WMS 1Q2010 REVIEW

WMS reported in line earnings and reiterated guidance. Given WMS's lofty multiple, in-line probably wasn't quite good enough for the stock. WAP's performance and backlog provide optimism though.

 

 

WMS reported Adjusted EPS of $0.36 in line with consensus and revenues of $165.3MM which missed street numbers by $2.5MM. WMS came in a penny light of our EPS number and $1.6MM shy of our revenue number.

 

3Q09 Detail: 

 

The entire revenue miss vs our expectations came from lower "other product sales revenues" while the Street was too aggressive on slot shipments.  WMS sold 4,851 new units, well below the Street projection of 5,500 units - one analyst actually projected 6,829 units.  We suspect that at least one analyst was incorrectly telling clients that WMS's shipment to Firekeepers was excluded from 4Q09 results and would be in 1Q2010.

  • New unit sales revenues came in line with our estimate, with higher ASPs compensating for slightly lower shipments
     
    • NA new unit shipments of 4,851 were 43 units below our estimate and international unit shipments were 77 light of our estimate
    • We estimate that WMS got 15% of new openings and expansions in NA and over 30% of replacement shipments - although we will have to wait for the other suppliers to report their results to confirm those numbers
    • Higher ASP's made up the revenue gap.  This is not unexpected, since any upside to new shipments would likely come from Class II or Helios platform jurisdictions, which have lower ASP
    • WMS expects flattish ASP's to from the current quarter starting in the 2H2010 with higher Blue Bird 2 (BB2) mix being offset by lower priced Helios sales
  • "Other product sales revenues" missed our mark by $1.6MM despite higher conversion kit shipments
    • Most of what was in used games this quarter were trade-in resales, not BlueBirds, so they were very low margin. Some quarters in the past they sold refurbished units which had higher prices and better margins
  • Gross profit was in line with our number, due to margins being 90 bps higher mix of BB2's 
     

 

Gaming operations revenues were in line with our expectations and gross margin was $1MM better than our estimate. As we wrote in our preview for the quarter on 10/23/2009, it was "all about WAPs"

  • WAPs had another huge quarter, adding 374 units sequentially after adding 386 units last quarter. Not only did the install base for WAPs growth 15% sequentially, but we estimate that average revenue per day also increased y-o-y
    • While there were many questions focused on growth in revenue per day and it's sustainability, a large portion of the growth was also mix driven, as WAP's generate more then 2x the average daily win of other participation products
  • Gains in WAP placements were offset by sequential declines in the install base for LAPs (116 units), stand alone games (271 units), and casino-owned daily fee games (101 units)
    • From a development standpoint WMS has put more emphasis behind the WAP platform, as can be seen with 3 major WAP game launches in the quarter. WMS has a large backlog for WAPs and should have another strong quarter in Dec. 
    • Some of the standalone's had very good longevity and that caught up with them this quarter.  We should see similiar attrition on standalone and LAPs next quarter.  In the second half of the year standalone units should grow if WMS's new games are successful, while LAPs are expected to stabilize and stay flattish in the back half of FY 2010. 

Below the gross margin line, R&D came in $2.3MM, or 10%, above our estimate, while D&A came in $0.4MM below our estimate due to the lower number of net additions to the participation install base

 

FY 2010 guidance was left unchanged but revenue guidance for 2Q2010 of $184-190MM is below consensus of $192MM. 

  • The December quarter should have higher domestic unit sales as there are materially more new openngs and expansions shipping in the quarter, including:
    • City Center (1,940 slots), River City (2,000), Choctow Casino in Oklahoma (3,000)
  • The December quarter is also seasonally slightly stronger for replacements than September ahead of New Year's and the holidays

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