WMS HANGS IN

We weren’t expecting a great quarter and it wasn’t. However, the positive long-term outlook remains very much intact.

 

 

FQ3 was setting up as a positive catalyst for WMS, that is, until the stock took off from $38. At $48, the quarter had to be good, and it wasn’t.  Should people be concerned? We’re not. We feel very good about the long-term. Here are the major takeaways: 

  • WMS gained ship share in North America this quarter – guessing they are up to between 27-29%
  • Replacements in NA are accelerating faster than we expected
  • Australia and Mexico are promising for WMS
  • Gaming operations were disappointing … but a large part of that is probably just due to timing and the June/Sept quarters should show handsome install base gains

Product Sales:

WMS beat our expectations on products sales and margins; however, the beat was low quality.

  • Total unit shipments missed our number by 287, all on the international front.
  • Domestic shipments were 192 better than we thought – driven by stronger replacement shipments.
  • While domestic replacement units should be seasonally up again in June vs. March there are several new casinos openings which may slip into Sept from June
    • Sugar house – if it ships in June it will be at the very end of the quarter and that’s 1,700 units
    • Gun Lake – we originally had 1,200 units shipping in the June quarter but it looks like they are having funding  issues and so September at best               
  • International missed our estimate by 479 units – we clearly thought the number would be up y-o-y
    • International revenues were up 5%
    • Bigger piece is that Europe didn’t rebound as much as WMS expected from the tone at ICE show - That’s actually why they toned down expectations for the June quarter.
    • Our guess is that WMS shipped about 400 to Mexico and roughly 200 units to Australia this quarter.
    • Latin America  - we weren’t expecting huge growth there and there really hasn’t been any replacement in that market in the March Q.
  • ASP was $400 better than we estimated and expected to be strong in the June quarter as lower priced shipments will be offset by the premium pricing on xD

Gaming Operations:

Slightly better product revenues were more than offset by worse gaming operations (basically everything was a little worse than we expected – install base, yields, and margins)

  • $1MM of the miss came from the removal of 193 standalone games – we assumed that standalone games would be flat
  • Net WAP placements were also below our estimate
  • We didn’t take into account the favorable jackpot benefit in 3Q09
  • Net yields were also lower than our estimate
    • For the first time, yields within each category didn’t go up aside from mix shift
    • More susceptible to industry trends as they get bigger footprint wise
  • They attributed good/bad to timing in that business…for the last few quarters, their footprint hasn’t grown because they have been trying to shift the footprint to WAP. They timing of when the old ones will get taken off exactly and when they get replaced with the new ones (a big issue for IGT) is difficult to estimate with any precision
    • Expect the footprint to accelerate in the 4Q2010 – due to WAP in the 4Q2010
    • WAP’s will have their largest net placement quarter in FQ4.
    • Older games have now stabilized with refreshes – expect stand alone to stabilize or only decrease a little – not like the last few quarters
    • LAP’s should stabilize (may even increase slightly due to the success of Goldfish)

Other stuff was better…

  • R&D and SG&A were a little lower than our estimate
  • Taxes were way lower - but that’s not sustainable

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