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Executives

William Pfund - Vice President, Investor Relations

Brian RGamache - Chairman of the Board, Chief Executive Officer

Orrin JEdidin - President

Scott DSchweinfurth - Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Joseph Greff - J.PMorgan

Celeste Brown - Morgan Stanley

Ralph Schackart - William Blair & Company, LLC

William Lerner - Duetsche Bank Securities

David Katz - Oppenheimer & Co.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Todd Eilers - Roth Capital Partners LLC

Marla Backer - Soleil - Research Associates

Steven Kent - Goldman Sachs

Steve Altebrando – Sidoti & Company

Edward Williams – BMO Capital Markets

Kent Green – Boston American Asset Management

Rachel Rothman – Merrill Lynch

WMS Industries, Inc(WMS-OLD) F1Q09 Earnings Call October 27, 2008 4:30 PM ET

Operator

Welcome to the WMS Industries first 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 Monday, October 27, 2008.

It is now my pleasure to turn the conference over to Bill Pfund, Vice President of Investor Relations.

William Pfund

Welcome to WMS Industries’ conference call to discuss our fiscal 2009 first quarter results With me 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 10K for the year ended June 30, 2008 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 any transcripts of this call are only made as of this date Monday, October 27, 2008.

Now let me turn the call over to Brian.

Brian RGamache

Today WMS reported financial results demonstrating once again that by creating high earning products coupled with equal focus on operating excellence WMC is able to generate impressive financial performance even in tough economic times We continued to achieve greater market share, improved operating margins, increased profits and generated significantly higher cash flow despite the seasonal impact of lower product sales volume.

In light of the turmoil in our economy and capital markets and its impact on our customers, we believe our quarterly execution is clear evidence of the ongoing strength of our current market positioning which emphasizes the creation of player appealing high earning products To be very clear here at the top of this call, we have reiterated our annual revenue guidance this afternoon as our visibility and path for continued growth is clear.

Furthermore, the operating and financial success we’re achieving is resulting in an even stronger balance sheet that allows us to self-fund continuing investments that support further innovation, profitable growth and other actions to enhance shareholder value.

This afternoon we reported year-over-year revenue growth of 14% to $151 million and through fiscal discipline and operating leverage achieved a 41% increase in net income or $0.27 in diluted earnings per share This is truly a great start to fiscal 2009 We believe our operating results demonstrate that when presented with the right products that clearly meet the entertaining expectations of their players, casinos will spend capital.

For WMS this means that our high earning and differentiated products are providing the momentum for us to continue to penetrate international and domestic markets and grow our market share Likewise, our continued double-digit growth in gaming operation revenues reflects a strong player appeal and customer demand for our innovative and great performing participation products.

Without a doubt this is the toughest operating environment I can recall and I know investors are concerned about our revenue visibility for the balance of our fiscal year One important consideration is that our revenue base is diversified from an individual customer basis with no single or multisite customer accounting for more than 5% of our revenues and our revenues are also diversified on a geographic basis and from a mix of business perspective.

Like all gaming suppliers we have customers that are highly leveraged but the largest segment of our customer base is in reasonably good shape First, since our significant presence in Native American facilities which typically maintain a more limited use of debt provides a great balance for overall sales mix Our international customers are also not typically levered and as reported today this business continues to be a growing part of our overall revenue base I would also remind everyone that gaming suppliers have been facing a challenging environment in North America for several years now due to the low replacement rate for gaming machines.

This environment has raised the hurdle rates and squarely placed more emphasis on the earning performance of products than the bandwidth of product offering, the very areas that have been at the forefront of our focus and strategic direction By coupling innovation and intellectual property with new technologies we have consistently developed products with great content while significantly expanding our arsenal of unique differentiated gaming machines.

Investors should note the following data points relative to the visibility of our reiterated revenue guidance:

First, our open orders for new gaming machines totaled 12,600 units and coupled with the approximate 5,500 units that shipped in the first quarter represents nearly 60% of the high end of our annual new guidance only four months into the fiscal year This level of open orders is consistent with the level of the past nine quarters and highlights casino operators’ continued strong demand for WMS products With GGE coming up in three weeks we’ll be adding to our order book and getting further insight into our second half customer demand.

Next, our first quarter average selling price was strong even before we officially launched the premium priced Bluebird 2 gaming machine and our multigame transmissive wheels product in the December quarter Also our current open orders for participation installs and conversions totals 2,000 units also clearly within the range of the past nine quarters and is another data point demonstrating continued strength in demand for these high earning games At September 30 our installed footprint is already within the guidance range for the average installed base for the full year.

Finally, our first quarter record revenue for participation games of $68.75 million, a 14% gain over last year continues to demonstrate strong play levels in spite of the slow economy So far during the month of October our [wrap] daily revenue is consistent with the rate achieved in September despite the expected seasonal turndown for the December quarter.

Turning to the balance sheet, in this liquidity sensitive environment we continue to generate strong cash flow and further strengthen our already strong balance sheet At September 30, 2008 our cash, cash equivalents and restricted cash totaled $128 million This reflects an increase of $8 million since June 30 even as we repurchased approximately 10 million of our shares during the quarter In this environment it is extremely comforting to have our strong cash flow, a rock solid balance sheet, the healthy cash balance, access to our $100 million credit line and prospects for continued growth.

Despite the present economic environment, through the collaborative efforts of the entire talented WMS team, we continue to excel and generate solid quarterly results Our entire organization has made terrific progress improving operating execution As I look to the future, we have ample opportunities to further strengthen our revenue levers and improve our operating execution On a competitive basis I firmly believe that with our talented and creative workforce, our focused culture of innovation, and our unique pool of intellectual properties and advanced technologies, we have a strong foundation to continue our growth and expansion.

Now let me turn the call over to Orrin who will share his perspective on our operating performance.

Orrin JEdidin

Our strong performance is a direct result of our disciplined focus on five key operating priorities First, driving growth in our gaming operations business while selectively investing our capital deployed in that business Second, growing our North American market share by innovating differentiated products Third, expanding the breadth and profitability of our international business Fourth, improving our margins Five, increasing our operating cash flow We believe our accountability and consistent performance of these priorities is significant evidence of the strength of our organization and our operating discipline.

In the September quarter the revenues and profitability of our gaming operations business was exceptional Compared to the prior year quarter total gaming operations revenues increased 24% and represented 42% of our total first quarter global revenues, up from 39% last year Gross profit in gaming operations increased 27% year-over-year while net capital invested in gaming operations at September 30, 2008 is 16% lower than the prior year.

The success of our new product launches continues to drive an increase in the average installed base of participation units despite the high level of commentary and concern given to news of participation games coming off certain casino floors, our average footprint for the quarter increased 12% from the September 2007 quarter and 4% from the June 30, 2008 quarter.

At September 30, 2008 our footprint totaled 9,616 participation units plus an additional 792 casino owned units for which we earn a daily fee Our average daily revenue increased 14% over a year ago, an increase of more than $8 per day.

In light of the present state of the economy with consumers parsing out their entertainment spend this quarter’s results are probably one of the strongest reflections ever of the player appeal and ultimate earning power of our games.

We successfully launched our Star Trek series of games this quarter representing the commercialization of our fourth foundational technology and newest category creating platform, adaptive gaming This new platform is enabled by the technological capabilities over a wide area network and offers unique gaming experiences never before seen on the casino floor While still quite early in its rollout, the initial results and feedback are highly encouraging Players clearly enjoy the recognition and rewarding experience of our personalization, recognition and episodic game play.

More evidence of our excellence in game development is demonstrated by the fact that at the end of September, two years after its launch, we have more than 1,400 of the original big event units on casino floors, the first games on our unique unity gaming server enabled platform Despite the high hurdle rates for participation games, our unique server enabled community gaming experience provides a differentiated and communal gaming experience that has proven resiliently popular with large numbers of casino patrons.

Through the additional introduction of new games, including Bigger Bang Big Event which is also a wide area progressive that incorporates transmissive reels technology, we now have a total of more than 2,500 community gaming units deploying these server enabled gaming capabilities on casino floors.

Our second priority is to grow our North American market share During the six months from January to June 2008 our shipped share of the recorded unit sales by the primary four suppliers was 23% which was up from 19% in the prior year comparable six month period Notably we were the only major supplier that grew its market share during this period.

When compared with our estimated overall share of the casino slot floor of 10% to 12% in North America, you can see the impact form our higher earning games and growing product bandwidth and more importantly the substantial runway for future share and revenue gains in spite of the sluggish replacement cycle.

New unit sales in the September quarter were up 9% in North America which we believe is ahead of the overall industry.

In this environment market share growth results from having differentiated products and serving divers market needs Our competitive advantage in developing innovative products enabled by new technologies and intellectual property allows us to capture a greater portion of capital operators invest in gaming machine purchases The success of our innovation in G plus video offerings and our mechanical real products are a strong testament to this strategy.

Recently we began offering another new differentiated product with the sale of a premium priced multigame product based on our transmissive reels’ technological platform Previously we had limited the use of our patented transmissive reel technologies to only participation products

Now we’re beginning to plan transition of this technology into a broader product offering that includes for sale games This provides another clearly differentiated product line for operators today Demand for this unique product is meeting our expectations even with its premium price Longer term this is but one more step in utilizing our proprietary technology which offers an innovative solution to bring the benefits of network gaming to the mechanical reel portion of the slot floor.

Our third priority is to continue to grow our global market presence In the September quarter our international new unit shipments rose 17% This growth was driven by continued broad-based demand across a wide range of markets from Latin America to Asia to Eastern Europe Shipments to international markets represent 38% of our total new unit shipments in the September 2008 quarter.

An important element in the future success of our international growth is customer acceptance and demand for our new Orion operating platform in games. These products created specifically for international customers and markets are differentiated from our standard WMS games by their incorporation of new bonusing and progressive jackpots enabled by the successful integration of [SiPs] multilevel progressive systems technologies.

With the success of our efforts to expand our network of local sales and service offices, we’re seeing the direct benefit from a greater number of customer touch points Couple this with our ability to simultaneously launch new products on a global basis and we are now approaching international customers with a broad range of solutions.

Our fourth priority is to enhance our operating margins In the September quarter, which historically represents our seasonally low product sales revenue base, we were able to improve our operating margin to 16.1%, an increase of 340 basis points This enhancement was achieved through a combination of improved total gross profit margins of 63.1% and increased operating leverage on higher revenues even after a significant increase in our R&D spending.

With the increased capabilities and opportunities from our continuous improvement initiatives, we have substantially advanced our ability to monitor and thereby proactively manage our operating margin We believe significant opportunities still lie ahead to continue our lean [sigma] and strategic sourcing initiatives that will further improve our gross profit margin Couple this with enhanced leverage on our depreciation expense and we expect to further improve our operating margin even in this more difficult operating environment.

Our fifth priority is to drive higher cash flow and in the September quarter our cash flow from operations reached a first quarter record of $48 million, a 24% increase from the previous record first quarter operating cash flow achieved last year This is particularly impressive given the preparations for and soft launch of our new Bluebird2 gaming platform New product launches are typically coupled with increases in inventory The slight increase in our inventory at September 30, 2008 compared to June 30, 2008 and the rather substantial decrease compared to September 30, 2007 highlights the benefits from our use of lean [sigma] tools and our cross functional collaborative teamwork efforts.

Now before turning the discussion over to Scott, I’d like to update you on our network server supported gaming initiatives To reiterate our overall strategy, WMS has been pursuing a unique path for the server enabled market place a strategy founded on a bank-by-bank rollout of technologies for the server ready environment This strategic path has been and remains focused on utilizing discreet technology advancements that create unique differentiated revenue producing products in advance of the launch of the full functionality of server-based gaming networks.

Regardless of when our customers adopt fully network gaming floors, we are presenting them quarter-by-quarter product-by-product with high earning products that have been enabled by the evolution of this technology.

Unlike our major competitors our approach to network gaming started with a clean slate as we’re not hampered by old legacy system platforms that need ongoing maintenance, updating and development support Through the use of industry standard communication protocols and a truly open architecture, our approach is aimed to creating and delivering high return benefits that our customers desire while utilizing increased power and capabilities of a server supported high speed network to create exciting new gaming experiences for players.

Our network gaming R&D efforts over past years have been fully dedicated to our WAGE-NET system and the new applications that it enables in an open architecture gaming environment The first GSA compliant network system, our first system of WAGE-NET, is performing well on busy floors at both a popular Native American casino in California and a high profile Las Vegas strip casino.

We continue to align ourselves with our customers in the drive to reach a networked environment where all games, networks, servers and software can easily communicate and interoperate in real time on a fully GSA open standards compliance basis In fact, we believe that open standards in a truly interoperable environment are one of the most important issues facing the casino gaming industry today.

To achieve the full benefits from network gaming the industry needs a future where hardware, software and applications can work together seamlessly with full transparency. We’ve taken a leadership role in advocating the benefits to our customers of a truly interoperable environment.

At G2E this November we are poised to once again lead the industry in product innovation That’s a bold statement but we’ll showcase a number of innovative new games, systems and applications including products based upon our fifth and sixth foundational technology platforms As in the past our products that will drive revenues and growth during the next 12 months will be demonstrated around the perimeter of our booth.

Additionally as in years past, a sampling of products in development that are focused on driving our growth strategy during the next 12 to 36 month timeframe, along with some concept products that present our long-range direction, will be showcased in the area of our booth known as the Vault And with the full commercial launch of our new Bluebird2 gaming machine in the current quarter, we will of course prominently feature the progression of how our development team will take advantage of the enhanced capabilities of this innovative platform to drive new exciting and entertaining gaming experiences for players.

Now let me turn the call over to Scott to review our financial performance and outlook for the second quarter.

Scott DSchweinfurth

Touching on some of the financial highlights of the September 2008 quarter, our net income increased 41% on a 14% increase in total revenues Total revenues exceeded the high end of our revenue guidance range largely due to higher than expected performance in our participation business and global market share gains.

New unit product shipments increased 12% in the September 2008 quarter to 5,492 gaming machines with just over 10% of the units shipped being Bluebird2 gaming machines reflecting stronger than anticipated demand for this new product Customer response to the Bluebird2 product and the initial performance of the early units sold are very favorable and we continue to expect that these units will account for 15% to 20% of new unit shipments in fiscal 2009.

The average selling price in the quarter increased to a record $13,331 We expect to achieve continued year-over-year increases in new unit sales in the second quarter especially with our open orders of 12,600 units and we expect to achieve a higher average selling price We anticipate that a higher mix of premium products including the new Bluebird2 platform and the new multigame transmissive reel product that Orrin mentioned will be an important element of the year-over-year increase.

Our participation installed base at September 30, 2008 increased 295 units or 3% to 9,616 gaming machines on a quarterly sequential basis and it was 922 units or 11% over the prior year quarter, a great start to our fiscal year.

In the fiscal second quarter we expect to achieve a more moderate increase in the installed base primarily from the ongoing rollout of the Star Trek series of games which are appearing on casino floors across the full spectrum of casino operators, the launch of an entirely new pair of games on our transmissive reel gaming platform, and a refresh for the Monopoly transmissive reel footprint along with the continued rollout of the Happy Days local area progressive game.

We expect the typical seasonal influence will likely cause a normal decline in the average daily revenue by 6% to 8% sequentially from the $68.75 achieved in the September quarter That will still represent a very healthy gain year-over-year compared to the $60.46 achieved in last year’s second quarter which benefited from the introduction of the Wizard of Oz and John Wayne games.

Clearly our portfolio of great games has thus far enabled us to overcome the impact of the slow economy The success of our unique new participation games and our strategy focused on the selective placement of these innovative gaming machines enables us to achieve strong play levels and improve the cash flow of our overall business With a strong start to fiscal 2009 we are confidence that our average installed base will increase to between 9,600 and 9,750 units for fiscal 2009 reflecting the continuous rollout of new and exciting participation games including many new participation games that will be demonstrated at G2E.

Our backlog of open orders for participation games and game conversions remains strong at 2,000 units We also remain steadfast in our belief that it is prudent to expect that the average daily revenue will be constrained by the economy in the near term However with opportunities to further improve upon the efficiency of capital deployed in this business we expect that the participation business will continue to provide a strong component of our profitable growth and increase our cash flow from operations.

Turning to margin improvement, gross profit increased 20% year-over-year to $96 million or 300 basis points to 63.1% of revenues The gross margin on product sales increased to 50.1% This is especially significant as we achieved this record margin in our seasonally lowest product sales quarter.

Importantly, with the launch of the Bluebird2 platform and further opportunities to benefit from increased volume, lean [sigma] and strategic sourcing initiatives we believe that we will continue to achieve operating improvements that will enhance the gross margin leading to our reaching the high end of our guidance of 50% to 51% gross margin on product sales for fiscal 2009 The improvement in gross profit was a significant contributor to our 16.1% operating margin which was a healthy 340 basis points higher than the prior year This improvement was accomplished despite the planned acceleration of R&D expenses.

Our R&D expenses rose to $22 million in the September quarter As Orrin indicated, we’re continuing to aggressively pursue further innovation, technological advancements and unique gaming experiences, those basic elements that enable unique new gaming products with high appeal to casino patrons and thus enable market share gains and revenue increases We continue to expect R&D expenses will be in the range of 13% to 14% of total revenues in fiscal 2009.

Selling and administrative expenses increased to $32 million again due to the seasonal impact of revenues as a percentage of total revenues these expenses were higher than our expected annual range. We continue to expect that for the full fiscal year, selling and administrative expenses will be in a range of 18% to 19% of total revenues.

As expected due to the improvements we have made in the use of capital in our gaming operations business, we are realizing greater leverage on depreciation expense For the September 2008 quarter total depreciation expense declined to $17 million from $18 million in the June 2008 quarter despite the impact of 320 additional units in the average installed participation base for the quarter As previously noted, a greater number of gaming machine units are remaining in the field longer and have been depreciated to their residual value.

As expected the effective tax rate increased in the September quarter to approximately 36% from 34% a year ago As you may be aware, in the $700 billion relief legislation signed in early October the Federal R&D tax credit was reinstated retroactive to the beginning of calendar 2008 and will continue through calendar 2009.

Due to the accounting rules we could not record any of this benefit in the September 2008 quarter In the December 2008 quarter we expect to record an approximate benefit of $0.03 per diluted share of which approximately $0.02 will be attributable to the nine months ended September 30, 2008 That will cause the December tax rate to be approximately 30% and to be lower than the anticipated quarterly rate for the March and June 2009 quarters which we expect will approximate 35%.

We continue to make great progress in generating higher cash flow from operations In the September quarter our net cash provided by operating activities increased to a first quarter record $48 million contributing to the increase in cash balances to $128 million despite the opportunistic repurchase of approximately $10 million of common stock during the quarter and $26 million spent in investing activities.

While higher margins and increased net income play a significant role in this improvement, we also realized the benefit from lean [sigma] initiatives in the reduction of inventory and accounts receivable Despite the 14% revenue increase and the launch of our Bluebird2 gaming platform, we held the line on inventory Additionally, in the September period we were able to reduce our day sales outstanding from June 30, 2008 by 18 days to 87 days.

We recognize investors concerns regarding the credit worthiness of some customers In addition to closely monitoring credit terms and receivable balances, I would also note the following data points.

First At September 30, 2008 each of our domestic customer account balances whether from an individual casino or aggregated for all properties owned by a multisite casino operator were under $5 million with the exception of one multisite casino operator customer who owes us $5 million.

Second As a result of our conservative credit philosophy, during the last eight years including the economic slowdown that occurred in 2001 and 2002 our annual bad debt experience in aggregate has not exceed 0.5% of total revenues.

Our already strong balance sheet which continues to strengthen remains well positioned to support our growth efforts. With the challenging capital markets and uncertain economic environment, having a rock solid balance sheet and strong cash flow provides significant comfort even as we continue to build our competitive advantage in innovation, intellectual properties and technology through accelerated R&D funding.

In the September quarter we repurchased 322,645 shares of our common stock at an average price of $29.80 for aggregate consideration of just under $10 million We believe this level of activity represents a prudent allocation of capital and we still continue to invest in innovation to drive further growth We continue to have approximately $100 million available under our authorization for additional repurchases over the next two years.

Since the inception of the company’s common stock repurchase program in January 2002, we have repurchased nearly 7 million shares or 12% of shares outstanding at an average price of $14.75 for a total expenditure of approximately $102 million.

Today we reiterated our fiscal 2009 revenue guidance of $712 million to $728 million based on the visibility and factors that Brian mentioned.

For the December 2008 quarter we expect to achieve total revenues of $172 million to $178 million representing 24% to 25% of our annual guidance which is consistent with the range of revenue achieved in our second quarter over the past two fiscal years This range reflects what we realistically expect to achieve with the visibility we have with existing organic growth trends and also reflects our sensitivity to typical seasonal influences on average daily revenue in our gaming operations business and the anticipated impact on consumer spending related to the economic environment.

As we previously noted, we expect that the September quarter revenues will be the lowest of the fiscal year and we expect to achieve sequential growth in each subsequent quarter with our June quarterly revenues being the highest Consistent with the past two fiscal years our third quarter is anticipated to account for between 25% and 27% of annual revenues and our fourth quarter is expected to represent 28% to 30% of annual revenues.

With that, let me turn the call back to Brian for final comments.

Brian RGamache

Our first quarter results once again demonstrate that WMS is well positioned for both the present market place and fort the future Our high earning products are providing solid revenue growth through both product sales and the recurring revenue stream of our gaming operations business We continue to make significant strides forward in improving our operating execution which is manifesting itself in both higher margins and stronger cash flow.

In this challenging environment we’re being careful not to overextend ourselves or overreach to maintain our focus on operating execution and achieving our targets. We are also able to continue to self-fund investments that will generate further growth.

Before opening the call up to your questions, let me summarize our competitive strengths First and foremost, we have the products that players and customers want A culture of innovation is the marriage of developing differentiated gaming experiences and the creation of intellectual property and technology advancements Our fanatical emphasis on understanding the expectations of casino patrons allows us to define the entertainment value our players want and armed with these insights our game developers are the best in the industry at creating popular products that generate high earnings for the casino operators.

In the meetings we’ve had prior to leading up to G2E our customers have been extremely positive and most importantly nearly everyone is discussing committing future capital As I have often said, when presented with a competitive environment and great content, customers will always find a way to place must-have products on the casino floors.

Second we will demonstrate at G2E that we have developed new products and category-creating platforms utilizing the most advanced technologies for the server-based environment of network gaming Our strategy built on a clear vision of high value-added products and systems applications is allowing us to grow quarter-by-quarter even before widespread adoption of interoperable server networks.

If network gaming were to arrive tomorrow, we have the products and applications that will provide value-added returns for the customers But if it takes longer, that too is fine Unlike some, WMS has situated itself to commercialize unique server enabled products that benefit from the opportunities they had of full adoption of floor wide network gaming Thus we are well positioned to further grow our market share across the casino floor and continue to differentiate ourselves from our competitors.

Third Our revenue guidance is solidly grounded Couple the exciting new product pipeline with the visibility form our open orders of 12,600 for sale units and the positive response from our Bluebird II gaming machine, we are comfortable with the unit shipments and average selling price guidance Our growth in the installed participation base in the fiscal quarter coupled with the exciting new products scheduled for introduction throughout the year makes us confident in achieving continued solid double-digit revenue gains in our gaming operations business.

Fourth As we’ve demonstrated consistently over the past few years, we have significant opportunities to continue to improve our margins and deliver greater free cash flow We monitor our progress daily throughout the quarter and remain disciplined in our management of expenses Importantly, we are still in the early stages of implementing our lean [sigma] and strategic sourcing initiatives even as we adopt new continuous improvement tools By cultivating our innovative mindset and focusing on process improvements we expect to continue improving our margins and cash flow in both the near term and in the longer term.

Today we have a much deeper and broader workforce with the skills and experience to achieve greatness by remaining focused on our well-defined strategic priorities, we are confident that our success will build long-term value and yield rewarding results for our stockholders.

Now we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Joseph Greff - J.PMorgan.

Joseph Greff - J.PMorgan

My first question centers on the backlog, the current open orders for more than 12,600 gaming machines and conversion kits Can you break that out a little bit on how much of that is the Bluebird II cabinet and how much of that is this multigame transmissive reel for sale product?

Brian RGamache

We don’t break out each segment but I would tell you that 20% of the backlog is Bluebird II and again incumbent in that is the transmissive products.

Joseph Greff - J.PMorgan

I think Brian you just said in your closing comments that for fiscal ’09 the new unit shipments are still in that range of 29,200 to 30,000 is that correct.

Brian RGamache

That’s the guidance that we gave, and we’re sticking with it Correct Just to make sure you heard the earlier comments, 60% of our games are either in backlog or have been delivered in Q1 So this is the best visibility we’ve had in my 8.5 years with the company.

Joseph Greff - J.PMorgan

If you were to look at the North America number of new units related to replacement and then expanded or new casinos, how much has that gone down and how much would you say your market share; I’m assuming that’s gone down just given the macro How much have you assumed in terms of market share increases based on the great visibility within your backlog?

Brian RGamache

We believe that our market share currently; we’re the first ones to report so we really can’t validate that till our competitors report But we think our shipped share currently is in the 22% to 24% range and again we’ll validate that in a few weeks after our competitors have reported Again I think it’s probably split evenly between our new unit shipments and our replacement teams It’s pretty consistent throughout.

Operator

Our next question comes from Celeste Brown - Morgan Stanley.

Celeste Brown - Morgan Stanley

Can you walk us through what has gotten better and what has gotten worse since your last outlook or your last guidance? You expressed in your last call rather vehemently that you had built in quite a large cushion into your guidance Do we still have a sizable cushion or are we closing in on that.

Brian RGamache

Let me answer the first question I think that our guidance really that we gave on August 5 said that we had factored into our guidance what was the 10% to 12% revenue growth, and the economy was stagnant and it was certainly not going to be any upticks in the economy.

I think when you look at the month of September as one of the operators reported this morning, September probably wasn’t a great month operationally but when you look at our win per day in our participation business, the fact that we’re able in the most difficult times to increase our win per day by 14% and our revenues 24% year-over-year in the participation business, that’s probably some upside that we weren’t expecting.

Our games are holding up; they’re performing at a very high level; and I think when you see the fact that September is our seasonally second slowest quarter of the year as Scott indicated, and the December quarter is our slowest quarter of the year, the fact that we did so well in the gaming operations business was a terrific surprise to us.

There are not a whole lot of surprises that we’ve seen throughout the remainder of the year It’s been a tough year It’s a grinding year But it’s been that way for the past call it two to three years So there are really no new surprises there and the budget that we built back and delivered to you on August 5 is consistent with how we feel the year is going to end as well.

Celeste Brown - Morgan Stanley

Are you seeing things a little bit tighter on the new unit purchases or are things holding in as you would have expected?

Brian RGamache

We were quite surprised pleasantly that customers that have been through here on the G2E previews have been very optimistic about spending capital with us so I don’t think we’ve talked to one customer yet that’s been through here, and we’ve had a bunch of them, that hasn’t talked about spending money with us in calendar ’09.

It’s just about where we thought it would be It’s not going to be a whole lot different in calendar ’09 than it was in calendar ’08 The customers will always find room to put high performing games on their floor There are capital issues out there but they will find ways to put games that are earning on their floors no matter what.

Operator

Our next question comes from Ralph Schackart - William Blair & Company, LLC.

Ralph Schackart - William Blair & Company, LLC

I had a question for you on the win per day linearity significantly higher on an absolute level than we were forecasting and higher than your $63 to $64 estimate I’m just curious, were there any big changes throughout the quarter in any given month in that roughly $69 number you reported today.

Brian RGamache

I think our WAP performance is probably outperforming the rest of our participation business When you look at the success we’re having with Wizard of Oz and some of the early placements now with Star Trek, we’re seeing some real traction in that business and we’ve seen it through October as well Again October, November and December from a participation standpoint is not a great quarter for us because of the holidays and all the distractions and so forth But we think that based on what we’ve seen in October, it’s very encouraging for the December quarter.

Ralph Schackart - William Blair & Company, LLC

It appears to be coming through the numbers but on the price increase for the Bluebird II can you give us some granularity on the response from the customers based upon that price increase?

Brian RGamache

There’s quite an uptick in the price on our Bluebird II but I think customers see value in it I think they see that it’s server enabled and it’s got an incredible graphics package and dual screen, so people see a value in it I think that’s one of the few issues that really isn’t a problem in regards to buying our products People see value in our games today.

Ralph Schackart - William Blair & Company, LLC

Did you buy back any stock since the end of the quarter, since it closed out?

Scott DSchweinfurth

No, we haven’t.

Brian RGamache

We’re in a quiet period by the way too we’re not allowed to buy stock until the quarter opens back up the window will open back up tomorrow.

Operator

Our next question comes from William Lerner - Deutsche Bank Securities.

William Lerner - Deutsche Bank Securities

When you take a look at your free cash flow, you guys as I calculated are generated peak free cash flow in basically the Great Depression it seems With that in mind, what do you do with it Brian? I know obviously there’s opportunity to buy back some stock and reinvest organically in IP and so forth but do you think you need to do anything transformational or how are you thinking as some of your competitors have different dynamics that they’re dealing with you may have an opportunity to go after some technology they haven’t focused on that may be important?

Brian RGamache

We’re actively growing our business We’re hell bent on that When you look at our balance sheet today, the nice thing is we’ve got plenty of alternatives in which to deploy that capital to build shareholder value We’ve said in the past that R&D was very important to our culture; licensing is critical; IP and technology; small tuck-in acquisitions; and also we’re not afraid to buy the stock back as we’ve shown over the recent years We’re not opposed to any of those things.

I do believe that in this current market that we’re in we want to use our balance sheet to strengthen our position going forward We think that the current situation affords us some very unique opportunities to build shareholder value and we’ll be reporting back to that as time goes on We’re looking to make the most for this time We’re keeping our heads down There’s nothing different that we’re going to do We’re going to keep executing We’re going to continue to grow our business We’re going to continue to hire the best people we can From our perspective we’re just all systems go forward.

William Lerner - Deutsche Bank Securities

Obviously investors are concerned about casino cap ex going forward and people will if there’s anything to question when you look at a quarter as good as this it’s, “Yes open orders are notable but every casino in the US will close down and cap ex budgets will go to zero.” Of course you guys have had this sort of dynamic around your stock over the last several quarters at the very least even with open orders and you’ve been executing What has been the conversion, I guess for Scott, of open orders to actual sales and how do you think about that going forward? I’m sure it’s a relatively high number.

Scott DSchweinfurth

Yes, it is It’s clearly greater than 90% Generally if a customer doesn’t want something, they aren’t going to go through the rigors of ordering it only to cancel it More likely they just wouldn’t order it So we’ve seen a very high conversion of our open orders into actual shipments.

Brian RGamache

To further that point we’ve recently entered into negotiations on two significant orders internationally International doesn’t seem to be as big a problem as it is here in the domestic market place so we’re seeing different kinds of levers than we’ve ever had the luxury of having before to provide that risk mitigation.

William Lerner - Deutsche Bank Securities

On the participation side, there’s a lot of talk and we’re seeing some evidence of participation games being removed I don’t know whether this was just a Harrah’s experiment or if it’s wider in nature but you guys have seen your footprint grow there What is it that folks are missing? What’s the experience on the participation side? Obviously some casinos if they’re moving games out despite not having to spend any capital for game ops units or mitigating expenses, so it’s just a weird sort of dynamic and it’s interesting to see your growth I’d love to get some color there.

Orrin JEdidin

Obviously when you look at the installed base increasing by 12% and the win per day going up as well, it will always come down to the strength of the games The games are performing consistently; we’ve got some real longevity on them; we’re not seeing them come off the floor; and we continue to grow that installed base of participation.

We’re also starting to see a little bit of participation coming in from the international market which is a new market for us In the past that had typically been a North American pricing model We’re beginning to see a meaningful percentage of our total base coming from international So we’re looking at the product plan going forward We would expect to see continued growth using that same strategy.

Operator

Our next question comes from David Katz - Oppenheimer & Co.

David Katz - Oppenheimer & Co.

I know we’ve addressed this probably five or six different ways already but I wanted to register my surprise on the win per day of your participation games and see if we couldn’t get just a little more detail on what your strategy is and frankly how that’s possible at this point? Carrying that forward, how your confidence is possible for the rest of the year, and how you see that win per day ramping one way or the other? I guess I’m still a little bit surprised by it as you are.

Brian RGamache

It’s a pleasant surprise but it really has to do with our WAP component being a bigger part of the mix of the business As you know the WAP is about 40% more profitable than the stand-alone placements for our company and that yield is significantly higher as a percentage of the coins in That’s number one Number two, Larry Pacey and [Phil Gelabert] and their teams have done an incredible job of making must-have products out there.

We’re not playing the games because people like us or we’re being nice to them These games are performing and we’ve taken the strategy of limited placements We’ve kind of looked at this as a return on capital and I think by doing that it’s really allowed our demand to stay high and the yield stays high and the products stay fresher longer, and it’s been a great recipe for us All the way around we’re executing and I think the WAP component and its growth has really come a long way to help us drive that yield.

Orrin JEdidin

I think another secret to our success is we’ve evolved from relying on theme being theme reliant or theme dependent to dependence on entire game platforms, whether it’s adaptive gaming, sensory immersive, transmissive reels; these are entire product categories with real staying power and earning power on the floor and we know we’ll put great themes behind it So once that category has proven to be a successful product category, we’ll provide the theme support that keeps that product category on the floor earnings month after month after month.

Scott DSchweinfurth

From the CFO’s perspective, the other thing that we’ve done is we’ve looked at the placements that are at the bottom end of the range of revenue per day and we’ve selectively removed them from locations that weren’t going to be able to generate a higher return We’ve done what we normally do We renovate the games and put them out in casinos where we do get a better return on our investment there.

David Katz - Oppenheimer & Co.

So in other words, you’re suggesting the win per day can continue to climb throughout the rest of the fiscal year despite weakening volume trends in aggregate.

Brian RGamache

Scott said something very important Our Q2 win per day is always our lowest water mark of the year But that’s not to say that in Q3 and Q4 which are seasonally our biggest, strongest quarters that we couldn’t pick back up and resume some acceleration because we have some spectacular products coming out in Q3 and Q4 that will I think be on the PAR of the Wizard of Oz So we have some very exciting products we’re going to be showing at G2E this year that will get you as equally excited as we are.

David Katz - Oppenheimer & Co.

If we were to pick a hypothetical casino operator that is under the most extreme financial duress that any of us have seen in quite some time and you walk in to sit down and meet with them and I think what you’re trying to express to us is that they’re still sitting down and finding a way to allocate some capital to you even under the most dire circumstances.

Orrin JEdidin

That would be correct.

Brian RGamache

That’s always been the case in our industry That’s always going to be the case People will figure out a way to get it done Again we have to be creative during these times We have to be more aggressive We have to have our thinking caps on as well and we’ve proven that we can use our balance sheet to work with people to secure these orders.

Operator

Our next question comes from Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Brian, you already touched on this a little bit but when you look at your international business, it continues to grow here I think it’s now 38% of revenues.

Brian RGamache

Of unit shipments.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Of unit shipments as the domestic economy here is already starting to soften, the international markets will probably see that coming down the path six months from now I just want to get a little feedback from what you’re hearing from your customers there.

Brian RGamache

First of all, we don’t have an enormous amount of participation games internationally We might have a couple hundred here or there if that many So most of our sales internationally are unit shipments The casinos aren’t levered over there The casinos are much smaller in scale They’re probably the average 30 to 50 unit casinos for the most part, and we’re not seeing the kind of economic issues over there with those customers currently.

Now that may change over time but again we’ll know more on that at G2E and the [Ice Show] in January But we just had a very successful trade show at the [Saxy Show] in Argentina and we sold a record amount of games down there So there is great demand for our product internationally and as Orrin said in the previous call, we’d love one day for our box sales to come 50% from the international market We used to aspire to be 1/3 but now with [Orion] and some of the other things that we’re doing internationally, we’d like that number to get to 50% over time.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

I don’t know if you can break this out, but how much of your backlog is for international markets.

Brian RGamache

I don’t know if we break that out to be honest with you Scott can follow up with that.

Operator

Our next question comes from Todd Eilers - Roth Capital Partners LLC.

Todd Eilers - Roth Capital Partners LLC

I don’t know if you gave this or not, but if not could you give the mix between mechanical reel and video product placements in the quarter or sales? Also what your expectations are for the end of the year? What you think that mix can get to on an annual basis?

Brian RGamache

I think we were close to 26% for the quarter I think somewhere in that 26% to 30% is where we’re looking that’s probably a good barometer.

Todd Eilers - Roth Capital Partners LLC

That includes the latest transmissive product launch as well.

Brian RGamache

Right that would fall in that category.

Todd Eilers - Roth Capital Partners LLC

On D&A trends, you guys are benefiting from some of your older gaming ops or participation units coming off schedule Scott, can you talk to trends going forward there? At what point would you expect that to normalize and how should we look at that going forward?

Scott DSchweinfurth

As we eventually get to using the Bluebird II platform in our participation business, there will be some capital spent there and that may be a little bit higher because it obviously has a higher cost list But the guidance that we provided at the beginning of the year was for gaming ops capital to be somewhere in the $50 million to $60 million range and I believe that we haven’t changed from that.

Todd Eilers - Roth Capital Partners LLC

Can you talk a little bit on the gaming op side on the other revenue line which I think is kind of royalties, VLT revenue, that dipped a little bit? Was that the elimination of the [Star] games agreement and is that a good run rate going forward or how should we look at that as well?

Scott DSchweinfurth

That is mostly dependent upon our licensees’ demand for content It can fluctuate between quarters but probably the single biggest change quarter-over-quarter was indeed the fact that the [Star] games agreement is sort of in a runoff position at this point as that contract expired at the end of January 2008.

Operator

Our next question comes from Marla Backer - Soleil - Research Associates.

Marla Backer - Soleil - Research Associates

Obviously with your doing as well as you are in this difficult environment, have any of your competitors approached you to potentially license some of your technology? And if you could control it in order to maintain the competitive edge that you obviously have right now, would that be something that you’d consider doing?

Brian RGamache

Although it would be very flattering, the answer is they haven’t approached us as I think they’ve probably got their own development paths that they’re pursuing We believe that our secret sauce here is really the culture of our company and innovation is embedded in our DNA I think what we have here is very special and it’s very difficult to duplicate So thank you for the compliment but I think that we would keep it to ourselves.

Marla Backer - Soleil - Research Associates

On the Bluebird II cabinet, the floor space that it takes up is less than the older cabinet is that correct.

Brian RGamache

That would be correct.

Marla Backer - Soleil - Research Associates

So how does that compare with other next gen cabinets that competitors are offering?

Brian RGamache

I think it’s very similar to our competitors from a size standpoint I think I’ve heard our guys describe it as 30% less space.

Orrin JEdidin

It has a slimmer profile it does take up significantly less space than the Bluebird I and it is comparable to what you’re seeing out there in terms of next gen cabinets.

Operator

Our next question comes from Steven Kent - Goldman Sachs.

Steven Kent - Goldman Sachs

On gross margins, could you just talk about them? They were very, very strong and I just wanted to see sort of how that lays out over the year I’m sorry if I forgot that there’s some seasonality here or if there’s something else going on.

Brian RGamache

When you look at our operating margin improving 340 basis points, it really was driven by our product sales margin that increased 240 basis points to 50.1 and our gross profit was up 300 basis points to 63.1 I really think it’s a mix of business, it’s better costing on our raw materials, and it’s better processes internally to allow us less waste and more productivity So it’s really been a terrific effort Ken Lochiatto and the whole supply chain team have really been focused on this and I think there’s more room to come here This is our margin improvement that we had really achieved in the fourth quarter This is our 50% margin in the smallest quarter of the year and I would think there’s going to be terrific progress throughout this year

Scott DSchweinfurth

The guidance that we gave for the year was the product sales margins would be from 50% to 51% and I said on the call that we’re now anticipating with the quick start that we got in the first quarter that we’ll be sort of at the higher end of that range for the year as a whole Our operating margin we provided a target there of 18% to 18.5% and we obviously haven’t changed that at this point.

Orrin JEdidin

The interesting thing Steve is that was all done while rolling out two new platforms which is never easy to do.

Steven Kent - Goldman Sachs

So to, I think it was the Celeste’s question, it feels like this is the area where maybe there is the great upside potential because I mean some of the things you’re talking about won’t disappear really in any environment, these are permanent reductions in expense structure.

Orrin JEdidin

I think that’s accurate Steve I think when you look at our demand for our Bluebird2 if we see that demand pick up and we have some great response to G2E to some of the innovation that we’re bringing out, that mix of business could shift the operating margin dramatically But, there is some upside here, I think we’re starting to see the fruits of the labors that we’ve put forth the last several years now in getting our business processes and our supply chain really in synch with the cadence that we hoped toward.

Operator

Our next question comes from Steve Altebrando – Sidoti & Company.

Steve Altebrando – Sidoti & Company

Do you have a rough breakdown of the gains on participation by platform?

Scott DSchweinfurth

I can tell you that at the end of September, just over 50% of the units were on the four newer platforms and the balance was on sort of the pre community gaming platform.

Steve Altebrando – Sidoti & Company

In terms of releasing the transmissive for sale, I know you had previously announced that but any concerns about that cannibalizing the participation segment.

Orrin JEdidin

None at all We had originally planned Steve to take the transmissive real out in participation business to see the market and get them comfortable with the product We’ve been successful and now we want to try to monetize that intellectual property through – and obviously we will take our titles that mean the most to the players and put them on the participation games and we’re still going to continue to treat that participation business with the respect that it deserves But, we will continue to roll these products out over time and we believe that it’s going to be a very effective tool heading in to the server based world as well.

Steve Altebrando – Sidoti & Company

Then my last question, in terms of international participation business, that seems like that’d be a pretty significant opportunity, are we talking mostly about one country in particular or several countries that are now going towards this?

Brian RGamache

Many of the countries don’t allow it fortunately.

Orrin JEdidin

[Inaudible] to entertain like a daily fee basis Steven and that’s been a good business for us and it’s really just starting out Like Brian said, it’s traditionally been a North America pricing model that we’re just starting to see some placements international and we think it could eventually be meaningful.

Steve Altebrando – Sidoti & Company

Are you seeing it just from one country in particular?

Brian RGamache

Actually, we’ve had some success in selling games and having a hybrid model throughout the international arena and we actually have a few hundred games I believe on participation in the pure sense throughout the rest of the world.

Operator

Our next question comes from the line of Edward Williams – BMO Capital Markets.

Edward Williams – BMO Capital Markets

A couple of quick questions for you, what is you share base at the end of the quarter? And, what should we be using at this point for a diluted basis going forward?

Scott DSchweinfurth

The diluted amount at the end of the quarter was –

Brian RGamache

You’re talking about September 30th, Ed?

Edward Williams – BMO Capital Markets

Yes or today, if you have it.

Scott DSchweinfurth

It’s $60 million.

Edward Williams – BMO Capital Markets

Then what is your expectation for gross margins if we look at the gaming operations component and how that should trend over the course of the balance or the year?

Scott DSchweinfurth

That has been sort of in a range of 78% to 81% over the last six to eight quarters and I think it will continue to trend in that range there is many different elements that have an impact on that but we’ve been in a relatively narrow range and we would expect that to continue going forward.

Edward Williams – BMO Capital Markets

Then if we look at international sales for the year, what’s your expectation for what the international contribution will be for product sales or looking at the equipment that is getting sold, and or if we were to look at the revenue guidance that you provided?

Brian RGamache

I think we should probably for modeling purposes look at 35% of our unit shipments.

Orrin JEdidin

And the margin is similar to the North American market as well.

Operator

Our next question comes from the line of Kent Green – Boston American Asset Management

Kent Green – Boston American Asset Management

Just a little more elaboration on those two orders that you were negotiating internationally Are these large orders relative to the international or relative to the total corporation.

Brian RGamache

They would be large orders relative to the total corporation.

Kent Green – Boston American Asset Management

Are these larger casino companies? Are you starting to see companies that are ordering for multiple casinos now?

Brian RGamache

You know Kent for competitive reasons we’d really rather not going further in that discussion since we are still in the delicate negotiations But, we are pursuing two large orders that could have meaningful impact on the year.

Kent Green – Boston American Asset Management

Could you give us a little bit of a feel for the hottest areas and maybe the weakest areas both domestically and international?

Orrin JEdidin

The hottest areas for our new product categories, particularly the [Wide A] progressive as I mentioned are performing at the top of many of our games, specifically the Wizard of Oz games It may be one of the best performing games we’ve ever put on a casino floor It looks going forward is we’re going to showcase at G2E in just a few weeks to see the fifth and sixth new product categories that we’re going to be introducing at that time which will also be a participation caliber product we anticipate to be equally as strong.

Regarding some of the more challenges we have, we’re so selective and our tolerance for risk is so tight that we do so much research that our batting average is pretty high in terms of product success We haven’t had any duds to speak of in [inaudible] all of our products have been very, very well represented across our product spectrum during the quarter.

Kent Green – Boston American Asset Management

The international market, what parts of the world – I know a lot of people keep citing South America as the big surprise, is that true for you?

Brian RGamache

It still remains Kent, South America, Asia and both eastern and western Europe continue to be very good fertile markets for us.

Orrin JEdidin

Also obviously Macau tends to be used as sort of the barometer but Asia is a very, very large territory so when we do refer to Asia it’s not just Macau it’s all the other parts of the country.

Brian RGamache

There are certain parts of the country that are performing very well.

Kent Green – Boston American Asset Management

I suspect that you will not see as much of a slowdown there because gaming is still in the infancy stage in a lot of these areas even if we have a economic slowdown domestically and internationally.

Brian RGamache

We think the regions got great potential In light of what they’re going through right now, I think the region still has enormous potential for the gaming manufacturers in general.

Operator

Our next question comes from Rachel Rothman – Merrill Lynch.

Rachel Rothman – Merrill Lynch

Just a quick follow up on the buyback if I could, can you guys give us a little bit of color or context around what sort of cash balance you feel would be necessary for working capital purposes just to maintain the organization?

Scott DSchweinfurth

Well we has $128 million of cash at the end of September I can’t imagine that we would want to draw that down let’s say below a $50 million number although at some point a couple of years ago we were below that But, I think at this stage we wouldn’t go below that I would also point out that we are continuing to generate positive free cash flow on a quarterly basis and we have access to our $100 million credit line So, we’re in a really strong position with the liquidity that we do have on our balance sheet.

Rachel Rothman – Merrill Lynch

I guess given where the share price is today, are you free to do open market repurchases or is the buyback under a 10B51 or maybe you could talk about why you weren’t more aggressive during the quarter?

Scott DSchweinfurth

We haven’t entered in to any program trading, we are doing open market purchases the blackout period began at the beginning of October and it will continue through tomorrow, close of business and we’ll be able to be in the market if we wish to be on Wednesday.

Orrin JEdidin

The great thing Rachel is we have great flexibility on our balance sheet We can really return shareholder value in a variety of different streams and we’re studying all those streams As I mentioned earlier, we are very focused on making the best we can out of this current situation.

Rachel Rothman – Merrill Lynch

Then from a geography perspective I think somebody asked earlier about areas of strength and weakness as it pertains to the actual games but can you talk about in terms of the geographies within the US where you’re seeing pockets of strength and weakness and maybe what we could interpret from them? Are there certain regions doing better in terms of shipments or participation games or certain types of games?

Orrin JEdidin

I would say that primarily the destination markets are probably the most impacted by the macroeconomic challenges that we’re seeing The locals, particular Native America while they’re off some very tough comps they are off a bit but not dramatically as some of the destination markets But even there, we continue to ship a decent amount of product and our gaming operations continue to perform strong If I had to generalize it would probably be I’d say that those destination markets, i.e. the Las Vegas strip, Atlantic City, being a bit more impacted than the locals markets.

Operator

I am showing no further questions at this time.

Brian RGamache

Thank you very much for joining us this afternoon We look forward to reporting our additional progress on our next call and we’ll discuss our September 2008 quarterly results In the meantime I hope to see many of you in a few weeks in Las Vegas at G2E Have a great evening.

Operator

Ladies and gentlemen that does conclude the conference call for today We thank you for your participation and ask that you please disconnect your lines

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