10/26/09 06:00PM EDT

WMS's 1Q2010 results are better then they look at first glance. Although, given the lofty multiple and high expectations, in-line may not be good enough.

At first glance, it looks like WMS came in below expectations and guidance looked equally uninspiring. However, looking under the hood, results are not bad at all - at least not relative to our expectations. We think some investors were hoping for a raise in FY guidance.


  • Dynamics of the market are consistent with their expectations. However, meetings with casino operators since August have been positive
  • WMS has a 13% share of current slots on the markets, and with current ship share rates in the 24% range, they believe that they have a large opportunity
  • Think that replacements will increase moderately in CY2010, but that with entry into new Class II markets, Helios platform, and international growth, WMS's growth can outpace the market

Quarterly overview

  • WAP units are becoming a larger percentage of their participation base and contributes to better ROI and average daily fee earned per day
  • Realizing significant success on REEL 'EM IN, COMPETE TO WIN game, performance on par with WIZARD OF OZ
  • While new unit sales declined, ASPs increased, due to higher BB2 mix.
  • 550 units were due to new units, balance were replacements 2,400
  • Shipped to two Indian gaming casinos in 1Q2010
  • Shipped to Mexico this quarter
  • Are starting second field trial in Australia this quarter
  • Believe that they have plenty of room to grow margins
  • WC was a cash drain this quarter;  higher royalty expenses, higher stock comp, longer term financing options, and A/P timing all negatively impacted cash flow this quarter.

Financial highlights

  • Realized higher average daily fees and margins as a result of WAPs becoming an increasingly large part of their participation base
  • D&A was flat as they benefit from efficiencies, keeping participation games in the field longer and having more fully depreciated units in their install base
  • The tax rate was a little higher than they anticipated but they expect it to increase slightly in 2Q2010, and increase again in 2H201 as the tax credit expires and the rate goes to to 37%
  • Net cash balance of $120MM, subsequently, by quarter end another $25.7MM of the converts were converted to stock. Have 58.7MM shares outstanding and market cap of $2.8BN. Net net they will save 500k in CY2010


  • Guidance assumes lower play levels in line with usual seasonality
  • Continue to expect sequential growth in March & June quarters
  • Reiterated FY 2010 revenue guidance
  • Potential growth markets for beyond 2010:
    • CA, IL, Maryland, Ohio, Kentucky, MA
    • Singapore, Phillipines, Spain, Japan, Italy
  • WMS is uniquely positioned to benefit from networked gaming through software and systems
  • Working on several master purchase agreements and multi-year purchase arrangements


  • Some of the new competitor's products look similar to WMS's
    • Imitation is the highest form of flatterly - will continue to try and stay ahead of the market
  • Feel good about their guidance - things are progressing along with their expectations
    • Upside is possible, but will come from better replacement cycle/ market share gain
  • Change in competitive environment; re: financing/discounts?
    • Not really
  • Opportunity to improve margins ... goal of getting to 25% operating margin
    • They were up 300 bps in their seasonally slowest quarter, and as volumes ramp that should help them achieve that
  • How sustainable is the growth in their daily revenue per day?
    • As long as they keep delivering good content and increasing mix to more WAP it will help them
  • Have they starting thinking about the next version of Blue Bird cabinets?
    • Yes - can see BB3 at G2E
    • Think Helios will be important for markets where win per day is lower and cant afford a 16k machine
  • I really don't understand why people keep asking the same question about win per days and their success... their games perform well, hence they grow the footprint. WAP games earn over $125 perday (our guess is over $130 this Q) hence the more games they place here the higher the overall daily fee... what's confusing here???
  • Focus on the yield vs just growing the footprint should see over install base growth though throughout the balance of the year
  • Customers are very excited about the networked gaming applications and BB2
    • They are referring to a lot of the "networked features" like customer recognition and community gaming already in their games.  Wagenet will allow customers to put those features on banks of games
  • Australia?
    • Second phase of a 2 phase field trial - trial should finish by CY2009
  • Italy and Brazil are also exciting markets for them
  • ASPs internationally are similar to NA
  • Less than 10% of participation games are outside the US because many markets don't allow for that pricing model
  • Placements in Class II markets domestically
    • Pursing for sale model in these markets - literally just went live in the last few weeks - small shipments
    • Shipments to Mexico were all Class III (included in international)
  • Helios platform launch
    • Markets where that platform works well? Lots of international markets don't do more than $30-$40 per day so a 10k ASP makes a lot more sense
  • Are they underpricing their WAP product?
    • Kind of a redundant question since WAP gets % of coin in and the better the games do the more WMS earns... what am I missing?
  • How much of the ASP growth is due to mix vs price increases?
    • Last year 17% were BB2, so there is a big mix impact, think that by 2/3Q2010 mix will be over 70% of shipments
  • REEL EM IN, COMPETE TO WIN is performing at WIZARD OF OZ level or better
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