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With WMS trading near its 52 week low, we don’t think it's a stretch to say that investor expectations for FQ4 (June) are pretty low. 

Last quarter’s results and 2012 guidance weren’t exactly inspiring which begged the question of what additional shoes would drop.  Speculation regarding product and production issues and concern surrounding the sustainability of WMS’s market share in the face of heightened competition have emerged.  

We were early to voice concerns over WMS’s unsustainable market share [see our notes: “4Q SLOT SHIP SHARE UPDATE” (2/25/11) and “WMS: ADDRESSING THE ISSUES” (11/3/10)] but that was when the stock was trading with a $40 handle.  Sure wish we had made an aggressive short call then.  But at today’s levels a lot of the bad news is already priced in.  In fact, we think 25% market share is sustainable and its participation share should actually increase consistently over time. 

Regarding the quarter, If WMS can meet just the low end of their guidance we think that the stock can begin to work again as shorts will likely cover and the long-term is very compelling.  That doesn’t mean you have to buy it ahead of the quarter.  That would be for the brass ball crowd.

We estimate that WMS will report $209MM of revenues and $0.53 cents/share next week – slightly below consensus on the top line but in-line with EPS.  No doubt the $8MM (or roughly 500 units) that were delayed in shipping out last quarter will help WMS make its numbers.  Fiscal year end quarters also tend to be strong as companies will often offer their customers promotions to incentivize the placement of orders [see “SLOTS: MAKING THEIR QUOTA" published on 7/20/11].

Details:

  • $132MM of product sales at a 52% margin
    • 4,100 NA units – bolstered by the units that were supposed to ship last quarter
      • “The $8 million of orders were not canceled but they shipped in early April rather than by March 31st. Our production and distribution teams were simply unable to fulfill these orders in time as they were received after our normal cut-off dates which created challenges and stresses related to logistics of an already compressed order fulfillment period.”
    • ASP’s of $16.3k
      • “I don’t think pricing really entered into our issues in Q3. Pricing comes up every now and again. It didn’t use to come up hardly at all. It comes up a little bit more frequently now but we still believe that we have pricing leverage and if our content continues to perform at the levels of the G+ Deluxe and the Real Boost product, we’re not going to continue to see pricing as an issue.”
    • 2.6k international units
    • $23MM of used machine, parts, and conversion kit revenue
  • $76MM of gaming operations revenue at a 80% gross margin
    • Over the last 5 years, the average increase from the March to June quarter in gaming operations has been a $5MM sequential lift – largely due to seasonality
    • New releases should also help the quarter as well as recent approvals
      • “Battle Stations, we got the Pirate Battle and we have Leprechaun’s Gold that have essentially moved from Q2 and Q3 in our original fiscal ‘11 planning into Q4, Q1 and Q2. So, you’re going to see the games that we launched in Q3 are going to help suffice through Q4 and the games we’re launching in Q4 are going to help build our footprints slightly and our average win per day should see a nice up tick over the next couple of quarters. So, you are going to see some accretion in the footprint and the rate over the next call it two quarters.”
  • Other stuff:
    • Until revenue growth picks up, we expect that WMS will keep a lid on costs
    • We expect R&D to remain flat sequentially at $28MM, D&A to decline to $18MM, and SG&A to tick up sequentially to $39MM but be down YoY