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