WMS 3Q CONF CALL NOTES

WMS 3Q CONF CALL NOTES


“Following a period of transition and re-focus on the development of products that address customers’ near-term needs, our newest for-sale and participation games continue to re-establish WMS’ excellence in the creation of differentiated content and games that deliver value to our customers. Over the next three quarters, we will begin to commercialize our latest games and platforms which were introduced to broad acclaim at the recent Global Gaming Expo. We believe these products are among the most exciting new games and cabinets we have brought to market and expect them to provide casino operators with new must-have products for their players."

-  Brian R. Gamache, Chairman and Chief Executive Officer

CONF CALL NOTES

  • Expect to ship at least a 1,000 additional VLT's to Canada in the balance of  FY13 and additional units in FY14
  • Shipped 193 units to IL 
  • According to Gamache, WMS has never gotten better feedback on their products from G2E.  This reminds him of 2006 or 2008 when they launched BB2.
  • CPU-NXT3 operating system is already approved and the Gamefield xD cabinet has already submitted and is approved in some jurisdictions already.  Expect to submit the Blade cabinet later this month.  Anticipate shipping the first units of both these new unique cabinets which utilizes CPU-NXT3 platform in the March quarter.
  • MyPoker launched this quarter at Station's properties in LV and expect to roll out out more units with CZR in the regional markets in the March Q
  • Expect their ship share to new markets to average in the high teens. 
  • Expect their ASPs to be more variable in 2013 especially if IL VGTs become a larger percentage of the mix
  • Used game sales were higher, they are beginning to sell BB2 used game machines which garner higher prices.
  • The improvement in gaming content during the past year has resulted in higher than normal conversion kit sales over the last five quarters, and expect this will continue at least through the launch of the Blade cabinet.

  • Have 17 new participation games launching in the balance in FY13; therefore, they expected continued growth in their participation base and average daily revenue to begin improving in 2H13
  • About 70% of WMS's installed base has been upgraded to new hardware and operating system platforms, with just under 35% of the installed base having the latest games that were launched in the last three quarters.
  • R&D in the 15-16% of total revenues range in FY13, decreasing throughout the year as revenues ramp
  • Selling & Admin expenses declined YoY largely reflecting the impact in the prior year of $4.3MM of incremental bad debt expense for Mexican customers

  • D&A is higher primarily due to a greater depreciation associated with a continued transition and upgrade of their installed participation base along with the growth in the installed footprint and the completion of a major facility plus amortization of Finite Life intangible assets from 2 acquisitions in the June Q
  • Expect R&D, D&A,  and G&A to increase in a measured way throughout the FY13. Total increase is expected to be $30-35MM. Expect the non-marketing expense amounts to ramp slightly every Q throughout the year, reflecting additional headcount to support additional revenue growth. Marketing to increase more significantly in December Q and then level out at 30-40% of Jackpot Party's Social Casino revenue.
  • They expect aggregate capex spend on gaming operations and PP&E to decrease by 20% in 2013
  • Repurchased 5MM of stock in the September Q (~317,300 shares) and have ~143MM remaining in the current repurchase authorization
  • Revenues are expected to grow modestly from the September Q to the December Q and to slightly exceed Dec 2011 revenues. However, lower margin VLTs are expected to exceed 25% of new units sold this quarter, resulting in the product sales margin declining to a range of 48% to 49%. Operating income is expected to be slightly down QoQ, reflecting an incremental cost to support interactive products and services. On an annual basis, benefits from our higher revenues this year will be offset by planned higher spending that support new product flow and the building of a foundation for interactive products and services.
  • Details on their i-gaming initiatives:
    • Online gaming operations: Real money UK-based platform Jackpot Party.com and distribution of the 888 B2B poker platform in the US  (Play for fun and real money when legalized)
      • Earn money from Jackpot Party.com from player net wins 
      • First roll-out of a fully managed B2B real money online casino site will be in collaboration with Groupe Partouche in Belgium, utilizing our JackpotParty.com platform and operating infrastructure. Soft launch this Q and full go-live in Jan 2013. They will earn money through a rev-share agreement.
    • iGaming Product line:  royalty-based content licensing via remote game server integration through Jadestone subsidiary. Content distribution to online gaming customers. Have agreements with Betson & Unibet.  They get revenue share dollars every time their games get played. Will go live in early calendar 2013.
    • Social gaming/play4fun initiatives (B2B):  Platform allows their bricks and mortar customers to offer play for fun on their site. They get go-live fees and recurring monthly fees. If gaming gets legalized, they can convert these sites.
    • Mobile games through Phanton EFX: 
    • Social gaming: Jackpot Party on FB 
      • 2 million monthly active users and with it 500,000 daily active users yielding a very nice engagement rate of about 25%.

      • Kaunched Jackpot Party Social casino in July and averaged just over $55,000 in net daily revenue to WMS
    • They will launch Jackpot Party Casino on mobile devices in the near future
    • Total investment to enter the online by WMS was under $100MM spread over several years
  • Expect additional ship share increases over the next several quarters and years

Q&A

  • Over the next 12 months, they expect that replacements will continue to be "tough-sledding."  Have the best visibility that they have had in some time because of the new cabinet launch and the Canadian VLTs.
  • They believe that they have 120k BB1 and BB2 cabinets installed that need replacing and that the Blade cabinet will help spur that replacement cycle
  • They are in ramp up and investment mode in their interactive businesses.
  • Think that the 2H of 2013 will be more robust. New launches will be more accretive to their existing footprint. The one headwind they have is that coin-in isn't doing as well with lower play levels at casinos.  Feel like they are in a great position going into 2H... locked and loaded.
  • What was the one-time IL game set sale?  It was another VLT jurisdiction where they had a game set delivered, have another one of those opportunities coming later this year.
  • The closest to recurring revenues in interactive is the social gaming sites for 3rd parties which have recurring licensing fees (Game server integration)

HIGHLIGHTS FROM THE RELEASE

  • "Net income and diluted earnings per share in the September 2012 quarter reflect higher year-over-year research and development expenses to support the growth of interactive products and services as well as for the ongoing development and commercialization of a greater number of new participation and for-sale games and cabinets."
  • "Gaming operations revenues increased... primarily reflecting growth in revenue from interactive products and services and the third consecutive quarter of growth in the installed participation base to 9,632 gaming machines... partially offset by lower gaming operations daily revenue per unit"
  • "Gaming operations gross margin was 78.6% in the September 2012 quarter compared with 79.1% in the prior year, reflecting the impact of higher jackpot expense on wide-area progressive games, partially offset by the benefit of increased revenues from high-margin interactive products and services"
  • "Product sales revenues rose modestly reflecting sales of 693 new video lottery terminals (VLTs) for the Canada and Illinois VLT markets. Product sales revenues also include higher other product sales revenues including one-time software revenues of a VLT game set and higher revenues from used gaming machine sales, which more than offset the anticipated lower industry-wide shipments for new casino openings and expansions and a lower average selling price reflecting the higher mix of lower-priced VLTs and the competitive marketplace."
  • Product sales details:
    • 3,791 new sales (2,453 NA & CA; International: 1,338)
      • NA new openings and expansions: 727
      • Replacements: 1,726
    • ASP: $16,033
    • Used games: 1,660
    • Conversion kits: 2,400
  • "A 120 basis point improvement in gross profit margin due to higher product sales margin and a greater mix of gaming operations revenues. Product sales gross margin was 53.1%, a fiscal first quarter record, reflecting the mix of business, ongoing benefits from the Company’s continuous improvement and supply chain management initiatives, and the VLT game set software, which more than offset the impact of a lower average selling price and the seasonally lower unit volumes for the September quarter that typically impacts margin." 
  • "WMS was selected by the Manitoba Lotteries Corporation to join two incumbent suppliers to replace existing VLT units throughout the province." 
  • "During the quarter, Jackpot Party® Social Casino was launched and became one of the five largest and most popular social casinos on Facebook®, as measured by the number of daily active users and monetization rates."
  • "In September, the Company’s first-of-its-kind interactive, casino-branded Play4Fun™Network went live at a tribal casino in Iowa, enabling the casino’s players to access multiple play-for-fun slot and casual games online, all under the casino’s own brand association."
  • “We are extremely pleased by the initial success we are achieving in leveraging the value of our library of proven gaming content into the interactive markets, including social, casual and mobile entertainment. This success is reflected in the $9 million year-over-year growth in revenue from interactive products and services, and we anticipate a range of $35-to-$40 million in annual revenue for fiscal 2013 from these revenue streams. While the costs needed to build a sustainable foundation for interactive products and services impact near-term operating profitability, we believe this investment favorably positions WMS to participate in the attractive, high-margin growth potential of these opportunities that can lead to the creation of new value for our shareholders.” 
  • "Revenue from interactive products and services increased to $9.5 million from $0.7 million in the prior-year period, primarily reflecting the successful July 2012 launch of Jackpot Party® Social Casino on Facebook®, which currently ranks among the five most popular social casinos onFacebook based on the number of daily active users, coupled with organic growth in our UK-based B2C online website and the addition of Phantom EFX retail sales and Jadestone game server integration revenues."