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WMS Industries Inc. (WMS)

F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

August 5, 2008 4:30 pm ET

Executives

Bill Pfund – VP, IR

Brian Gamache – Chairman and CEO

Orrin Edidin – President

Scott Schweinfurth – EVP, CFO and Treasurer

Analysts

Joe Greff – JPMorgan

Celeste Brown – Morgan Stanley

David Katz – Oppenheimer & Co.

William Lerner – Deutsche Bank Securities

Steven Wieczynski – Stifel Nicolaus

Ralph Schackart – William Blair & Co.

Kent Green – Boston American Asset Management

Steve Altebrando – Sidoti & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the WMS Industries’ fourth quarter conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions) As a reminder this conference is being recorded, Tuesday, August, 5 2008.

I would now like to turn the conference over to Bill Pfund, Vice President, Investor Relations with WMS Industries. Please go ahead, sir.

Bill Pfund

Thank you, operator. Good afternoon and welcome to WMS Industries’ conference call to discuss our record fiscal 2008 fourth quarter and full year results, our guidance for fiscal 2009, and the operating trends and competitive strength that support our outlook for fiscal 2009.

With me today are Brian Gamache, Chairman and Chief Executive Officer, Orrin Edidin, President, and Scott Schweinfurth, Executive Vice President, Chief Financial Officer and Treasurer.

Before we start, let me review our Safe Harbor language. Our call today contains forward-looking statements concerning the outlook for WMS and future business conditions. These statements are based on currently available information and involve certain risks and uncertainties. The Company’s actual results may differ materially from those anticipated in the forward-looking statements depending on the factors described under “Item 1. Business-Risk Factors” in the Company’s Annual Report on form 10-K for the year ending June 30, 2007 and in our more recent reports filed with the SEC. The forward-looking statements made on this call and webcast, the archived version of the webcast and in any transcripts of this call are only made as of this date, August 5, 2008.

Now, let me turn the call over to Brian.

Brian Gamache

Good afternoon everyone. Today, WMS reported record results for the June quarter that put a strong exclamation mark on our fiscal 2008, our best year ever and the fifth consecutive year we achieved strong double-digit growth in both revenue and profit.

Fiscal 2008 diluted earnings per share increased 34% to $1.15 on annual revenue growth of 20%, which clearly demonstrates our ability to generate both ongoing revenue traction and consistent progress in operating execution even against the challenging headwinds of a difficult replacement cycle and a weak economy.

WMS has now met or exceeded its revenue guidance in each of the last nine consecutive quarters, during one of the toughest market environments in industry history. And overall, WMS has met or beat revenue guidance in 14 out of the last 16 quarters with the two exceptions resulting from the impact from Hurricane Katrina and the closing of the Russian market. We achieved this track record thanks to the imagination and innovation of all the WMS team who create, produce, deliver, and service some of the highest earning products in casino floors.

Our annual operating margin increased 240 basis points to 16% and eclipsed 18% in the fourth quarter. Our operating execution also led to cash flow from operating activities increasing 57% over last year to a record $186 million. The significant cash flow we are now generating provides a solid foundation for funding a substantial array of future growth opportunities and enables us to simultaneously reinvest in WMS through accelerated R&D initiatives and through opportunistic share repurchases, as evidenced in the June quarter by our aggressive $25 million buyback.

Throughout fiscal 2008, we continued to implement our lean sigma initiatives and maintain a disciplined focus on executing our strategies for near, mid-, and long-term. This discipline resulted in our ongoing share gains in North American unit shipments, steady double-digit growth in our participation business earned through the increases in both our installed footprint and average daily revenue, continued international expansion, growing margins, culminating in our product gross sales margin of 50%, and gamin operations margin of 81%, and an operating margin of 18% in the June quarter. Improvement in our working capital realization increased cash flow from operations and the strengthening of an already rock solid balance sheet.

I am very pleased with the success we are achieving expanding our revenue opportunities. With increased international sales, higher conversion in used game revenues, and rising gaming operations revenues, we have reduced our reliance on the North America new unit demand, and these factors position us well for continued growth in fiscal 2009. And we are driving our revenue growth productively. In fiscal 2008, our average revenue per employee increased 11% or approximately $45,000 to $438,000 per employee, a compound annual growth rate of 15% over the last five years.

I also want to note the quality of our earnings in fiscal 2008. We achieved 38% growth in annual net income to $68 million even as we significantly accelerated our spending for R&D activities, which rose $22 million year-over-year or $6 million more than we spent the entire first year when I joined the Company in 2000.

Looking a little deeper, we also were impacted by a higher year-over-year tax rate, which reduced annual diluted earnings per share by $0.07 and we recorded a write down to net realizable value of a license technology, which amounted to $0.04 in the fourth quarter.

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