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In-line FQ2 EPS.  Lower SG&A and R&D offset by lower than expected revenues and gross profit margins. FQ3 revenue guidance below Street but F2010 in-line.


F2Q 2010 CONF CALL

  • On track to achieve continued revenue growth. 
  • Believe that they have the leading ship share in replacement. 
  • Continue to generate growth in their participation business.
  • At quarter end they had less than $10MM of debt and cash of $159MM
  • Anticipate to be slightly above the high end of their operating margin guidance of 21%
  • When BlueBird xD comes out they believe that it will be very well received based on its performance in trails
  • Improved economic environment in Europe should lead to a pick up in replacement units
  • First technical testing with one concessionaire in Italy to share shortly.  Believe that the market will be levered towards lease vs for sale product, given the high upfront capital investment
  • Application for license approval in Australia on the docket now.  Expect to get approved.  Expect shipments to ramp in the June quarter and continue to ramp thereafter.
  • Italy, Australia, Mexico and Helios launch should help them grow their international presence
  • Remainder of their gaming machines at Aria should be connected to SB "shortly."  In coming quarters, Aria will introduce their portal games and Wagenet.
  • Wagenet is currently on trial at several facilities and once approved that should be another engine of growth for them along with their portal technologies.
  • Expect to continue growing their WAP installed based and growth in average daily win per day.  Expect to remain above the high end of their guidance for daily fees on participation
  • ASP on sale games also exceeded the high end of their guidance, with the launch of BlueBird xD and strong performance of BB, ASP should continue to exceed $15,000 per unit for the balance of the year.  ASP will be negatively affected by Helios & Australia launches
  • Expected WMS's new unit volumes to increase in the 3rd quarter due to Mexico, replacements, and Helios
  • For FY2010 expect total units to be a little below the low end of their guidance, but ASP's to be above the high end of high end
  • Product sales gross margins were impacted by lower conversion sales, higher used game sales (lower margin), and increased shipments into new markets
  • Expect R&D to run at 14-15% of total revenues (above original guidance)
  • Continued to use cash to finance game sales
  • Expect future cash flow to be impacted due to investment in new WAP rollouts and Italy launch
  • Opportunistic share repurchases remain an attractive use of cash for WMS
  • Think that over time fewer customers will choose extended term financing, and think they will take advantage of discounts associated with shorter payment terms
  • Inducement charge for converts was $0.4MM

Q&A

  • Illinios expect to have better than their average NA share, expect shipments to kick in 2Q2011
  • Internet gaming in UK follows on the heels of what they have already been doing with network gaming and online character customization. Won't launch until 2011
  • Their share of WAPs are growing, and think that their products coming out in the 2H2010 will allow their footprint to continue to grow
  • Seen a decrease in sale financing recently as operator balance sheets improve
  • Launch of Helios, a value priced platform, so that will depress ASP's a little but GM is similar to other products
  • Australia is through a distributor, hence the margins and ASPs will be a little lower than normal, but neither Helios nor Australia will have an impact on guidance
  • Italy will be part of their game ops business? Will be recorded in other gaming operations revenues so it won't impact their average daily fee.  Expect shipping in June 2010 Q but likely no revenue recognition until Sept Q since there's still testing to do.  Australia will happen before Italy
  • Think that their replacement share is in the low 30s
  • Game operations had some unfavorable jackpot expenses and lower high margin royalties
  • Product sales margins in 2H2010? Should be in the mid 50's range as volume increases.
  • Wizard of Oz continues to hold up very well, but have seen a slight degradation in the quarter - nothing alarming and Ruby Slippers should help
  • How is their Class II expansion going?
    • Shipped a few hundred units to Washington and some to Alabama and Oklahoma. Going slower than they expected but should ramp in 2H2010 (have some nice orders)
    • Right now they are predominantly selling the Class II games
  • Lord of the Rings, timing / strategy?
    • Coming out June/July time frame. Have great expectations, focus group testing and show responses have been great.  Think it can be another Wizard of Oz
  • Big negative working capital was in the Sept quarter, due to total receiveables increasing (financing) and increase in inventories due to the advance purchase of the computer chips, also some drag from royalty agreements. Hopeful that most of the WC drag is behind them
  • Where is the sequential increase in revenues in 3Q2010 coming from? Combination of better product sales and gaming operations. Highly unlikely that the gaming install base will decrease by YE
  • Depreciation in games operations continues to decrease?
    • games are staying on the floor longer