Marina Bay Sands in Singapore. Image source: Las Vegas Sands.

After two years of negative numbers from Macau's gaming market, there are finally some positive signs for the industry. The decline in gaming revenue has slowed, and Las Vegas Sands (LVS 2.91%) is starting to see some positive signs for gaming trends.

A close look at recently reported second-quarter earnings numbers shows that there may still be challenges in growing the company's earnings long term.

The numbers

Overall, Las Vegas Sands' revenue fell 9.3% in the second quarter to $2.65 billion, but net income dropped 32.2% to $394.4 million because the company's operations are heavily leveraged to the bottom line. Adjusted EBITDA, which is a proxy for cash flow from operations, only fell 5.9% to $953.8 million.  

The declining results should be put into some context. Gaming revenue in Macau fell 9.2% in the second quarter, so that's the bar against which results should be measured. And that's where the figures get a little alarming.  


Net Revenue

Change YOY

The Venetian Macau

$666.1 million


Sands Cotai Central

$472.7 million


Four Seasons Macau

$125.0 million


Sands Macau

$185.0 million


Data source: Las Vegas Sands earnings report. YOY = year over year.

The rapid decline in revenue shows that Las Vegas Sands is losing market share. Long term, that's the biggest concern for the company, with Galaxy and Melco Crown (MLCO 1.67%) recently opening new resorts or expansions and Wynn Resorts (WYNN 0.20%) and MGM Resorts (MGM 0.72%) adding new properties on Cotai, where Las Vegas Sands is completing The Parisian.

Investors may see an even further decline in revenue at individual resorts as new properties pull customers away, and that could eventually result in a hit to cash flow from operations. 

The Parisian in Macau is nearing completion. Image source: Las Vegas Sands.

Will a Macau turnaround help Las Vegas Sands?

Now, the market seems to be focused on the fact that Las Vegas Sands is adding to speculation that Macau is bottoming out. Mass-market play is stable, if not rising slightly, and VIP play isn't in free-fall like it was a year ago. Since Las Vegas Sands focuses on the mass market, that should be good news for the company.

Still, contrast the mass-market strategy with the numbers above and the new resorts from Wynn Resorts, MGM Resorts, and Melco Crown. Las Vegas Sands' mass-market share is in decline, even before most of the new supply in the region hits the market.

The stable corner of Las Vegas Sands

As usual, Macau gets most of the attention for Las Vegas Sands. But Marina Bay Sands in Singapore and Las Vegas operations are important for the company as well. Marina Bay Sands has seen a decline in revenue as Chinese visitors have shied away, similar to Macau, but in the second quarter, revenue fell just 0.4% to $710.1 million, and EBITDA fell just 1.7% to $357.0 million.

I will point out that the numbers were driven by a very lucky quarter on the VIP side. Rolling chip volume, which measures VIP play, was actually down 29.1% in the quarter, so luck masked some real weakness in Singapore.

Las Vegas operations saw revenue climb 3% to $356.5 million and EBITDA rise 33.8% to $72.5 million. Two years ago, it would have been a shock to investors to say that Las Vegas is the most stable section of the company's earnings, but that's the case today.

The dividend conundrum

Just as earnings have begun to decline, Las Vegas Sands has doubled down on growing its dividend. The company has grown the dividend at a 30% compound annual rate since 2010 to an annual rate of $2.88 per share in 2016. That's a rate of $0.72 per quarter, $0.20 more than the company made in net income.

The problem with paying more in a dividend than you earn is that the money has to come from somewhere. And one place is issuing debt. Over the past year, Las Vegas Sands' net debt has grown from $7.0 billion to 8.0 billion, showing that the company is paying more than it's making.

To be fair, a company with a lot of capital assets, like Las Vegas Sands, can pay out more than it makes in net income because that figure includes non-cash charges like depreciation. However, the leveraging of the balance sheet to pay dividends is worth watching for investors.

Balance of 2016 will be key

It'll be key to watch how Macau's gaming market performs in the second half of the year and what the impact of new resorts has on existing operations. I think we may see a continued decline in earnings from existing resorts, even if the mass market grows. And that could have an impact on Las Vegas Sands' bottom line and the trajectory of the dividend heading into 2017.