WMS F4Q 2011 CONF CALL NOTES

Hard to find much positive in this quarter and the conference call didn't exactly alleviate intermediate concerns. We'll have more opinions in an upcoming note.

“Given our outlook for flat near-term industry replacement demand and the industry’s current pace of new technology adoption, we recently conducted a thorough review of our business strategies and product plans"

- Brian R. Gamache, Chairman and Chief Executive Officer

HIGHLIGHTS FROM THE RELEASE

  • $203MM of revenues and $0.44 of Adjusted EPS - missing street expectations and guidance and took down the top end of their FY12' to 3-5% growth from 3-7% top line growth
  • New unit sales: 6,510
    • NA: 4,043 with 3,700 replacement units
    • International: 2,467
    • "Ongoing growth in Australia and Asian markets was more than offset by lower shipments to Europe and Latin America."
  • ASP: $16,951
    • "The average sales price for new units increased 9%... largely reflecting a higher mix of Bluebird2 and Bluebird xD gaming machines coupled with a higher mix of premium products. Bluebird2 and Bluebird xD units accounted for more than 98% of total global new unit shipments"
  • Other product sales declined "primarily reflecting a decline in revenues from conversion kit sales and other higher-margin products."
  • Install base at QE: 9.870
    • "The quarter-end and average installed base were negatively impacted by idle participation units at certain casinos that were closed during a portion of the June 2011 quarter due to flooding along the Mississippi, Missouri and Ohio rivers. The estimated impact during the quarter from these idle units, including an above-average number of high-performing coin-in units, totaled nearly 8,000 lost unit revenue days, with an estimated impact to earnings of approximately $0.01 per diluted share."
    • "During the June quarter WMS received approvals for two new participation games – the STAR TREK Battlestations and Alice themes – and, including new games that received approval in the preceding quarter, installed over 500 of these new games"
  • Average win per day: $76.13
  • "Total gross margin was 57.4% compared to 60.7% in the March 2011 quarter and 63.8% in the year-ago period, and includes a 320-basis point impact of inventory, other asset write-downs and other charges, coupled with a lower mix of high-margin gaming operations revenues and a decrease in product sales gross margin"
    • "Product sales gross margin was 44.9% in the June 2011 quarter, including the $4.9 million, or 380-basis point, impact of inventory and other asset write-down charges included in cost of product sales"
    • "Gaming operations gross margin was 79.8% in the June 2011 quarter compared with 81.1% a year ago, reflecting the $1.7 million, or 230-basis point, impact of the asset write-downs and other charges included in cost of gaming operations, partially offset by favorable jackpot experience."
  • "We are streamlining our product management and product development functions, simplifying product plans and further prioritizing on-time commercialization of new game themes, products and portal gaming applications for our core product sales and gaming operations businesses. These actions are expected to better direct resources and focus on near-term revenue opportunities and will reduce our overall organizational staffing by approximately 10% to a level that better correlates with the current operating environment, while maintaining our ability to create great games that engage current players and attract new players. We expect these actions to further strengthen our operating efficiencies and effectiveness, meaningfully reduce costs and improve our operating margin. The tough decisions we made as part of the strategy review also led to the impairment, restructuring, asset write-down and other charges recorded in the fiscal fourth quarter. We expect to record further pre-tax charges of $11-to-$14 million, or $0.12-to-$0.15 per diluted share, in the September 2011 quarter, largely to complete the restructuring actions."
  • "Total revenues in the June quarter were less than anticipated principally due to lower product sales revenues resulting from the Company entering into an operating lease arrangement with the Seminole Tribe of Florida for 600 new units in lieu of prior expectations of a comparable unit-sized product sales order in the June quarter."
  • "During the June quarter, we began to realize benefits from initiatives announced in April aimed at improving operating execution and the ratable launch of new products, as quarter-end compression was reduced and the flow of new product approvals improved in the June quarter."
  • "We also decided to provide operating leases to selective customers as a way to leverage WMS’ solid financial position and strong balance sheet to bring our latest cutting-edge products to customers’ gaming floors.... Our new, multi-year operating lease agreement with the Seminole Tribe of Florida includes many of our most innovative new gaming entertainment products, such as the G+ Deluxe and Reel Boost series of video games and our Networked Gaming Portal applications. We will consider similar mutually beneficial operating lease arrangements with other customers when WMS can achieve an attractive return on investment.”
  • "WMS repurchased 674,664 shares, or $21.5 million, of its common stock in the June 2011 quarter at an average price of $31.83."
  • "WMS today narrowed its revenue guidance for fiscal 2012 and now expects 3%-to-5% growth over fiscal 2011. Overall, the Company’s guidance assumes that the general industry and economic environment will remain lackluster, with customers’ capital spending plans remaining flat with prior-year levels during the remainder of calendar 2011 and into calendar 2012."
    • further international market penetration
    • increased Class II opportunities
    • modest resumption of growth in the second half of the fiscal year in WMS’ participation business
    • a modest contribution from the commercialization of the Company’s initial portal game applications
    • a modest increase in online gaming revenues
    • expected improvement in new unit demand from an increase in new casino openings and major expansions in the second half of the fiscal year.
    • The Company expects the replacement cycle for gaming machines in the U.S. and Canada, along with overall average pricing, to change minimally on a year-over-year basis.
    • Guidance does not reflect any incremental revenues from the potential expansion of Illinois gaming or the opening of the Illinois or Ohio VLT markets.
    • R&D spending equivalent to about 13% of total revenues
    • Operating margin improvements
  • "Consistent with fiscal 2010 and 2009, quarterly revenues and operating margin are anticipated to be lowest in the September 2011 quarter and increase in each subsequent quarter with the highest revenue levels and operating margin in the June 2012 quarter. WMS expects quarterly revenues in the September 2011 quarter to be slightly below the percentage of annual revenue achieved in both fiscal 2010 and fiscal 2009, reflecting anticipated lower year-over-year demand as a result of the change in timing of the G2E industry trade show moving from the third week of November to the first week of October and a slightly higher percentage of revenues in the June 2012 quarter due to an anticipated increase in new casino opening activity."

CONF CALL NOTES

  • Expect further margin improvement for product sales in FY12
  • Expect revenues from new unit sales to increase slightly in FY12' but to be back end loaded
  • Expect that installed footprint will grow in F2012 and average daily revenue will remain flat
  • Expect that D&A will increase sequentially due to higher leased units and the BB2 refresh
  • Have 18 approved game themes in Australia and continue to have traction there
  • Progressing with approvals and field trials for their portal application products. Will continue to maintain pricing flexibility with early adopters.

Q&A

  • Based on their expected revenue increases and expected margin improvements they would be very disappointed if they don't meaningfully increase EPS in FY2012
    • This may be the only positive takeaway from the call but management did hedge by saying they are not providing EPS guidance - do they have credibility?
  • Pricing elasticity - are they pricing too high vs. their peers?  The ASPs they are quoting are already net of discounts
  • Thinks that their ship share is in the mid-20s this quarter. Expects that pricing will continue to be challenging in the next quarter or two.
  • When they spoke about margin improvements in '12 they are looking at adjusted margins
  • Pricing for used games is down even though units are flat
  • Think that the SG&A savings will be north of $20MM on a run rate basis
  • The cost savings will be through R&D, SG&A, and product margins too - since they are all headcount related
  • Operating leases will show up in other revenues in gaming operations. The current other game ops revenue includes royalties, operating lease revenue, and daily fee machines.  The current quarter doesnt include a full quarter of the Seminole fees.
  • Q1 will be lower than F09 and F10 as a % of year revenues
  • They are not actively pursuing deals
  • Replaced a third of their BB1 participation footprint. Feel like they have some pent up demand for their new participation titles. Pirate Battle was just approved in NJ.
  • Have 300 portal application units today, expect it to double by YE. By end of F12', think that they will have 100 customers. Feel like they can generate their own replacement cycle with the rollout of portal applications.
  • Product sale margins - think that 48-49% was a normalized level for the quarter when you add back the writedowns. Think it will be a ramp up from Q1 to Q2.
  • Italy - one regulator.  One of the early international providers is ahead of everyone in the queue so they are just patiently waiting. They haven't included Italy.
  • Capex - they will continue to convert the install base of their gaming operations business