had 11 straight quarters of growth. When you have 11 straight quarters of growth, how do you interpret volatility?

Steven E. Kent – Goldman Sachs Group Inc., Research Division

I’m not sure, Sheldon, if you’re asking me that question, but all I’m saying is as the business gets bigger.

Sheldon Gary Adelson

I’m asking you that question, Steve. How do you conclude volatility out of 11 straight quarters of growth?

Steven E. Kent – Goldman Sachs Group Inc., Research Division

Well, your own slide shows the volatility, Sheldon. It’s getting wider and wider.

Michael Alan Leven

Steve, this is Mike. If you…

Sheldon Gary Adelson

One quarter to last year’s quarter. If you look — unless you look at something I don’t have.

Michael Alan Leven

If you look at the quarter-to-quarter to the second quarter of ’11 the third quarter ’11, it’s basically the same volatility. What you are saying is in ’12. It’s larger in ’12 than it was in the first quarter or the second quarter, it’s larger.

There could be a multiple reasons for that. You could have more players playing. That will give you wider variation on the hold. At the end of the day, I think if you look at the normalization range, whatever is played on the revenue and the volume is going to end up at that level of volatility. So I think it’s — I don’t think it’s anything you can really forecast except that if you end up at 2.85% or 2.9% or 3% as your hold, your real forecast is what is the revenue number, what is the roll number? And we could be — so I don’t — as Rob said, I don’t think there’s any science to it. I think it’s basically going to end up in the same place. What we gained in the first quarter, we lost in the second quarter.

Robert G. Goldstein

Yes, I think, Steve, that’s the appropriate comment we Mike just made. We picked $72 million plus side Q1 against the expected hold adjust. We lost back $87 million, so net net net on billions of dollars of volume, the net’s less than $20 million first half of the year. That could be — it just is not that big a deal.

Kenneth J. Kay

Steve, the other way to think about …

Sheldon Gary Adelson

The difference in what you’re calling volatility and the delta between an adjusted and unadjusted, this has nothing to do with us, it’s the nature of the law of averages. Sometimes you’re up, sometimes you’re down. So it has nothing to do with any operational policy or whatever we do. One day, we could be — the difference would be 100% and the next day, it could be minus, and there’s nothing that we can control and there’s nothing, I don’t believe, there is anything that one can interpret out of the difference between the hold adjusted and non-hold adjusted over a period of time.

related:

Was Las Vegas Sands Q1 Earnings Beat Due to Good Luck?

Wynn Gets Unlucky In the Quarter

-KD

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