There are signs that WMS may be pulling forward earnings.
WMS will report earnings next week and while we don’t think the bottom line number will be as awful as recent quarters, quality should be low. More importantly, beyond the quarter, we see cracks in the health of WMS’s underlying business. It seems like WMS is continuing to pull earnings forward - never a good sign. Some warning signs are:
- WMS is booking Revel units in the December quarter – the only supplier to do so. It seems strange to rush this booking since no cash will be received for several quarters, if not longer.
- WMS is the only “Big 5” supplier to sell units to Maryland Live rather than lease them, thus boosting near-term profits at the expense of a long-term, steady cash flow stream
- If our estimates are correct, WMS will be the only supplier to post a YoY decline in replacements
- WMS was the only supplier to take a material charge in Mexico. Either WMS was operating in some grey areas or everyone else’s accounting is that much more aggressive.
Turning to the December quarter, this quarter may mark the 5th straight quarter that WMS misses Street expectations. Our best guess is that WMS reports $0.28, falling 2 cents short of consensus, although it’s possible they make the quarter through the cost side.
FQ2 2012 Projections:
$103MM of product sales at a 51% margin
- 5.3k new unit sales with 3.2k from NA
- 680 new units and 2,500 replacements
- WMS shipped just over 300 units to Revel in the December quarter. We believe that it may be the only large manufacturer recognizing revenue from Revel in that quarter. We’re pretty sure that WMS will also be booking receivables rather than collecting cash for their placement (as are all the other manufacturers shipping to cash poor Revel). The only other opening/expansion of any size is the Northern Edge Navajo Casino in AZ. WMS booked shipments to both Kansas facilities and Miami Jai Lai last quarter.
- While replacements will be up sequentially, we’re pretty confident that they will be down YoY
- ASP of $16.1k, down 3% YoY and QoQ. With higher pricing than the other products, the xD platform contributed 32% of sales in the September quarter.
- $17.5MM of other product sales
- Conversion kit sales will be down materially QoQ as September was an ‘unusual’ quarter for WMS. We assume that WMS sells 2,500 kits
- WMS also noted that used game sales have plateaued. We assume that 2k used games were sold in December – but at more ‘normal’ prices then what was realized in the September Q.
- Despite realized cost reductions in the production of BB2 and xD cabinets, margins should be roughly flat sequentially. September benefited from an outsized number of conversion kits sales which have over 90% margins.
Projecting $68MM of gaming operations revenue at a 79% gross margin:
- We expect a small decline in the install base (45 units) and slightly lower yields due to seasonality
- R&D: $26MM
- SG&A: $35MM
- D&A: $23MM
- Interest and other income: $2MM
- Tax rate: 35.5%