WMS: NOT OUT OF THE WOODS YET

We’re bullish on slots for CY2012 but the big short squeeze and WMS’s pulling forward of shipments has us cautious about the near-term outlook.

WMS reported an interesting quarter, one that the investors loved or at least liked enough to scare the shorts off the shorts.  To be clear – all of the red flags that we raised before are still there.  Those 957 new units that were deferred are a perfect example of trying to pull revenue forward.  However, we actually raised our back half F12’ estimates – granted we were 20 cents below consensus to start with.  We’re currently at $1.47 for FY2012 EPS.

Here are some quick takeaways from the quarter:

Product Sales

  • If you include the deferred units, their ship share should be about 23% - otherwise, we think it was closer to 17%
  • While the company didn’t say so, it’s pretty obvious that the 957 deferred units (which were all new and expansion shipments) were shipped to the Ohio casinos
    • Again, not confirmed, but we’re fairly certain that Scioto Downs is in there
    • We know that there was more than one casino shipment there and it was not Revel or Maryland Live so that makes Cleveland Horseshoe a pretty good guess
    • Out of the revenue recognition reasons that were not fulfilled and hence, led to the deferral,  we’re pretty sure WMS still had some contractual obligations to be met
    • As a reminder, the racinos in Ohio are governed by the Ohio Lottery Commission and the manufacturers have been licensed by that entity
  • If we had to guess, the 1,500 unit deal is with Caesars, and our understanding is that the shipment of those units will be heavily weighted towards the first half of calendar ‘12
  • ASP’s will likely be a tad higher in WMS's 2H12
  • WMS is back to shipping to Mexico – contrary to prior guidance, there were some Mexico shipments in international.  Last year, there were about 1k units sold into that market. 

Gaming Operations

  • Participation revenues were clearly disappointing.  The company claims it was 1 for 1 replacement but the numbers tell you that it wasn’t that good. 
  • The only good news is that most of the units that came out were weighted to the beginning of the quarter.  We don’t know if they will get back to flat by year end; we’re not giving them the benefit of the doubt in our model just yet.
  • There were no new leased units – still only the 600 units placed with the Seminoles at $15/day
  • Portal applications are earning between $10-15/day and have very high margins
  • The online UK casino is growing fast on the top line but is still not break even and likely contributed a bit of a drag on game operations margins
  • The other bucket in games operations will become material next year when Italy comes online