Advanced Drainage Systems, Inc. (WMS)

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WMS Industries (WMS)

Q1 2013 Earnings Call

November 01, 2012 4:30 pm ET

Executives

William H. Pfund - Vice President of Investor Relations

Brian R. Gamache - Chairman and Chief Executive Officer

Scott D. Schweinfurth - Chief Financial Officer, Executive Vice President and Treasurer

Orrin J. Edidin - President, Chief Executive Officer of Williams Interactive LLC and President of Williams Interactive LLC

Analysts

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Casey Newell

Todd Eilers - Roth Capital Partners, LLC, Research Division

Presentation

Operator

Thank you for standing by, and welcome to the WMS Industries Fiscal 2013 First Quarter Conference Call. [Operator Instructions] As a reminder, today's conference call, on November 1, 2012, is being recorded. I would now like to turn the call over to Paul Pfund, Vice President of Investor Relations for WMS Industries. Please go ahead.

William H. Pfund

Thank you, operator. Before beginning our review today, we'd first like to extend our sincere wishes for a quick recovery to our stockholders, investors, associates and friends in New Jersey, New York and other areas impacted by Hurricane Sandy. I'd also like to remind everyone that 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. Reported results may not be indicative of future performance, and 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 and Item 1A Risk Factors in the company's annual report on Form 10-K for the year ended June 30, 2012, and in our more recent press releases and 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 made only as of this date, November 1, 2012. On the call today are Brian Gamache, Chairman and CEO; Orrin Edidin, President; and Scott Schweinfurth, CFO. Now let me turn the call over to Brian.

Brian R. Gamache

Thanks, Bill, and good afternoon, everyone. WMS's fiscal first quarter financial results reflect continued operating improvements on our gaming machine product lines as well as very encouraging revenue performance from our interactive products and services. In addition, we recently secured additional VLT contract for new units, which provides further unit shipment visibility for our fiscal year. For the September 12 quarter, WMS generated total revenues of $159 million, modestly exceeding our expectations and representing our first year-over-year gain of total revenue in the past 7 quarters. Among the highlights of the first quarter are: overall the $4 million increase in total revenue went to a $4 million increase in gross profit, providing a very healthy gross profit flow-through; gross margin on our product sales reached a new fiscal first quarter record of 53%; and the gross margin of the gaming operations increased to nearly 79%, up from 77% in the June 12 quarter. Combined, we generated 120 basis point year-over-year improvement in total gross margin to 64.5%, just short of our record level established 3 years ago. In gaming operations, our average installed footprint grew on a quarterly sequential basis rising 253 units over the June 12 quarter. Our installed base at quarter end increased for the third consecutive quarter, this time by 71 units on a quarterly sequential basis, which led to a year-over-year increase of 40 units, represent the first year-over-year increase in our installed base in the last 8 quarters.

Next. WMS was selected by the Canadian Province of Manitoba to provide VLTs that will replace their existing footprint. Including Alberta, we expect to ship at least 1,000 additional VLTs to Canada during the remainder of our fiscal year, with more new units planned into fiscal '14. In addition, the VLT market in Illinois opened, and we shipped our first 193 new units in the September quarter. And with the Gaming Control Board continuing to approve additional target locations, we expect to continue to ship more units in fiscal '13 and into fiscal '14.

At the operating expense level, the year-over-year increase in R&D expense primarily reflects the cost of investments that we are making to build our comprehensive suite of interactive products and services. Importantly, we are building the foundation for these revenue streams without distracting the organization from the ongoing improvement initiatives for our casino slot content and gaming platforms. Orrin will provide more insight into the revenue generation in our interactive product and services to enable a better understanding of our strategies and opportunities.

And last but not least, our cash flow from operating activities grew by 60% or $8 million to $21 million, and our adjusted EBITDA grew by $10 million or 24% over the last year to $53 million, as our EBITDA margin improved to 33% of total revenue.

Before turning the call over to Scott, I would like to address one additional topic. I have been through a dozen G2E shows and all that time, I've not observed WMS ever had more positive customer response to our products than we had this year. The combination of more new games with more new math models on 2 operating platforms and 5 cabinets, all of which will be available before the end of our current fiscal year, will provide casino operators with more cutting edge differentiated and innovative games than ever before in both participation and for-sale products. While the competitive landscape is not to be underestimated, I believe the breadth and depth of our products far exceed our customers' expectations. And I believe this because this is what our customers are telling me and our sales representatives. The strength that differentiates our products and enthusiasm that our customers displayed reminds me of 2006 when we introduced a significant number of new gameplay technologies that have now become staples on platforms such as: sound chairs, transmissive real technology and community gaming style games. Or at 2008 when we launched the Bluebird2 cabinet with its, at that time, next-generation CPU-NXT2 operating system. At G2E this year, we did all of those. We showcased the new next-generation CPU-NXT3 operating system supported by 22 new games, the revolutionary new Gamefield xD cabinet dedicated for participation games and the sleek and inspiring design of the new Blade cabinet for our product sales. Incidentally, I would remind you that the CPU-NXT3 operating system is already approved, and we've already submitted the Gamefield xD cabinet and it's approved in some jurisdictions already, and that we expect to submit our exciting new Blade cabinet later this month. We anticipate shipping the first units of both these new unique cabinets, which rely on the CPU-NXT3 platform in the March quarter.

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