ASPs move the opposite way of IGT/BYI. Too bad because there were some bright spots in the Q.
As we summed up in our teaser from our conference call notes and Report Card, low ASPs and weak international sales spoiled what could have been a good quarter from WMS. While international sales can be volatile, the drop in ASPs is disconcerting. We know Konami was very aggressive in pricing during the quarter but both IGT and BYI reported almost 10% ASP increases. Clearly, WMS is feeling the competitive heat more so than the competitors.
In any event, WMS clearly missed the mark this quarter vis-a-vis investor expectations on both revenues and EPS by a considerable margin. If not for the low tax rate in the quarter, WMS would have reported $0.38 vs. consensus of $0.44. Coupled with the recent run-up in the stock, investors are probably taking little solace that there were actually several bright spots in the quarter.
Since WMS led with their left foot this quarter, we’ll start with what went wrong.
THE BAD
- ASPs: It’s true that large shipments to new openings typically get a decent discount but IGT and BYI reported strong ASPs. It’s also true that it’s a very competitive market and therein lies the worry for WMS. There was no signal from the company since December that pricing could be an issue. The issue may be that WMS started from a higher point than its competitors and since their competitors have stepped up their product quality, WMS has had to simply get more competitive on price.
- On the VLT front, WMS was the only supplier to sell rather than lease units to Maryland Live. Since their contract fell under Spielo, the purchase price was not disclosed. However, our understanding behind WMS’s rationale to sell vs. lease the units at $25-28/day to the facility was based on a lucrative sales price. So we’re left scratching our heads here a bit.
- International units: While international units are notoriously difficult to predict since they are mostly replacements, WMS’s low number of shipments definitely surprised us. Based on our conversations with management, we expected a 2,000/Q run rate. Instead, it looks like WMS’s units are slipping below FY2007 levels. No doubt various jurisdictions are reviewing their regulatory standards but it does seem a bit odd to us that this is not impacting any of the suppliers.
A TREND
- Declining unit revenues in gaming operations: Both IGT and WMS attribute declining win per day to mix shift which makes sense from the anecdotal evidence. WMS specifically mentioned that they have an increasing number of games out on a fixed fee or daily lease. Just a few years ago, BYI was the only supplier to consider this pricing model outside of markets where true participation was not possible. We also know that casinos have been targeting WAP games to increase margins.
THE GOOD
- North American shipments: Shipments (not recognized units) to North America came in 500 units above our estimate. While we are still waiting to speak to several suppliers, we believe that WMS could be in second place for market share this quarter. Lower ASPs helped.
- Healthy margins: Despite the disappointing ASP’s, margins were strong. Of course, the large number of conversion kits sold in the quarter didn’t hurt.
- Install base no longer stalled? After 6 quarters of declines in their install base, dare we say that WMS has turned a corner? It certainly appears so. Unfortunately, all the new great content they have coming out still faces competition and that’s the new market norm.