Rendering of Wynn Palace. Image source: Wynn Resorts.
The long decline in Wynn Resorts' (WYNN 2.98%) operations has ended for the time being, but it's not all good news for the company. Revenue is growing again, which should continue over the next year, but management has said it estimates only 100 table games will be allocated to Wynn Palace when it opens next month in Macau. That's a fraction of the roughly 500 table games management had originally hoped for.
Steve Wynn thinks his company can manage the low number of table games by lowering incentives for gamblers, installing games with a large number of seats, and making sure games are optimized for profits. But it remains to be seen if there will be enough tables to make the kind of money Wynn was hoping for when his company started construction on the $4.2 billion Wynn Palace.
How Wynn returned to growth
Second-quarter earnings for Wynn weren't outstanding, but they were better than expected. Revenue increased from $1.04 billion to $1.06 billion as Wynn Macau grew 3.6% in the quarter. Adjusted EBITDA, a proxy for cash flow from resorts, increased 5.8% to $295.4 million, and net income rose 25% to $70.4 million, or $0.69 per share. A better-than-expected hold percentage in Macau helped results, but that positive was offset by $20 million in labor costs associated with employees being trained for the Wynn Palace opening.
Compare Wynn's Macau performance to Las Vegas Sands (LVS 1.96%) in the quarter and you can start to see the strength the company demonstrated. The revenue figures and growth rates below should be compared to a 9.3% decline in Macau's gaming revenue overall in the second quarter.
|
Resort |
Q2 2016 Revenue |
Change YoY |
|---|---|---|
|
Wynn Macau |
$639.3 million |
3.6% |
|
The Venetian Macau |
$666.1 million |
(9.9%) |
|
Sands Cotai Central |
$472.7 million |
(14.7%) |
|
Sands Macau |
$185.0 million |
(23.4%) |
Data source: Las Vegas Sands and Wynn Resorts earnings reports. YoY = year over year.
Right now, Macau is going well for Wynn Resorts. But its newest property might not be as profitable as expected, and that's what investors are worried about today.
How Wynn plans to manage the table cap
Most of the discussion on the post-earnings conference call centered around how Wynn plans to handle a potentially disappointing number of table games allocated to Wynn Palace. The earnings release said the company expects to be allotted an additional 100 table games when the resort opens, and more in the future. Tables will then be moved from Wynn Macau, making the split 350 table games at Wynn Palace and 270 tables at Wynn Macau.
Steve Wynn said he would manage that low number of tables by focusing on the highest-margin junkets and mass-market tables. And he could add new tables that have more seats than a traditional table game. And he said that non-gaming revenue could make up for some of the lost tables, especially given the high-margin non-gaming revenue provides on a cash basis.
I would expect Wynn to handle the allocation as best it can, but it may be too much to ask to expect more than about $500 million in additional EBITDA annually when the resort opens.
Wynn Resorts still set for growth in 2016
The opening of Wynn Palace will be a landmark event for Wynn Resorts, and even a casino with fewer tables can't hide that. What investors will want to look for is how quickly the company can grow revenue in the hotel, restaurants, shopping, and other attractions. The new resort may not get over half of its revenue from non-gaming sources, like Las Vegas does, but moving in that direction would be good for Wynn and Macau. Next quarter we'll get a better idea of how those operations are impacting the top and bottom lines.
