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WMS Industries Inc (WMS)

F2Q10 (Qtr. End 12/31/09) Earnings Call

January 26, 2010 04:30 a.m. ET

Executives

Bill Pfund - VP, Investor Relations

Brian Gamache - Chairman and CEO

Orrin Edidin - President

Scott Schweinfurth - EVP, CFO and Treasurer

Analysts

Steven Kent - Goldman Sachs

David Katz - Oppenheimer Capital

Steve Altebrando - Sidoti & Co

Carlo Santarelli - JPMorgan

David Bain - Sterne Agee

Todd Eilers - ROTH Capital Partners

Joe Greff - JPMorgan

Dennis Forst – KeyBanc

Presentation

Operator

Welcome to the WMS Industries second quarter fiscal 2010 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, January 26, 2010.

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

Bill Pfund

Thank you, Benjamin. Good afternoon and welcome to WMS Industries conference call to discuss our fiscal 2010 second quarter results. With me are Brian Gamache, Chairman and Chief Executive Officer; and Scott Schweinfurth, Executive Vice President, Chief Financial Officer, and Treasurer. Orrin Edidin, our President is in London this week heading our presence at the International Gaming Expo trade show or IGE perhaps better known under its former acronym of ICE. Although it is already been a long day for him, he is joining us to share his perspective on the show and answer questions following our prepared remarks.

First, 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-ended June 30, 2009 and in our more recent filings 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, January 26, 2010.

Now, let me turn the call over to Brian.

Brian Gamache

Thank you, Bill. Good afternoon, everyone. Today we reported our best ever financial results for a December quarter. This represents the sixth consecutive December quarter that we’ve delivered significantly stronger year-over-year operating and financial performance which started in the December 2003 with the launch of our original Bluebird gaming machine.

We also have achieved meaningful higher year-over-year company performance in each quarter during the challenging calendar 2009. The only one amongst our competitors set to do so and we accomplished it despite our customers’ constrained capital budgets and the impact of the economy on consumer discretionary spending.

These record results are due to the collective and unselfish contribution, passion and talent of our entire organization. Our people and our culture of innovation are the very foundation of our abilities to consistently grow the company and to overcome difficult challenges. It is this strength and consistency that bode well for our continued near and long-term success.

In the December 2009 quarter, our total revenue was at the high end of our guidance and increased 6% over the prior year. Our operating income reflecting the benefit of ongoing continuous improvement initiatives grew a robust 30%. As a result, our diluted earnings per share increased to $0.44 from $0.41 last year. Recall the last year’s results included two unusual items, a $0.05 per share benefit from the settlement of a trademark litigation and an additional $0.02 benefit from a retroactive reinstatement of the Federal R&D tax credit.

We achieved excellent operating leverage on our increase in revenues, as improved gross margins and relatively flat operating expenses resulted in the 9.2 million increase in operating income on $10.5 million increase in revenues, pretty good flowthrough. Importantly, our strong operating execution favorably positions the company for future sustainable growth. We continue to focus on investments in R&D initiatives to support a steady flow of innovative new products and to expand our distribution channels.

The high return we continue to achieve on the innovative products we have already commercialized demonstrates the success of our past R&D spending. Our current spending on R&D projects support the development of innovative products in our future vision, while we further ramp up our company wide innovation efforts for games, products, systems and form factors, we are also simultaneously expanding the global distribution channels for our products, thus leveraging our R&D efforts across more opportunities and providing new sources of revenues that compliment our existing global growth potential. We continue to [expect] steady demand for our premium feature Bluebird 2 platform launched commercially just over a year ago.

This strong preference along with the enthusiastic customer response to our new products at G2E last November, has solidified our belief that we remain at the forefront of product innovation, while providing further visibility that we are in track to achieve continued revenue growth.

We are quite pleased to note that once again as in four of our last five quarters, we believe that we've had the leading [shipped] share of unit replacement sales, while in North America replacement sale is increasing 10% year-over-year and 33% sequentially over the September 2009 quarter.

And we continue to generate growth in our participation business, reflecting the strength of our growing install base of wide-area-progressive games in spite of the weakened economy and low gaming revenue in several markets.

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