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Our notes from the earnings call.

 

“WMS’ fiscal 2010 fourth quarter operating performance including record top- and bottom-line results, improved margins, and growth in other key performance metrics were achieved despite a still-sluggish replacement market and lower spend-per-visit by casino patrons in many markets."

- Brian R. Gamache, Chairman and Chief Executive Officer

HIGHLIGHTS FROM THE RELEASE

  • “Our anticipated fiscal 2011 growth also reflects the benefit of further success in those markets we entered in fiscal 2010; our expected VLT shipments to Maryland and Illinois and a modest expectation for initial VLT placements with concessionaires in Italy; along with the commercialization of our proprietary WAGE-NET networked-enabled applications and the start-up of our online gaming business in the UK.”
  • FY2011 Guidance:
    • Revenue: $830-850MM, +8% to 11% YoY growth
    • New Unit Shipments: 25.8 to 26.6k
    • ASP: $15.7-16.1k
    • Average installed participation base: 10.7-10.9k
    • Daily revenue per machine: $77-79
    • Operating margin: 22.5-23.0%
    • R&D as a % of revenue: 15% or 20% YoY
  • 1Q2011 Guidance:
    • Revenue: $174-179MM, +5% to 8% YoY growth
    • Operating margin: 17.5-18.0% 
  • "Announced plans to increase investments in internal, organic growth initiatives of more than $50 million and a new $300-million, three-year stock repurchase authorization. Under the new authorization, the Company expects share repurchase activity will exceed prior-year annual levels, depending upon market conditions."
    • "An incremental year-over-year increase of approximately $40 million in gaming operations equipment to support what the Company expects will be a leased VLT market in Italy, an expansion of operating lease arrangements with customers globally, and the conversion of a portion of the existing installed participation base from Bluebird to Bluebird2 gaming machines."

CONF CALL NOTES

  • Expect continued ship share gains and growth in FY2011
  • PENN's Cecil County, MD - they had 29% ship share
  • Launched Lord of the Rings on June 30th - and is being met with high praise so far
  • ROI improved to 15% in 2010
  • Expect that replacement sales will only improve modestly in the US, their growth will come from:
    • penetration of new markets for them: Washington and other Class II markets
    • Mexico & New South Whales growth
  • Bluebird xD- initial feedback is very strong, but the initial margins are a bit lower then they expected
  • Backlog remains robust
  • Launched Helios cabinets, which is margin neutral. Allows WMS to enter incremental markets
  • ASP increase due to modest list price increases and xD penetration, offset by growing mix of lower priced units like Helios
  • Players can extend their gaming experience online for Lord of the Rings.  At home account sign ups are exceeding that of Star Trek in its early life cycle.
  • Assume a modest increase in WAP units in FY2011
  • In Italy - they will have leased games over a 9 year term. They are close to announcing their first deal and negotiating a second deal.
  • Wagenet testing should conclude in the Dec Q and begin collecting revenues.  Portal applications have increased win per day by 20%.
  • UK internet gaming will also launch but contribution will be modest
  • Expect roughly flat growth in new units
  • Expect FY 2011 quarterly revenue trends will be consistent with past seasonality
  • Unit guidance doesn't include any new markets like MA/Ohio/AZ/Greece/Brazil etc where there is regulatory uncertainty
  • FY2011 Product gross margins: 52-55%; however, in 1Q2011, margins will have a sequential and YoY decline due to the launch of new platforms and low seasonal volume.
  • FY2011 Game operations margins: 79-81%
  • R&D will have unusually high growth - normally they would expect R&D to be 14% of revenue
  • Opening an R&D center in India
  • For FY2011, they expect to have more leverage on SG&A - lower % of revenues than in 2010
  • D&A will pick up in 2011 with increased spend
  • Tax rate will be in the range of 36-37% for FY2011
  • Provided a great amount of extended payment term sales.  Do not believe that this demand will diminish but shouldn't be a drag on cash flow either.
  • Inventory increase was due to CPU NexGen chips

Q&A

  • Domestic shipshare?
    • Guess it's in the 30% range
  • Lord of the Rings rollout.
    • Have about 150 out in the field and several hundred more coming.  Win per day is not quite Wizard of Oz, but still really good.
  • $40MM capital investment in Italy VLT?
    • Correct. This year they spend $40MM vs. $80MM in FY2011.
  • Impact on Dynamix?
    • No impact on them
  • Some Class II business impacted ASPs a bit in the quarter
  • Replacements are an industry-wide issue, not a WMS issue. They did think that they would see more of an uptick in replacement demand.
  • Extended financing - not seeing as many customers approaching them but still seeing it
  • Average life of a WMS participation game - pre refresh?
    • Depreciate it over 3 years and top box over 1 year
    • Refresh content every 6 months but hope to maintain the floor share for 5-7 years
  • Yield difference between BB2 and BB1?
    • BB1 was launched in 2003
    • Expect to see a 20% performance improvement in BB2.
  • What is xD expected to do for them?
    • Because it's a different niche than BB, they expect that it will help them gain share.  Think that 25-30% of their annual shipments should be xD and pricing is 25% higher.
  • Sold about 1/3 sales from box sales - for international, 33-35% of total sales is normal and this Q (40%) was a bit unusual.
  • IL should be a Feb/March event, with Q4 ramp up. More of a FY2012 opportunity for them. Expect to have similar ship share in that market nationwide. Think that the total market will be ~25k units, even without Chicago.
    • Expect it to be primarily a for sale market for them
  • Number of logins so far for Lord of the Rings are ahead of expectations - trending ahead of Star Trek in the same point of the life cycle.  Star Trek has over 1MM logins now.
  • Online gaming in the US?
    • Think it's when not if, and think it's a huge opportunity for them to distribute their content.  They are entering UK to better understand the business and the opportunity.
  • Investing at double the rate of R&D than their competitors. Think that investing in their business is their best use of cash right now.