WMS: SO WHAT ABOUT THE $40M?

We’ve gotten comfortable with the higher R&D. Here we’d like to address the incremental $40m in capital investment.

 

 

Unlike the R&D which is expensed as incurred, WMS will capitalize the $40 million in incremental Capex.  Investors are not freaking out about that as much as the $10 million R&D ramp which is strange as both expenditures are investments with real ROI.  Oh well, we thought we’d address the additional spend here:

 

 

The $40MM of incremental investment

It’s actually 3 buckets:

  • Italy (1/3)
    • Concessionaire is in the US right now as we speak finalizing the details of their contract with WMS, with initial placements expected in December
    • Since Italy will be lease market, initial December placements won’t have much impact in the quarter but will ramp through the year.
  • Leased games (1/3)
    • Operators want to lease more games from WMS rather than buy all of them 
    • As they extend their efforts in Class II, they’re willing to commit capital to that 
    • Don’t have any specific deals in mind, but there are many operators that prefer to lease right now rather than commit capital to purchases
    • For example, Harrah's preference at the moment is to lease vs. purchase.  While their budget for game purchases is almost zero, they did make a huge increase in their capital budget for leasing games this year.
    • Florida is another market where the preference is to lease vs. own, since leases are tax deductible. 
    • WMS can always recycle leased boxes for use in their participation install base should they roll off in a short period of time.
  • Growing and refreshing their participation base (1/3)
    • WMS's entire participation base is on the Bluebird 1 ("BB1") platform, which was first released in December 2003
    • As those games age and need refreshing, WMS will replace them with fresh content on the Bluebird 2 cabinet, transitioning the base to their new platform over the next few years.
    • The reason that they have continued to put out their participation content on BB1 is because BB1 has been a cheaper platform for them and customers don't care since the content was so unique. 
    • So for example, even the new Lord of the Rings, which was created to run on a BB1 or a BB2 platform, is initially being released on repurposed BB1 cabinets that are only 2-3 years old