WMS: LOW EXPECTATIONS FOR FQ1

FQ1 was likely another weak quarter but can management convince investors they can turn it around?

We don’t think anyone has great expectations going into WMS’s print on Monday after close, despite the stock's nice recovery from $16ish lows in early October.  Buy-side whispers of a big earnings miss made their way to the sell-side after G2E and analysts took down numbers for the quarter and year.   

We’re still a penny below consensus for the quarter, although it’s not really about the quarter for WMS.  The performance of this stock will be determined on the Company’s ability to convince investors that the story isn’t broken and that they are on the road to recovery.  While there may be some short covering, management will likely be unsuccessful on this earnings conference call.  WMS is probably a show me stock at this point.

While replacements have been improving since 2008, the lack of new casinos and expansion have put overall slot market demand at all-time lows.  However, calendar 2012 should display a sharp uptick in new casinos/expansions. 

For FQ1, WMS likely incurred more impairment charges and needs at least another quarter to turn around the declines that they’ve been experiencing in their gaming operations install base.  As we wrote about in “G2E KEY TAKEAWAYS” on 10/06/11, we did walk away from G2E more bullish on the company over the long term.  They seem to be addressing their issues and getting back to what they do best – designing and developing good games.  However, it will likely take a couple of quarters to materialize.

Detail:

We estimate that WMS will report revenue of $180MM and adjusted EPS of $0.28.

  • We estimate product sales of $106.5MM at a 48% gross margin – impacted by some write-downs and promotional environment
    • 5,400 machine sales at $16.5k
      • 3,250 machine sales into NA – almost all replacement
    • $17MM of conversion and used game & other revenue – likely at lower than normal margins due to promotional activity
  • $73MM of gaming operations revenue at a 79% gross margin
    • We expected a sequential decline in WMS install base as well as yield pressure as WMS brings on new products at a slower pace than what’s been rolling off.  This trend should reverse towards the end of their fiscal year.
  • Other stuff:
    • R&D: $29.4MM
    • SG&A: $36.5MM
    • D&A: $21MM