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If you thought WMS was a “show-me” stock before FQ1…

Even we were too aggressive on the numbers.  In our quarterly preview, we expressed the opinion that FQ1 was likely to be another weak quarter and that management would likely be unsuccessful in convincing investors that the story isn’t broken.  What we didn’t expect was that FQ1 would be an absolutely pitiful quarter.  On the bright side, it’s hard to imagine the quarterlies getting much worse.  CEO Brian Gamache’s characterized his company’s situation this way: “WMS has reached an inflection point."  We would say “hopefully, WMS has hit rock bottom.”

Excluding unusual charges, WMS produced $0.23 of EPS this quarter, 20% below materially reduced projections.  Not only did WMS miss for the 3rd time in a row but they once again lowered their forward numbers.  But now guidance is “conservative”.  In the penalty box, show-me stock lost all credibility; what the heck is going on?  Pick your description, they all apply, and management isn’t talking their way out of this one.

Product sales were $19MM below our estimate, although on the bright side gross profit was only $7MM below our estimate

  • New unit sales were almost 1,500 lower than we estimated with International sales just slightly more disappointing than NA sales
  • Not only were NA unit sales than our estimate, but they included 930 new units – about 700 of which came from Kansas.  We weren’t modeling the majority of those shipments for another quarter given that neither facility is opening until the March quarter and we typically assume that shipments for large openings occur one quarter in advance of an opening.  WMS must have jumped through some serious hoops to ship all their units early.  Without pulling forward Kansas, the quarter would have been even uglier.  BYI’s NA shipments only had about 150 new units – almost all from a partial shipment to Kansas Speedway - and we'll have to wait and see what IGT reports tonight. 
  • We estimate that WMS’s ship share plummeted to just 18% in the quarter.  While the F1 is normally WMS’s weakest ship share we just didn’t think that we’d see an 8% sequential drop – 5% is usually the norm.  Again, if the early shipments to Kansas were excluded or only partially shipped, share would have been even lower at roughly 13-15%.
  • Gross margins and revenues got a nice lift from the sale of an unusually high number of conversion kits which have mid to high 80’s margins. 

Gaming operations revenue and gross margin were both 6% below our estimate largely due to lower average win per day as well as more attrition in the install base than we expected.

  • Given the approval of numerous titles in the quarter, we didn’t expect an almost 280 unit sequential decline in the install base when WMS just lost 550 units in all of FY11.
  • Average win is typically flattish from the June to September quarter – we modeled a $1.50 sequential decrease which clearly underestimated the degradation in yields.

On the bright side, there was a YoY 15% decrease in R&D spend - despite management adamantly claiming they would never cut R&D -marking the first YoY decrease in R&D since March 2006.  Normalized G&A was also $2.5MM lower than we estimated decreasing 11% YoY.