WMS: ENOUGH POWDER TO MAKE THE Q

It wasn’t a great quarter and FQ3 revenue guidance was disappointing. However, full year rev guidance was raised and long-term positive catalysts remain in place.

WMS revenue and gross profit missed Street projections in both gaming operations and product sales.  Similar to IGT, WMS was able to drive SG&A and R&D lower in the quarter as an offset.  At $0.44 in EPS we were a penny higher than the Street and right on with the actual.  International product sales were disappointing but they tend to be even more volatile than domestic product sales.

Despite slightly missing the Street’s gaming operations revenue and gross profit projections, that segment continues to impress us.  WMS’s WAP games are playing well, make more money for operators and therefore stay on the floor longer and yield higher dividends for WMS.  Depreciation per average installed device continues to decrease as the average life their install base lengthens.  We think that this “virtuous circle” of WMS growing its WAP footprint will continue as its games continue to produce.  If the portal application and Wagenet are a success we can see continued acceleration in gaming operations.

In terms of guidance, we are not surprised that FQ3 revenue guidance fell short of Street expectations.  The Street continues to miscalculate the impact of a dearth of new/expanded casino openings.  However, we are surprised that WMS raised its FY2010 revenue guidance by $5 million even as it lowered Street expectations for the near-term.  Visibility is not great in this sector so the prudent choice may have been to leave guidance unchanged.  However, the long-term positive catalysts for the sector remain in place so a revenue miss for a quarter or two may not matter.