WMS Posts Fiscal 2009 3Q Results

WMS Industries, a company focusing on the design, manufacture and marketing of gaming machines to the global gaming industry, has reported financial results for its fiscal 2009 third quarter ended March 31.

In a release on April 21, the Company noted fiscal 2009 third quarter highlights:

-Total revenues increased to a fiscal third quarter record $180.8 million

-Average installed participation footprint grew 10 percent to 9,785 gaming machines and the installed base increased 160 units to 9,901 gaming machines at March 31, from 9,741 units at December 31, 2008

-Average daily revenue rose 10 percent to a quarterly record $70.37 per participation unit

Product sales revenues totaled $114.0 million, as average selling price improved 18 percent to a record $14,854 on 6,431 new units shipped, with Bluebird2 units accounting for 47 percent of global unit shipments

-Total gross profit grew 16 percent to a record $117.3 million as gross margin increased 620 basis points to an all-time quarterly record 64.9 percent, including a 520 basis point improvement in product sales gross margin to a record 53.2 percent

-Operating margin rose to 21.1 percent, up 400 basis points from 17.1 percent, while operating income grew 29 percent to a quarterly record $38.2 million

-Net income increased to a quarterly record $24.4 million or $0.43 per diluted share, a 34 percent increase in fully diluted EPS on a 5 percent increase in total revenues

"WMS' 17th consecutive quarter of double-digit year-over-year earnings growth reflects our company-wide focus on product innovation and operational excellence, which generated yet again another quarter of revenue growth and margin expansion," said Brian R. Gamache, Chairman and Chief Executive Officer. "With the broad, balanced product and operational success being achieved in fiscal 2009, we are well positioned for continued top and bottom line growth in fiscal 2010 and beyond."

"Our operating execution is outpacing the challenging environment and is driven by the consistency of our high-return, high-earning games that are embraced by players and our casino customers worldwide," Gamache continued. "These factors combined with our emphasis on continuous improvement resulted in a 21 percent operating margin and a quarterly record $38.2 million in operating income, which further bolstered our strong balance sheet."

"The Company's consistent operating momentum and solid cash flow over the last several years enables us to continue to manage our investments in high-return initiatives, including self-funding the development of unique, technology-enabled gaming experiences to further our market penetration. We are directly focused on the macro-economic climate and our ability to deliver high-revenue generating products to our customers provides a clear competitive advantage in any economic environment. Reflecting our continued innovation, product differentiation and clear operating momentum, WMS is targeting revenue growth in Fiscal 2010 similar to Fiscal 2009, which will lead to further earnings growth based on the significant leverage we are realizing from improved operating margins."

Third Quarter Financial Review

Fiscal 2009 third quarter net income rose 30 percent to a quarterly record $24.4 million, or $0.43 per diluted share, as total revenues increased to $180.8 million for the quarter ended March 31, compared to total revenue of $172.8 million and net income of $18.8 million in the March 31, 2008 quarter.

Product sales revenues were $114.0 million for the three months ended March 31, compared with $113.6 million in the year-ago period, while gross profit on product sales revenues increased 11 percent to $60.6 million. New unit sales revenues for the March 2009 quarter were $95.5 million, reflecting an 18 percent increase in average selling price to a record $14,854 largely due to the favorable product mix driven by the sale of more than 3,000 premium Bluebird2 networked gaming ready units, which represented 47 percent of total global new unit sales. The year-over-year unit volume decline primarily reflects the sale of more than 1,000 units in the year-ago period to Native American casinos in California following the passage of a voter referendum, as well as the higher mix of Bluebird2 units, which results in lower unit sales as customers trade up to the premium Bluebird2 units within the constraints of limited budgets. International shipments in the March 2009 quarter totaled 2,459 units or 38 percent of total units shipped globally compared with 37 percent of total shipments in the March 2008 quarter.

Other product revenues, largely comprising sales of game conversion kits, parts and used games, increased 19 percent on a year-over-year basis to $18.5 million in the March 2009 quarter. Just over 2,700 conversion kits were sold during the March 2009 quarter, highlighting the strong customer demand for WMS' high-earning game content. This compares with slightly less than 2,300 conversion kits sold in the year-ago period. Additionally, approximately 1,400 used gaming machines were sold in the March 2009 quarter compared with approximately 1,200 used units in the year-ago quarter.

Gaming operations revenues grew 13 percent to a record $66.8 million in the March 2009 quarter compared with $59.2 million in the year-ago period, principally reflecting a 10 percent increase in the average installed base to 9,785 participation units and a 10 percent increase in the participation revenue per day to $70.37, which were partially offset by a $2.4 million decline in other gaming operations revenues due to lower royalty revenues. Gross profit on gaming operations revenues increased 21 percent in the March 2009 quarter to $56.7 million. The total installed base of participation games grew to 9,901 units at March 31, a quarterly sequential increase of 2 percent, or 160 units, since December 31, 2008. The installed base for wide-area progressive (WAP) units continued to grow both on a quarterly sequential and year-over-year basis and totaled 2,137 gaming machines or approximately 22 percent of the total installed base at March 31. Ongoing success with differentiated games on WMS' Sensory Immersion and Transmissive Reels gaming platforms, including two new Transmissive Reels versions of THE WIZARD OF OZ games as well as new MONOPOLY games, continued to drive both strong play levels and incremental unit placements of WAP products. Similarly, the continued introduction of innovative new games on our Community Gaming platform, including the unique POWERBALL Power Seat game and our innovative Adaptive Gaming platform, featuring the STAR TREK series of games, is driving further year-over-year increases in the installed base of stand-alone participation units.

Gamache added, "By creating a broad variety of exciting, player-appealing games based on innovative technology platforms and products such as our Bluebird2 cabinet, WMS is successfully driving revenue growth at a time when industry-wide new and replacement unit demand remains at low levels. Despite this environment, customers are finding ways to add 'must have' products to their casino floors and the growth we are achieving in our participation footprint, the record revenue per day for these gaming machines and the high level of customer demand for our premium Bluebird2 games are all examples and clear indicators of how we continue to drive revenue growth through superior new product introductions."

Total gross profit, as used herein not including depreciation and distribution expenses, increased 16 percent to $117.3 million for the March 2009 quarter from $101.4 million in the prior year, and total gross margin improved by 620 basis points to 64.9 percent. The gross profit margin on product sales revenues increased 520 basis points to 53.2 percent compared with 48.0 percent in the year-ago period. The increase primarily reflects further operating improvements achieved from our lean sigma and strategic sourcing initiatives, as well as growing sales of our new, premium Bluebird2 gaming machines. Gross margin from gaming operations increased to 84.9 percent in the March 2009 quarter, reflecting the increase in participation revenue per day and favorable WAP jackpot expense experience, compared with 79.2 percent in the prior year period and 81.7 percent in the December 2008 quarter. Our gross margins may not be comparable with other companies as our costs of distribution, which was $5.6 million in the March 2009 quarter and $5.2 million in the March 2008 quarter, are included in selling and administrative expenses consistent with prior quarters.

Research and development expenses for the March 2009 quarter were slightly lower on a quarterly sequential basis from the December 2008 quarter and declined to 13.7 percent of total revenues. The Company incurred $24.8 million for research and development expenses in the

March 2009 quarter, reflecting higher year-over-year spending for expanded new product development initiatives, principally innovative new customer solutions comprising systems and applications for networked gaming, which we expect to begin commercializing in fiscal 2010.

Selling and administrative expenses were up 2 percent on a quarterly sequential basis at $37.0 million, or 20.5 percent of total revenues, in the March 2009 quarter and were up 9 percent, or $3.0 million, over the prior year quarter. The year-over-year increase principally reflects higher payroll-related costs associated with WMS' global growth, including higher performance-based incentives due to the improved operating performance, as well as higher year-over-year legal expenses associated with litigation on pending insurance claims related to Hurricane Katrina.

Depreciation expense for the March 2009 quarter was $17.3 million, a decrease of 5 percent or $1.0 million compared with the year-ago quarter despite the 10 percent year-over-year increase in the average number of participation gaming machines in our growing gaming operations business. Further capital efficiencies being achieved in the gaming operations business related to the rollout of new participation games and increased longevity of gaming machine placements are contributing to the decline in depreciation expense relative to total revenues.

Cash flow provided by operating activities rose 4 percent for the nine months ended March 31, to $131.2 million. The nine-month increase reflects the year-over-year growth in net income, non-cash charges and a favorable change in deferred income taxes partially offset by the change in operating assets and liabilities.

Included in the change in operating asset and liabilities, as reflected in the comparison on the balance sheet from June 30, 2008, is a $14.3 million or 24 percent decrease in inventory, despite the growth achieved in total revenues. This improvement is particularly noteworthy in light of the launch of the new Bluebird2 platform, which incorporates a new component-parts supply chain. This improvement was more than offset by the impact of higher receivables associated with longer-term financing options granted to select customers during the March 2009 quarter which combined with a greater percentage of new unit sales being shipped in the month of March resulted in accounts and notes receivable increasing by $37.0 million from December 31, 2008.

Net cash used in investing activities for the first nine months of fiscal 2009 increased 8 percent year over year, primarily reflecting an increase in capital expenditures for property, plant and equipment, including approximately $5 million for the purchase of property adjacent to our Chicago Tech campus to secure our footprint in anticipation of future growth and $7 million on the acquisition and licensing of gaming systems software to be commercialized in the future. Capital deployed for additions to gaming operations equipment was essentially flat year over year in spite of the incremental increase in the installed base of participation gaming machines. Overall, meaningful improvement has been made in our ability to more effectively manage the capital deployed for additions to our gaming operations equipment. Adjusted EBITDA for the fiscal third quarter rose 12 percent year over year to $66.2 million.

During the March 2009 quarter, WMS repurchased more than 569,000 shares of its common stock at an average price of $17.57 for a total consideration of $10 million. The Company has approximately $75 million remaining under its existing share repurchase authorization.

In aggregate, total cash, cash equivalents and restricted cash increased to $122.9 million at March 31, compared with $119.6 million at June 30, 2008.

Fiscal 2009 Fourth Quarter Outlook

Reflecting the ongoing strength in its gaming operations business and the customer demand for new products, WMS today said that it expects total revenues for its fiscal 2009 fourth quarter to grow 8 percent-to-12 percent on a quarterly sequential basis to a range of $195 million to $203 million, resulting in annual revenue growth of 9 percent-to-10 percent over fiscal 2008. This would place annual revenues within or just below the guidance range provided in August 2008 at the beginning of the fiscal year which expected 10 percent-to-12 percent annual growth. Additionally, the Company announced that with a year-to-date operating margin of 18.2 percent and continued momentum in operating execution, it now expects to exceed the high end of its fiscal 2009 annual operating margin guidance of 18.0 percent-to-18.5 percent and has raised its guidance for this metric to 18.5 percent-to-19 percent. The improved operating margin primarily reflects the benefits being realized from ongoing continuous improvement initiatives balanced by the Company's continued focus on R&D initiatives.

WMS' ongoing emphasis on developing innovative new products and high-value customer solutions is also expected to lead to further revenue growth in fiscal 2010. Consistent with its past practice, the Company plans to initiate its guidance for revenue and certain other key operating metrics for fiscal 2010 at the time it reports its financial results for the fiscal 2009 fourth quarter in early August 2009.

The Company routinely reviews its guidance and may update it from time to time based on changes in the market and our operations.

Gamache concluded, "With industry leading innovation, disciplined operational execution and fiscally prudent management, we are able to achieve record financial performance despite the challenging economy. Strong, ongoing operational improvements have elevated our flexibility and are enabling us to proactively collaborate with qualified customers to place high-earning products on their casino floors. Our key operating priorities have and will continue to guide WMS and its operating teams toward further revenue, earnings and cash flow growth during the remainder of fiscal 2009 and beyond, while strengthening our high-quality balance sheet."

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