WMS FY3Q2010 PREVIEW + YOUTUBE

Probably a better quarter than the competition but the real story is beyond FQ3.

We expect WMS to print an in-line quarter after the close on April 26th.  Given that the stock has run over 20% since we wrote “WMS: NOW OR LATER?” on 3/10/2010, we’re not as confident that in-line will be good enough.  While we doubt that anyone expects a beat, we do think that the consensus is WMS makes the quarter.  The challenged replacement cycle and weak state revenues limit the opportunity for quality upside to earnings.

However, WMS is not a FQ3 story.  WMS should be able to beat consensus estimates by a few cents next quarter and we believe that there is upside to FY2011 consensus numbers.  We refer people to our WMS Black Book which we released two weeks ago for the long-term analysis.

Below is some detail behind our estimates for F3Q2010:

  • Product sales of $123.7MM at a 53% gross margin
    • 4.2k NA unit sales and 2.7k international units sales
      • WMS should ship more replacement shipments to NA this quarter than last, since March is a seasonally better quarter for replacements
      • We also believe that international units will be up YoY given WMS’s recent entry into Australia and Mexico
    • ASP of $15.5k
      • Originally, WMS thought that they would be shipping more legacy Bluebird cabinets to Mexico.  However, units shipped to Mexico have been primarily BB2 in a somewhat stripped down form.  Lower priced unit shipments to Australia this quarter should be quite small and have little impact on pricing.
  • Gaming operations revenue of $78.7MM at a 83% margin
    • Increase in average daily win given shift towards WAP
    • 250 incremental WAP placements, loss of 25 LAP units, flat standalone units
  • Other stuff:
    • R&D expense of $28.3MM
    • Selling & Admin expense of $39MM
    • D&A of $17.4MM
    • Interest income of $1MM
    • Tax rate of 37%

WMS FY2Q2010 “YOUTUBE”

Growth Opportunities

  • “The new Bluebird xD platform, the customer response has exceeded our expectations. When this gaming machine receives regulatory approval with a commercial launch expected in the June quarter, we believe it should prove instrumental in keeping our momentum strong for increasing our market share based upon the high player preference and earnings performance being achieved at our beta test site.”
  • “Another favorable factor arising from our recent discussions with casino operators here is that the improved economic environment in Europe seems to be translating into an increased sentiment toward expanding their capital budgets. This is similar to what we're hearing from our North American customers.”
  • Italy:  “Much effort is still needed before the first products are placed, which is anticipated to start this summer and we'll keep you updated on our progress.”
  • “Through these two important [Italy and Australia] new market opportunities, coupled with ongoing success in Mexico and other international jurisdictions, plus the launch of our Helios gaming cabinet, we expect to continue to expand our global presence and achieve further growth.”
  • “As we received regulatory approval for WAGE-NET and our initial portal applications in the coming months and quarters, we expect to benefit from the rollout of our network gaming strategy in numerous regional and travel casinos across the country.” 

Guidance

  • “We anticipate to be slightly above the top end of our fiscal 2010 operating margin guidance of 20.5% to 21%.” 
  • “Supported by the high mix of WAP units and typical seasonal influences that are generally favorably impact the March and June quarters, we expect to remain above the high end of our average revenue per day guidance and record further modest gains throughout the balance of fiscal 2010.”
  • “With the continued strong performance of our Bluebird 2 gaming machines, and the positive response by customers for the new Bluebird xD gaming machines, which will carry a premium price when launched this spring, we expect the upward trends in ASPs will continue. I'd note that the expected future ASP increase will be partially mitigated, particularly in the current quarter by the introduction of the value priced Helios gaming machines and the launch of products in Australia through a distributor. We expect the average selling price to continue to remain above the high end of our guidance of 15,000 per unit through the second half of our fiscal year.
  • “The improving trend in the replacement cycle is likely to offset the lower number of units we expect from new casino openings and major expansions compared to calendar 2009. Specifically, we expect WMS's new unit volumes to increase year-over-year in the March quarter and further ramp upwards in the June quarter reflecting; one, incremental and growing volume from distribution to new markets for WMS, such as Mexico, Class II, Australia and the launch of the Bluebird xD and Helios gaming cabinets. Two, further growth to our ship share; and three, improving -- the improving replacement cycle. Reflecting this improving trend for the second half of fiscal 2010, but also the slower pace of unit sales in the first half of the year, we expect unit volumes to be at or just below the low end of our annual guidance for unit sales”
  • “Based on positive customer feedback, we returned from G2E with an accelerated development program for certain R&D projects, including a ramp-up in the March quarter. As a result, we expect our fiscal 2010 R&D expense will run slightly higher than originally targeted which will result in R&D expenses in a range of 14% to 15% of total revenues for the full year.”
  • “I would note that in future quarters, we may see an upward bias in additions to gaming operation's capital spending as we roll out the first Bluebird 2 participation gaming machines and pursue attractive expansion opportunities to invest our capital in the Italian VLT business.”