In preparation for WMS's FQ3 2011 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its preliminary guidance on April 11, FQ2 2011 earnings call, and other releases.





Preliminary FQ3 Results:

  • Revenue $191-193MM (previously $209-215MM)
  • Diluted EPS: $0.40-0.42
  • “Our third quarter results are clearly a disappointment and reflect several factors including lower-than-anticipated new unit demand in the March 2011 quarter, WMS’ execution challenges that resulted in approximately $8 million in product sales revenue from customers’ orders that shipped in April instead of the March 2011 quarter, and continued challenges in commercializing new products, including a slower rate of initial regulatory process approvals arising from the increased complexity of our newest gaming features and networked-technology enablers.” 
  • Cash: $144MM; no debt
  • Repurchased $30MM (750k shares) of WMS stock; for FY2011, have repurchased $80MM (2.1MM shares) of WMS stock.
  • "Following the introduction of several new successful participation themes during the March 2011 quarter, WMS expects gaming operations revenue to have stabilized and be approximately in-line with the December 2010 quarter [$72.7MM], partially reflecting a quarterly sequential increase in average daily revenue per gaming machine."
  • "The Company expects total gross profit margin to be in-line with the December 2010 quarter total gross profit margin reflecting an improvement in gaming operations gross margin with gaming operations being a slightly higher percentage of total revenues, and a decline in product sales gross margin primarily due to higher revenues and lower margin from used gaming machines. The Company’s operating margin for the March 2011 quarter is also expected to be relatively flat on a quarterly sequential basis reflecting lower gross profit due to lower revenues offset by lower operating costs related to expense containment initiatives."
  • “Casino operators’ capital budgets for replacing slot machines have been at historically low levels for several years, and new casino openings and expansions are now at their lowest level in many years.”
  • “Based on recent customer capital budgets and unit demand trends, we don’t expect meaningful improvements in the industry environment over the remainder of CY 2011 or, at this point, for CY 2012 and today we issued revenue guidance accordingly. Until we begin to see consistent economic recovery, growth in consumer spending and improvements in industry replacement and new unit demand, we believe WMS’ annual revenue will continue to grow at a mid-to-high single-digit percentage rate consistent with the growth achieved in FY 2009 and FY 2010, and now in FY 2011.”

Revised FQ4 and FY2012 Outlook

  • F4Q revenues: $210-$220MM
  • FY2011 revenues: $790-800MM
  • FY20112 revenues: $810-850MM
    • "The expected revenue growth is based on continued market penetration, especially in international markets, new market openings domestically and internationally, growing revenues from new networked gaming and online gaming products and increased participation revenues."
  • “Operating margin guidance for the June 2011 quarter of 22.0%-to-23.5% reflects expected quarterly sequential improvements in product sales gross margin and operating costs declining as a percentage of revenues compared to the March 2011 quarter.”
  • FY 2012 operating margin: 21-22%


  • Gaming Laboratories International (GLI) approved the commercial version of WAGE-NET networked gaming system solution and Jackpot Explosion, the first themed application in the Ultra Hit Progressive (“UHP”) Portal application family.
    • “Our initial beta placements have clearly demonstrated the incremental value of a Portal application interoperating with a base game, with coin-in premiums averaging 35%-to-40% across more than 270 Bluebird2, Bluebird xD and upgraded Bluebird gaming machines at 12 casinos.”
    • Anticipates initial installations of WAGE-NET and Jackpot Explosion in Native American casinos in California that are currently running beta-tests of the products, followed by other tribal and commercial casinos among the 12 casinos presently acting as beta-test sites.
    • Recently began a WAGE-NET/Jackpot Explosion field trial in Nevada at a popular Las Vegas casino



  • “We remain on track to further improve Bluebird xD gross margins on a quarterly sequential basis throughout fiscal 2011...We continue to expect that the Bluebird xD gross margin will attain parity with Bluebird2 gross margin in the June 2011 quarter.”
  •  “With the growth anticipated in the installed base during the next two quarters, we believe that the average installed base for the full year will be a couple hundred units higher than fiscal 2010 but will be somewhat below the low end of our original guidance range we provided in August 2010.”
  • “With ... new participation products launching in the current quarter such as YAHTZEE, Revenge From Mars/Attack From Mars and the new PRICE IS RIGHT video game and additional new participation products in the June quarter, we expect further growth in the installed footprint throughout the remainder of fiscal 2011, helping to continue our strong momentum as we head into fiscal 2012.”
  • ”We expect to see further incremental increases in depreciation in the March and June quarters as we continue this transition in our installed-participation base and selectively invest in other high return lease opportunities.”
  • “In the March and June 2011 quarters, we expect our effective consolidated income tax rate to be in a range of 35% to 36%, inclusive of the ongoing R&D tax credit benefit and the small impact from the increase in the Illinois state corporate income tax rate.”
  • “With respect to international markets in general, our recent discussions with casino operators here suggest that the environment in Europe is stabilizing and could translate in a more positive sentiment for capital spending much later this calendar year. In the interim, we continue to see strength in Latin America, Asia and Australia.”
  • “We now expect to place our first units on a lease basis in Italy early in the September quarter after we complete the certification process.”
  • “In Illinois, we expect to hear shortly who’s been awarded the central system contract for the VLTs following a resubmission of bids back in early December. Following the announcement and signing of that contract and the awarding of licenses, we expect to generate our first sales in the second half of calendar 2011.”
  • “Our accelerating launch schedule throughout calendar 2011 followed in early calendar 2012 by the expected launch of the highly anticipated first games based on a next generation CPU-NXT3 operating system along with having the highest daily revenue amongst our competitive set provides WMS with the opportunity to generate enhance value from the meaningful opportunities to expand our share of the participation business.”
  • “I’m very confident that the participation business will get back on track in Q3. We will have a significant ramp up in Q4 based on the product launches and particularly in the WAP area.”
    • “We’ve got 12 new G Plus deluxe games for sale that are coming out over the next few months. Those games, we’ve already got four approved and there’s eight more coming. They’re doing spectacularly well for the additional placement so that gives us great confidence.”
  • “Used games, as Scott mentioned, is about 240 basis points off of our product margin and it’s about 100 points more than we had anticipated. So that the strong demand for our Bluebird1 trade-ins is actually a good thing because we’re starting to harvest our own market share replacement cycle.”
  • [UK online wagering marketing] “We’ve started initially rolling out some of the marketing programs as of last week, I believe, and we’ll start to ramp that up more aggressively in February, March and April. So we will get more aggressive as the year goes on but, again, as we guided before, those revenues for fiscal ‘11 will be deminimus.”

TGT: Near-Term Oversold

Keith covered Targ-eh (again) this morning, booking another gain on the short side of a name we've been bearish on all year. The stock is immediate-term TRADE oversold here.


TGT: Near-Term Oversold - 4 25 2011 11 51 04 AM


PNK should continue its string of strong quarters and keep up the regional momentum started by PENN.



We are projecting EBITDA of $63.5 million, significantly higher than the Street at $60.2 million.  Our EPS estimate of $0.08 is also meaningfully ahead of the Street's $0.05.  On a year over year basis, L’Auberge and New Orleans should be the standout properties on an EBITDA basis with a full quarter of contribution from River City driving most of the company-wide year over year gain.  Secular margin growth remains a story company-wide.  PNK generated 3 straight quarters of property level margin improvement and we believe at least 4 more straight quarters remain.


As can be seen from the following chart, regional gaming trends have picked up considerably sequentially with March being the standout of the quarter.  Whether March benefited from pent up demand as a result of tough weather in January and early February remains to be seen although we are hearing anecdotally that April has been a pretty good month.  We track trends on a sequential basis, seasonally adjusted.



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April may end up at HK$19-20BN



Macau slowed in the past week and we would expect further slowing as we approach the May holidays.  As of April 24th, table gaming revenues month to date were HK$15.5 billion.  Adding a projection for the last 6 days of the quarter and a full month of slots, we estimate total April gaming will finish at HK$19-20 billion, up 44-52% YoY.


In terms of market share, MPEL lost some share in the past week but is still trending well above its 3-month trailing average.  Here are the shares:




It matters when hold is volatile.



We recently cautioned our clients that MPEL may not hit the whisper Q1 EBITDA numbers of over $140 million.  Despite strong top VIP volumes, low hold may crimp margins since at least half of MPEL’s junkets are paid commissions based on volume, rather than revenue.  In these instances, MPEL bears the risk of hold fluctuations.


Currently, we are projecting company EBITDA of $131 million which is actually up from our recent estimate of $126 million but below the whisper expectations and below our previous estimate of $144 million.  We had previously thought that most of the CoD’s junkets were compensated on a rolling volume basis but now believe that it is closer to 50/50 revenue share.  Thus, the bottom line impact of March’s low hold is not as significant as we thought- however, our conclusion remains the same.

Consensus Meets The Hedgeye: Q1 GDP Estimates in Freefall

Conclusion:  With U.S. GDP likely coming in lower than “expected”, we continue to stay long of The Inflation via gold and oil as slower growth will give The Bernank cover to remain Indefinitely Dovish.


My ever astute colleague Darius Dale circulated the attached chart to our internal team earlier today.  It is a chart of Bloomberg Consensus estimates for Q1 Real GDP growth. These estimates have been falling, and falling hard.  Currently, the consensus estimate for Q1 growth is 2.6% and peaked at close to 3.5% in late March of this year.  Now with most of the data in the books, the “sell side” has dropped their estimates dramatically.  After the fact estimate revisions aren’t exactly helpful, but it is endemic of Groupthink on the sell side.


On November 11, 2010, we wrote a note, following a thoughtful discussion with former Peter Orszag, that outlined why GDP growth would likley be lower than expected in 2010 (email us for a copy).  The key reasons were as follows: 

  1. The inventory cycle is going the wrong way in the first part of 2011; moving to net-neutrality towards impact on GDP growth.  As a side note, Orszag noted that the sequential improvement in GDP in Q3 was unintentional as some firms were caught out by the slump in demand during the summer and unintentionally built up inventories in Q3.  That trend, Orszag expects, will reverse itself in Q4 and the early part of 2011. 
  2. The Recovery Act, despite the controversy, added 2%+ to GDP in 1H10.  By design the act was to have all the money “out the door” by the end of September and succeeded in doing so.  Going forward, the cost of the Recovery Act will be net neutral and eventually as it ramps down and, eventually – in terms of cash flow – will be net negative to GDP growth.
  3. The final factor is State and local deficits which are projected to be $100 to $150 billion a year for the next two tears.  Going forward, a much smaller share of which will be offset by federal subsidies, therefore a much larger share will need to be closed through tax increases and spending cuts at the State and local level.   

Coincidentally, right around that time, Hedgeye Macro was sounding the alternative alarm bell of “Growth Slowing as Inflation Accelerates”.


The implications of these key factors are anemic GDP growth (as the sell side is now realizing) and stagnant employment improvement. In aggregate, this likley provides cover for the Federal Reserve to stay Indefinitely Dovish.


Daryl G. Jones
Managing Director


Consensus Meets The Hedgeye: Q1 GDP Estimates in Freefall - 1


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