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Low ASPs and international struggles ruin what could've been an ok quarter.


“Our product realignment efforts are focused on addressing customers’ near-term demand for player-appealing, high-earning new products and, importantly, the flow of new product development, regulatory approvals and commercialization has returned to normal historic rates. We are executing in-line with our plan and are driving significant improvement across the company.”

- Brian R. Gamache, Chairman and Chief Executive Officer

CONF CALL NOTES

  • Product sale margins increased due to cost containment initiatives
  • Lower ASPs reflected a more competitive pricing environment, higher discounts due to larger size orders and higher # of lower-priced VLT units
  • Launching mypoker video poker platform at the end of 2012.
  • Product sales:  Includes shipments to MD Live and Ohio casinos
  • Recently received approved of their BBxD cabinet in New South Wales
  • Gaming operations:  Higher other revenues were due to growing contribution from network applications and online casino 
  • D&A was higher due to the investment / refreshment in their install base and investment in network and online gaming
  • Anticipate placements of VLTs in Italy and IL will require more capital outlays since those will likely be leased units
  • Economic conditions and sentiment seem marginally better but don't expect a large increase in the replacement market. 
  • Larger portion of new shipments in 2013 will be to VLT markets (Italy, IL, Canada)
  • Focus in the quarter was stopping the erosion in their install base
  • Have 2,100 open orders for participation games
  • In Canada, they expect to see additional opportunities in other jurisdiction in addition to Alberta
  • Going through technology inter-operability in IL and expect their first shipments to occur by year end 

Q&A

  • ASPs were down because of a mix issue - larger orders generally have a heavier discount.  You should use a 3 quarter average ASP rate for a run rate going forward.  So $16K range is a more normalized going forward rate. They are definitely feeling competitive pressures.
  • Issue with international shipments: 
    • Mexico has stabilized. Australia, Singapore and Switzerland are undergoing national standards. Europe is economically challenged. 
    • strange that no one else is seeing these issues
  • Average installed base shrank from the the 1H of the Q and then saw growth in the 2H of the install base
  • Q4 is their most prolific gaming operations product quarter from an availability/ new product point of view
  • Tax rate: should be more normal (36-37%) going forward
  • Why is June guidance lower than before?
    • They were expecting a quicker uptick on their new products. They have had good success with conversion kits.  However, it's taking longer for new product purchases. 
    • They thought it would be a 3 quarter turnaround but it's going to take longer
    • WMS is blaming the longer turnaround on the capital constraints on their clients but I think that it's just a much more competitive environment. WMS's competitors seem to be firing on all cylinders.
  • Capex on game operations will be at or a little higher than where they were in Q3 going forward
  • PP&E is likely going to be at or above March Q levels as they are getting close to finishing 2 large projects that they are working on
  • As their gaming operation install base gets refreshed, yields should improve.  They are having more success in their fixed lease products recently which also impacted reported yields. 
  • Not worried about ASP when their content is performing well. They will continue to be competitive on pricing but not "aggressive". They do not believe that ASP will keep ticking down.  Think that for the next few Qs they will be able to maintain a $16k handle on pricing.
  • Doesn't think that the commentary surrounding VLTs in 2013 is a soft way of guiding to lower ASPs
  • Think that they can get to 53-54% margins but it really depends on the product mix each quarter
  • They shipped to both Ohio properties in the quarter
  • Video poker expectations?  If they garnered 5-10% of the installed base over the next 3 years, that would be a home run for them.  Not looking for a grand slam, just a single or double. 
  • Will give more guidance on Interactive between now and Q4.  Believe that this is a very important part of their business going forward. 
  • 100 units installed per week is a good velocity and they averaged higher than that in Q3
  • Q4 should have a dramatic reset of expectations going forward (for game ops)
  • Q4 is usually their seasonally busiest quarter of the year.  April is slightly slower than they hoped it would be.  All their approvals though are on time. 
  • VLT sales in the quarter: They recognized the Maryland sale.  Expect to get back to mid-20's ship share in fiscal 2013.
  • Clue drove the WAP sales in March.  Epic Monopoly was the second biggest driver.  They also came out with a mechanical spinning reel version in March which also helped. 
  • Should be able to recognize the balance of the deferred units next quarter 

HIGHLIGHTS FROM THE RELEASE

  • Outlook: 
    • WMS expects quarterly sequential growth in revenue and operating margin in the June 2012 quarter. 
    • Expects revenues in the June 2012 quarter to be modestly lower than the June 2011 quarter, while operating margin is expected to improve on a year-over-year basis (adjusting out the net restructuring, impairment and other charges in the prior year period). 
    • Does not expect revenue in fiscal 2012 from the opening of the Illinois VLT market or from the VLT market in Italy. 
    • WMS believes that the challenged economic and industry environment will continue resulting in only limited improvement in the industry replacement cycle in calendar 2012. 
    • In fiscal 2013, the Company expects to benefit from further new unit shipments for casino openings, including two additional casino openings in Ohio; but a bigger portion of new unit shipments are expected to be to VLT markets in Illinois and Ohio, and replacement VLT shipments to Canadian provincial VLT operators.
  • Product sales: 
    • New unit: 5,993
      • Includes recognition of 759 deferred units 
      • US & Canada units: 4,598 (2,800 replacements)
      • International: 1,395 down from 2,338 last year.  "The decline primarily reflects lower shipments to customers in Europe, Mexico and Australia."
    • ASP: $15,233
      • Decline "primarily reflecting product mix as WMS shipped a greater percentage of lower-priced VLTs, the impact from a higher discount related to larger-volume orders and a lower number of premium games in the quarter compared with the same period a year ago, coupled with the impact of the competitive marketplace. WMS’ Bluebird xD units represented 24% of total global new unit shipments and the new Bluebird2e cabinet with emotive lighting...represented approx. 26% of new unit sales."
    • Other product sales... declined... reflecting lower revenue from sales of parts and used gaming machines, partially offset by higher conversion kit revenue.
      • 1,300 used gaming machines....  at lower average selling prices YoY
      • 3,900 conversion kits
      • The gross margin benefit from higher-margin conversion kit revenue was partially offset by lower parts sales and the lower margin on used gaming machine sales. 
  • Other gaming operations revenue increased... primarily reflecting higher royalties from licensing proprietary intellectual property and technologies, continued growth in the United Kingdom online gaming business and incremental revenue from networked gaming solutions.
  • First two jurisdictional approvals received in the March quarter for the new CLUE wide area progressive participation game and several other anticipated participation products, as well as additional jurisdictional approvals for earlier participation products including the Epic MONOPOLY theme. As a result, the quarter-end participation installed base increased 107 units on a quarterly sequential basis
  • Initial regulatory approvals for more new for-sale games in the March 2012 quarter, with more than 90% of these games having new, distinct math models. New game approvals and additional jurisdictional approvals for earlier for-sale games are helping drive improvement in new unit sales, particularly in game conversion revenue
  • Launched new Bluebird2e gaming cabinet with emotive lighting as an enhancement to the original Bluebird2 gaming cabinet, and approximately 26% of new unit sales in the quarter wereBluebird2e cabinets.
  • WMS’ networked gaming products installed on approximately 1,280 gaming machines at 64 casino properties globally, including the first cloud-based application of Remote Configuration and Download functionality for WAGE-NET system by a European multi-site casino operator.
  • Signed agreement with Group Partouche to provide Business-to-Business managed services for online gaming in Belgium using WMS’ Jackpotparty.com platform.
  • “We now have open orders for more than 2,000 units of our latest engaging participation products, including the CLUE and EPIC MONOPOLY games, two new games for our popular THE LORD OF THE RINGS series and a new THE WIZARD OF OZ game, which received initial approval at the end of the March quarter, earlier than anticipated. Our solid open orders, coupled with the expected initial jurisdictional approvals in the June 2012 quarter for theAladdin and the Magic QuestMonster Jackpots and GONE WITH THE WIND games and several other participation games, are expected to further increase our gaming operations installed base and contribute to ongoing quarterly sequential revenue per day growth in the June quarter."
  • "We expect to achieve another quarter of sequential growth in new unit shipments in product sales in the June 2012 quarter."
  • Repurchased 261k shares for $6.1MM