WMS YOUTUBE AHEAD OF ANALYST DAY

Here are our brief thoughts heading into Tuesday along with some recent management commentary.

WMS will hold an Analyst Day on Tuesday of next week and while we don’t expect a ton of new information to be divulged, the tone should be positive.  Management should provide an upbeat assessment of the long term potential of worldwide slot demand while also remaining cautious regarding the near-term replacement environment.  We also expect management to successfully address cash flow issues including the ramp up in capital spend related to Italy among other things, and the accelerated R&D. 

For FQ1, we are pretty much in-line with the Street.  Some additional thoughts:

• The quarter should follow normal seasonality patterns.  North American (NA) replacements are expected to be weaker sequentially - we’re estimating about 10,000 total replacement units for the industry
• New units to NA should be flattish with last quarter
  • WMS's shipment to Sugarhouse was accounted for in the June quarter
  • Big shipments for the September quarter include:
    • Cosmo – 23% of the floor
    • Penn Cecil County – 29% of the floor
    • Some expansion units into California tribes
  • EPS of $0.37 is in-line with the Street while our $2.02 FY2011 estimate is slightly below the Street.  However, replacement demand could accelerate at any time, particularly if casinos respond to upcoming Government tax incentives.

YOUTUBE

• “The early performance from the initial xDs and the overall feedback from operators across a diverse spectrum of casinos in various geographic markets is exceptional. The initial demand for xD is both gratifying and highly encouraging for our long-term success. In spite of the overall restrained capital spending environment, the strong initial backlog for Bluebird xDs is providing solid visibility just out of 2011 and supports WMS’s expectation of continued ship share gains and revenue growth in coming quarters.”
• “We did fall a bit short of our target for launching this product at a comparable gross margin to the Bluebird2, our team is squarely focused on the various improvements we need to make to close the gap.”
• “While we have modest expectations for unit volumes for Helios, it does open up certain markets where WMS did not previously have a presence and also offers opportunities to gain a foothold in these untapped markets and begin to build incremental growth”
• “I think LORD OF THE RINGS has had an extraordinary start, I think we’ve got about 150 of them out in the field so far and we expect to have several hundred more this quarter. But the comments thus far have been very positive, that the win per day that we’re getting from our operator partners is indicating that it’s not quite WIZARD OF OZ type numbers but not far off either.”
• xD premium to Bluebird pricing: “A little higher than that, probably 25%.”
• “Penn National’s New Hollywood Casino in Cecil County, Maryland, we achieved a 29% floor share”
  • This amounts to 435 units shipping in the September quarter
• “In fiscal 2011, we expect to spend an incremental $9 to $11 million or an equivalent to about 0.10 to $0.12 per diluted share on internal R&D activities over and above a normal annual increase in such as expenditures. We also plan to deploy about $40 million of incremental capital to expand our high return gaming operations business to address the growth opportunities in the Italy VLT sector, the pursuit of attractive operating leasing arrangements from customers globally and the ongoing conversion of our installed base participation games to the Bluebird2 platform.”
• “WMS has specific product initiatives and operating strategies that provide the basis behind our revenue targets for fiscal 2011:
  • 3 to 7% growth in unit volume
  • 1 to 4% increase in average selling price in our product sales business
  • 4 to 6% growth in our installed participation base
  • 1 to 3% increase in average daily revenues in our gaming operations business”
• “We expect that replacement sales in the U.S. and Canada will only improve modestly in calendar 2011 over calendar 2010, similar to the low single digit growth we’ve seen in calendar 2010 over calendar 2009.”
• “Key revenue growth drivers are:
  • Ongoing share penetration and new unit shipment growth for new markets…
  • Modest improvement in Class II and central determinant jurisdictions, which today are primarily tribal casinos in Washington State and around the U.S…
  • Continue the ongoing ramp up in Mexico and Australia due to the strong player appeal and high earnings performance from the initial sales in fiscal 2010
  • We estimate that these three markets -- Washington, Mexico, and New South Wales, Australia -- in aggregate have an addressable market of over 250,000 units longer term.”
• “In mid fiscal 2010, we also expect to deploy capital for our first VLT units to be leased in Italy.  We are close to concluding our discussions related to our first agreement with one of the concessionaires for VLT licenses in Italy and are presently in negotiations with additional concessionaires. These units will be leased gaming machines that earn WMS a daily revenue rate over a nine-year lease term. Revenues from these placements will be included in other gaming operations revenues. These lease units will not be included in the average installed participation base nor in the calculation of the average revenue per day per participation machine as they are not participation games.”
• “In fiscal 2011, we also expect to earn initial revenues from both the launch of network gaming applications and our online casino site in the United Kingdom. We have three of the nine beta test sites of our WAGE-NET system and the Jackpot Explosion portal application running at this time. we continue to expect that these tests will conclude in the December quarter and that we would begin to earn our first network gaming application revenues at that time.
  • That adding our Jackpot Explosion portal application increased coin in by over 20% over the same game themes at those sites that do not have the portal application running.
  • We expect to launch our Jackpot Party online gaming site in the December quarter for U.K. residents. This site will contain a variety of familiar WMS games including THE WIZARD OF OZ and Star Trek, along with some traditional casino games and unique play features not seen before in the online gaming world.
  • We expect revenue contributions from both of these businesses will be very modest in fiscal 2011 but in both cases they will represent incremental revenues over fiscal 2010.”
• “FY2011 …our expectation of 8-11% revenue growth …translates into annual revenue range of 830 million to 850 million"
• “Our first quarter revenue guidance of 174 to 179 million represents five to 8% growth over the September 2009 quarter”
• “In fiscal 2011, we anticipate …further improvement in operating margin, which we anticipate in the 22.5 to 23% range for the full year.”
• “In fiscal 2011, we expect the product sales gross margin to range from 52 to 55% as our continuous improvement programs and benefits from higher volumes are expected to offset lower initial start-up margins on some new products and some new distribution channels. However I would note that in the fiscal first quarter, due to the low seasonality of revenues and the initial impact from the start-up and full commercial launch of the Bluebird xD with its new complex supply chain, we expect a sequential and year-over-year decline in the product sales margin, which when coupled with our higher R&D spend will lead to a year-over-year decline in our operating margin to 17.5 to 18% for the first quarter.”
• “In our gaming operations business, we expect to sustain our gross margin during the year within a range of 79 to 81% while continuing to reflect the variability of jackpot expense experience and a mild dampening effect of having a higher percentage of WAP units in our installed base.”
• “We expect R&D expenses to increase to around 15% of revenue in fiscal 2011.”
• “While the dollar amount of spending on these initiatives will continue to increase, we expect the increase to be less than the rate of growth in revenue and thus expect that selling and administrative expenses will be lower as a percentage of revenues in fiscal 2011 than in fiscal 2010.”
• “With the anticipated increase in gaming operations capital spend in fiscal 2011 and launching into new businesses, we do expect depreciation expense to begin to increase this year.”
• “Absent legislative action to restore the R&D tax credit, we believe our effective tax rate will be in the range of 36 to 37% for fiscal 2011”
• “Of our North American units this year we could ship as many as 25 to 30% of our unit shipments for the year could be XD.”
• “Typically we sell a third of our products internationally from box sales. Q4 was a little bit of an uptick, we got to 40%, which is a record….I think it’s more in line of the 33 to 35% range is what I would suggest for modeling purposes this year.”
• “As it relates to Illinois, I would view that to be a second half of the year event for WMS. I would think probably sometime in the probably February, March timeframe, you’ll see some initial placements and then you will see Q4 probably ramp up from there. We don’t see it as a significant opportunity in our fiscal ‘11, it’s probably going to be more so in fiscal ‘12, but we will have a few units in there, and that’s baked into the guidance that we gave today.”