• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Difficult to find the silver lining in this quarter


“We already are realizing tangible benefits from our recent restructuring and realignment actions, which we expect will lead to a resumption of quarterly sequential financial growth in the December 2011 quarter and through the remainder of fiscal 2012.”

Brian R. Gamache, Chairman and Chief Executive Officer

CONF CALL NOTES

  • Increased the BBxD margin by 27% YoY. Anticipate a stronger product sales margin in 2H12 vs. 1H12.
  • 45% complete with capex initiative to transition their participation base to BB2 from BB1 
  • Expect that most of their gaming operations placements will be replacement units and that growth will not resume to gaming operations until 2H12
  • Enhancement from performance on portal units continues to be very encouraging
  • Continue to see growth opportunities in international markets

Q&A

  • Product approvals have been slower than they expected which is why the quarter is worse than they expected
  • They will not cut R&D
  • Going forward, you'll see their margins get back to 53-55%
  • Mexico receivables write-down
    • At the end of August there was a fire in Monterrey which spurred the government to look into shutting down casinos that were not completely on the up, given safety issues. So they decided to take some writedowns. Most of their customers are international customers with good credit. They're not giving up on getting their machines back but thought it was prudent to take reserves
  • Gaming operations - games have been out there for a long time which have led to a big drop off in performance and the lack of new product has really hurt them and caused a drop off in performance of average revenue per day.  Won't look for any improvements in Q2 but should see an increase in win per day and install base.
  • Balance buybacks with growth opportunities (M&A included)
  • They are very excited about the backlog of their participation games
  • Shipped games to Penn's Kansas Speedway, Kansas Star, and Miami Jai-Lai.  Also shipped into a lot of expansions. Think that their ship share was 20% at Penn and the other 2 were just below that.
  • 2011 operating margin improvement off of clean margins - backing out impairments. 
  • 18-20% ship-share this quarter - which is about where they thought they would be
  • They are taking a very conservative approach to their guidance.  Think that they have marked their inflection point 
  • How much did the elevated sale of conversion kit sales help their game sales margins?
    • 50% came from higher conversion revenue and 50% from lower costs on BBxD
    • There were no price increases in the quarter but they did have some special promotions on conversion kits in the quarter
  • Declines in gaming operations? 
    • Q2 is always a challenge. Would look for some stabilization in Q2 
  • Revenue from portal applications is still very small, despite doubling the number of units out there from Q4 to Q1. 
  • Gaming operations is still more competitive than it used to be
  • The increase that they are expecting in gaming operations install base is sequential not necessarily YoY.  They would be disappointed if they didn't make some YoY progress.

HIGHLIGHTS FROM THE RELEASE

  • WMS's $0.07 EPS number includes $0.17 of one-time items - so $0.24 is the "clean" number
    • "Pre-tax impairment and restructuring charges of $9.7 million, or $0.12 per diluted share, primarily for separation-related costs and charges related to the decision to close two facilities"
    • "Non-cash, pre-tax charges of $4.3 million, or $0.05 per diluted share, to write down receivables following government enforcement actions at certain casinos in Mexico"
  • “First quarter results reflect initial cost savings from these actions and we believe we are firmly on track to reduce annual operating costs by an expected $20 million." 
  • "We’ve now received at least one jurisdictional approval for all of the participation products that were originally expected to be commercialized in fiscal 2011. During the next several months, we expect additional approvals for these innovative products, and we expect a return to a more consistent pace of approvals for other new products beginning in calendar 2012."
  • "With our focus on capturing near-term revenue opportunities and an expanding flow of new products being commercialized, we anticipate building on the expected quarterly sequential improvement in December 2011 quarter’s operating results with further quarterly sequential revenue and margin improvement in the second half of this fiscal year that will also reflect a resumption of year-over-year revenue and margin growth in the March 2012 and June 2012 quarters"
  • Recent Operational and Strategic Achievements:

    • "Initial jurisdiction approvals received for five participation games: THE WIZARD OF OZ, Journey to Oz, BATTLESHIP, Leprechaun’s Gold, Pirate Battle and MONOPOLY Party Train games."
    • "Initial jurisdiction approvals received on more than 30 new for-sale games... including new G+ Deluxe and Innovation series of games – Colossal Reels, Invaders! 5X4 and Reel Boost themes."
    • "First three Portal application themes – Jackpot Explosion, Piggy Bankin and Peng Wins themes – now installed on a total of more than 480 gaming machines at 27 North American casino properties including trials, and a total of 700 gaming machines networked with WAGE-NET Remote Configuration and Download functionality, along with two recently completed installations of the WAGE-NET system with Remote Configuration and Download functionality at two international casinos."
    • "Extended the distribution agreement with our Australian distributor, eBet Limited, on a new five-year rolling basis and added the potential to expand into new territories including Queensland and Victoria, in addition to New South Wales."
    • "Selected by Alberta...  to participate in their VLT replacement initiative for the province."
    • Partners with Caesar’s ... for introduction of...  participation game expected to launch in mid-calendar 2012."
    • "Amended and expanded our revolving credit facility to $400 million, with a $100 million accordion feature, for a five-year term with lower spreads on interest rates and commitment fees and more flexible financial and non-financial covenants"
  • New unit sales: 3,918; ASP: $16,574; 51% GM
    • US & Canada: 2,530 (1,600 replacement)
    • International" 1,388 (35% of total shipments)
    • "Reflecting in part the previously anticipated impact from customers’ delayed capital spend in the September quarter pending their opportunity to see WMS’ newest products at the G2E industry trade show, as the show’s timing changed from the middle of November to early October this year"
    • BBxD: 32% of global new shipments; mechanical spinning reel: 16% of new units sales
  • "Other product sales revenues declined to $22.2 million...reflecting lower revenue of used gaming machines, mostly offset by higher conversion kit revenues. Approximately 2,500 used gaming machines were sold in the September 2011 quarter at lower average prices, including a higher number of used competitor units.. while we recorded revenue on approximately 5,500 conversion kits in the September 2011"

  • Gaming operations install base: 9,562 and Average revenue per day: $71.70
    • "The declines in the average and period-end installed base and average revenue per day primarily reflect the previously discussed lack of new participation products." 
  • "The product sales gross margin increase relates to progress with continuous improvement efforts to reduce costs on the Bluebird2 and Bluebird xD cabinets and higher revenues from higher-margin conversion kit sales partially offset by the impact from a lower volume of new unit sales and the lower margin achieved on sales of used gaming machines."
  • "Gaming operations gross margin was 79.1% in the September 2011 quarter compared with 81.0% in the year-ago quarter primarily reflecting higher licensing royalty expense and costs related to the start-up of our new operations launched in fiscal 2011"
  • "Notwithstanding the expectation for second-half growth assumptions...WMS now expects fiscal 2012 annual revenue to be modestly below the fiscal 2011 level, while operating margin is expected to improve year over year. WMS continues to expect that growth in the second-half of fiscal year will be driven by its improvement initiatives, modest growth in WMS’ gaming operations business and the expected improvement in new unit demand related to new casino openings and expansions in calendar 2012."
    • No incremental revenue from IL, Ohio or Italy
    • Assumes limited, if any, improvement in the industry replacement cycle in calendar 2012. 
    • R&D spending: approximate 13% of total annual revenues. 
    • "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."