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It's all about WAPs.


WMS guided to $160 - $168MM of revenues for 1Q2010, on August 3, 2009, and we don't think they are going to miss.  While the for sale market remains sluggish in NA given an anemic number of new openings and suppressed replacement orders, WMS already knew this when they gave guidance.   They should make up this weakness with another strong showing in participation. 

We estimate that WMS will report EPS of $0.37 and revenues of $167MM. Below are some of our assumptions and thoughts on the quarter.

  • Product sales will likely come in light, we estimate $90.5MM
    • Total unit sales just shy of 5,000 with pricing up 10% y-o-y
  • Participation should be good, we estimate $76.4MM

WMS's unit shipments are particularly difficult to gauge this quarter given the anemic number of North American new and expansion unit shipments - we estimate around 3,650 units.  So it's really all about replacement orders for WMS.  In addition, many of the new and expansion units are going to tribal gaming jurisdictions and may be Class II. Therefore, we would not be surprised if WMS's shipshare of new and expansion units this quarter comes in low, as it did last quarter. 

Last quarter we estimated that only 10.3k replacement units shipped to North American casinos.  This quarter's shipments will likely be even lower, since 2Q09 is a seasonally better quarter. How much lower is the million dollar question; our best guess is 7.5k units. For last quarter, we estimate that WMS got 36% share of replacement units, assuming a similar share in 3Q09 would put total WMS total NA unit sales around 3,000.  

We have less "edge" on the international shipments, as the majority of those units are replacement orders.  While WMS is entering Mexico and Australia, which should help them grow FY2010 international shipments, we estimate that y-o-y shipments to international markets in 1Q2010 will be down 5%.  International replacements have also been negatively impacted by this economic slump.

FY2010 thoughts:

  • FY2010 EPS of $1.89 and revenues of $770MM.  We believe that WMS may miss its new unit sales forecast but more than make up for it with strength on the participation side.
  • Product sales:
    • We think that FY2010 unit sale guidance is aggressive, unless international and Class II has materially more upside than we are modeling
    • Pricing guidance seems conservative and implies that WMS is pricing in some success in lower price Helios platform markets, as well as in international jurisdictions like Mexico
  • Participation:
    • WMS ended FY09 with an install base of 10,350.  Their guidance implies no growth in their install base, which we believe is very conservative given the positive qualitative feedback we continue to hear about WMS's participation products

4Q09 "Youtube"

  • In fiscal 2010, a heavier mix of lower margin product sales revenues and in fiscal 2009, coupled with lower initial startup margins on certain of our new revenue sources such as Class II in Australia, is expected to partially offset some of the anticipated improvement in our judicial businesses, resulting in product sales gross margin ranging from 52% to 54% for the full year.
    • Pricing on the Helios platform is roughly $8-10k per box, therefore should WMS have a lot of success here and meet their unit shipment guidance, pricing should indeed be lower than one would expect given the higher mix of BB2 platforms vs last year
  • We expect to sustain our gaming operation margin in the low 80's, in a range that will average between 80% and 82%, which includes a dampening effect of achieving our higher percentage of WAP units in our installed base.
    • WAP's do have lower margins than standalone participation games due to the associated jackpot expenses
  • We expect that depreciation expense will increase modestly in fiscal 2010, while declining as a percentage of total revenues
    • Typically participation games are depreciated over 2 years. The longer the average life of the participation box, the lower D&A expense on box on average.  We've seen WMS's "D&A per box" steadily decline as their games last longer over the last several years
  • We can still see participation business grow. But the rate of growth won't be like it’s been for the last couple of years.
  • On the international sales, I believe that they were 35% or 37% of units this year. That's likely to remain relatively constant next year.
  • We see the first six months of this year continuing on the trends of fiscal 2009 with the second half of the year picking up slightly in the calendar '10.