WMS: PUSHING OUT THE PAIN

Maybe my assessment is unique, but management seemed less confident than I’ve heard them in a while. I believe they have reason to be.

WMS put up a very respectable FQ2 last night, but not nearly as strong as we had predicted. The whisper numbers also appeared to be higher than the $0.36 that was posted. Disappointing unit sales and recurring revenue placements offset strong pricing.

While FQ3 (March) revenue guidance of $178-185 million fell short of the $188 million consensus projection, I don’t believe it is low enough. WMS will struggle to generate $170 million, in my opinion. The company is generating significant growth in itS gaming operations but the problem is twofold. First, industry wide slot shipments to new casinos and expansions will decline 70% in the March quarter. Second, very few casinos are buying slots and as IGT indicated on their conference call, replacement demand will be lower in 2009 than 2008.

WMS could see domestic slot shipments slip from 5,700 in FQ2 to 3,000 in FQ3. Slot sales are still the company’s largest business so how can total revenues increase sequentially with such a large drop off in this segment? I just don’t see it. The June quarter could be even more at risk. By implicitly lower FQ3 revenue guidance, WMS back-ended loaded the year as annual revenue guidance remained at $712-718 million. June replacement will once again be awful and industry wide slot shipments to new casinos and expansions should be down 40%. The EPS impact of our projected revenues shortfalls could be $0.04 and $0.08 in the March and June quarters, respectively.

No doubt most of the sell side analysts will blindly adjust their revenue estimates perfectly in line with management’s guidance. This sets the company up for its first earnings miss in years.

Revenue guidance unlikely to be met