Does measuring EBITDAR cause more problems for companies than it solves? Las Vegas Sands Corp. may reasonably be asking itself that question after shares in Sands China, the company’s local unit listed on the Hong Kong exchange, fell 2.49 percent in morning trading on Thursday–the first day of local trading after the three-day Lunar New Year holiday.
The fall was attributed in some media reports to analysts disappointed in the Macau EBITDAR margins revealed in the fourth quarter 2009 results. This was despite a narrowing (using GAAP–Generally Accepted Accounting Principles) in Q4 2009 of the net loss attributable across all operations to common stockholders. The net loss fell to USD113.9 million, compared to net loss of USD136.5 million in the fourth quarter of 2008. Diluted loss per share was USD0.17 compared to a diluted loss of USD0.27 in the prior year’s fourth quarter.
The Venetian Macau’s EBITDAR margin grew by only 6.7 percent year on year to 30.6 percent in the fourth quarter of 2009. By contrast operating income for the resort in Q4 2009 grew a whopping 95.3 percent to USD119.7 million from USD61.3 million a year earlier.
EBITDAR margin at LVS’s other Macau operation, Sands Macao, was actually down 1.4 percent year on year in Q4 ’09. That was on a 13.4 percent increase in operating income to USD43.9 million.
EBITDAR (as opposed to EBITDA) is earnings before interest, taxes, depreciation, amortisation and (importantly) rent/restructuring costs. It’s often used by companies (like er, LVS) undergoing debt or cost restructuring.
Using EBITDA and EBITDAR as supplementary information for investors isn’t unreasonable for gaming companies. Businesses don’t come much more leveraged than modern casino operators with their ‘borrow big today, pay tomorrow’ philosophy.
But having established earnings before major expenses as an accepted yardstick of performance, casino companies can’t be surprised if analysts start obsessing about the metrics on what is after all a ‘for guidance only’ figure rather than a strict accounting measure approved under GAAP (Generally Accepted Accounting Principles).
As LVS puts it in its preamble to its Q4 ’09 results: “When evaluating adjusted property EBITDAR, investors should consider, among other factors, (1) increasing or decreasing trends in adjusted property EBITDAR and (2) how adjusted property EBITDAR compares to levels of debt and interest expense.”
Quite. AGI couldn’t have put it better ourselves.
And while we’re in grumpy old man mode, we suggest analysts might find it useful to pay a little less attention to the headline numbers in Macau (such as the fact The Venetian Macao’s casino revenues were up an impressive 28.1 percent year on year in Q4 ’09 to USD485.5 million) and pay a little more attention the structure of the underlying gaming business.
As our sister publication Inside Asian Gaming has been repeating until its team are nearly blue in the face, Macau gaming revenues are more than 60 percent VIP baccarat–a trade notorious for its low margins because of the pervasive influence in Macau of the gambling agent system. It’s possible to argue that LVS has done such a good job of selling to investors the good news story of its drive to recruit more ‘direct’ VIP players in Macau (i.e. those with whom it has a direct credit agreement rather than those introduced to its high limit rooms via third parties) that it may inadvertently have raised market expectations above the actual pace of change.
Here’s to generating light, not just heat.
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