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WMS Industries Inc. (NYSE:WMS-OLD)

F1Q2012 (Qtr End 09/30/2011) Earnings Call

November 07, 2011 04:30 pm ET

Executives

Bill Pfund - VP, IR

Brian Gamache - Chairman & CEO

Scott Schweinfurth - EVP, CFO & Treasurer

Orrin Edidin - President

Analysts

Steve Wieczynski - Stifel Nicolaus

Dennis Forst - KeyBanc

Carlo Santarelli - Deutsche Bank

Mark Strawn - Morgan Stanley

Joseph Greff - JPMorgan

Todd Eilers - Roth Capital Partners

David Katz - Jefferies & Co.

Joel Simkins - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the WMS Industries fiscal first quarter earning conference call. (Operator Instructions) As a reminder, this conference is being recorded Monday November 7, 2011. I would now like to turn the call over to Mr. Bill Pfund, Vice President of Investor Relations. Please go ahead.

Bill Pfund

Thank you, Jason. Welcome everyone to WMS Industries fiscal 2012 first quarter conference call. 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 and Item IA risk factors in the company's annual report on Form 10-K for the year ended June 30, 2011, 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 only made as of this date, November 7, 2011.

This afternoon, Brian Gamache, our Chairman and Chief Executive Officer, will provide an overview with the first quarter results and key milestones; followed by Scott Schweinfurth, our CFO, with further insight on our financial results; and Orrin Edidin, our President, will discuss our progress on product and operational initiatives. We’ll conclude with final comments from Brian.

Now, let me turn the call over to Brian.

Brian Gamache

Thanks, Bill and good afternoon, everyone. WMS today reported total revenues of $156 million and diluted earnings per share of $0.07 for the fiscal 2012 first quarter inclusive of charges of $0.17 per diluted share. Since our last call in August, we’ve made significant operational improvements, achieved cost savings as a result of our re-organization and realignment and begun to receive a greater number of new product approvals all of which are in line with our expectations.

This progress is an encouraging indicator that we’ve reached an inflexion point in our performance. With quarterly sequential improvement anticipated in the December 2011 quarter to be followed by what we expect to be return to growth over prior year periods beginning in the second half of fiscal 12.

We realized meaningful cost savings in the first quarter as a result of restructuring and realignment actions reviewed in August. These actions realigned our product management and product development structure in our supply chain functions while reducing the global headcount by approximately 10% across all departments. We also received initial regulatory approvals of several participation games and more than 30 new per sale products including products previously delayed as well as approvals for our second and third portal applications enabled by our WAGE-NET network gaming solution.

We expect to receive additional jurisdictional approvals for these products by the end of December quarter which we expect will put us on a path to resume a more normal flow of product approvals in calendar 12. We also noted in this afternoon’s press release several strategic deals that demonstrated a continuing demand for our innovative products.

One, WMS’s selection by the Alberta Gaming and Liquor Commission to participate in their VLT replacement initiative. Two, signing an agreement with Caesar's Entertainment to be our launch partner for our exciting new Clue participation game once it’s approved later this fiscal year. And three, the extension of our distribution arrangement with eBet in Australia on a new five-year rolling basis with a potential to expand into Victoria and Queensland pending appropriate regulatory approval.

Now let me turn the call over to Scott.

Scott Schweinfurth

Thanks Brian and good afternoon everyone. Based on the restructuring realignment actions we announced in August coupled with government enforcement actions in selected casinos in Mexico that began at the end of August, we recorded charges of $0.17 per fully diluted share in the September 2011 quarter.

Included in our press release is a supplemental schedule detailing the charges, but in summary we incurred pretax charges of $14 million as follows: $9.7 million or $0.12 per diluted share in line with the level we noted in our August call related to impairment and restructuring charges including $5.9 million of separation related expenses, as we reduced our work force by approximately 10% coupled with $3.8 million of costs related to our decision to close two locations and $4.3 million or $0.05 per diluted share associated with the write-down of receivables for a small number of customers in Mexico.

The situation in Mexico has been very dynamic with generally improving in recent weeks. However, we believe it prudent to establish appropriate reserves at September 30, 2011 for certain customers.

Now let’s review our financial performance and trends. For our first fiscal quarter total global shipments totaled 3,918 units compared to 5,338 units a year ago. Last year’s new unit shipments benefitted from strong launch demand for BB xD cabinet. This year we believe our lower demand resulted from customers postponing capital spending in Q1 until they got to the recent G2E Trade Show in early October to see the latest WMS products.

Gaming machine sales for new casino openings and expansions in the US and Canada increased by about 600 units on a year-over-year basis to approximately 900 units, but were more than offset by lower replacement demand.

Replacement new units totaled just over 1,600 units in the US and Canada versus 2,900 units a year ago. Internationally, we sold 1,388 new units or 35% of total global unit shipments compared with 40% of total units a year ago.

Our average selling price was essentially flat with the year ago. Other product sales revenues declined by $1 million year-over-year, with the decline primarily reflecting lower used gaming machine sales revenues due to lower prices compared with a year ago, mostly offset by higher revenue we recorded from approximately 5,500 conversion kits.

Revenue from gaming operations declined in the September 2011 quarter, principally reflecting the impact directly related to the lack of new participation products. Without new products to refresh our installed base, the average daily revenue declined approximately 6% to $71.70 and our installed footprint of 9,592 units at September 30, 2011 was 7% below the September 30, 2010 level and 3% below June 30, 2011. Other gaming operation’s revenues were up $1.8 million primarily due to new online and network gaming revenues.

Turning to margins. Our product sales, gross profit margin improved to 50.9% from 48.7% a year ago and also improved relative to the June 2011 quarter. We benefited from the increase in higher margin conversion kit revenues and cost reductions for our per sale products. Our focus continues to be on taking costs out of the Bluebird xD and Bluebird2 cabinets through continuous improvement initiatives and significant progress has been made over the last 12 months.

We increased the average unit gross margin of BB xD units by 27% year-over-year while also improving the average unit gross margin on our Bluebird2 units. As a result of realized cost savings to date and further expected savings throughout the remainder of fiscal 2012, we anticipate a stronger product sales margin in the second half of the fiscal year as in the first half.

Our gaming operations margin of 79.1% in the quarter compared with 81% a year ago with the difference primarily attributable to higher licensing costs and incremental start up costs related to new businesses we entered in fiscal 11. Operating margins for the September quarter was significantly impacted by the aggregate 900 basis points impact of impairment restructuring and other charges.

As you analyze the results you can see that the reported R&D and SG&A expenses which include the impact of the additional Mexican bad debt charge of 4.3 million that we are realizing the initial cost savings from our restructuring and realignment initiatives.

These savings are partially offset by the anticipated higher depreciation and amortization expense which principally results from the depreciation associated with the continued transition of our participation base to Bluebird2 and Bluebird xD units and amortization associated with the investment in developing our network gaming and online gaming initiatives following their commercialization during the past 12 months.

Through September 30, 2011 our capital investment in the transition of our participation footprint to Bluebird2 and Bluebird xD units is about 45% complete. Our cash flow in the September quarter reflects lower net income including the impact of the impairment and restructuring charges, the continued investment in our gaming operations business resulting from the transition of our installed participation base to new product lines and 27.5 million of stock repurchases leaving 171 million left on a repurchase program. Partially offset by 35 million in borrowings under our long-term revolving credit line and higher add backs for depreciation and amortization and other non-cash charges.

Total cash and cash equivalents were $82 million at quarter end, down from a $105 million at the end of the June quarter. Total receivables of $335 million at the end of September were down $32 million from June 3, 2011 primarily due to lower revenue from the period.

Total current liabilities at September 30 were down $50 million from June 30 primarily due to the timing of payments on accounts payable and payments for income taxes. As you can tell from the qualitative remarks in our press release and in our prepared remarks for this call, we still expect the revenues for fiscal 2012 will follow the pattern of most prior years where the September quarter is the lowest and revenues build in each subsequent quarter with the June quarter being the strongest of the year.

As previously noted, having recently received initial approvals on new participation and per sale products coupled with the favorable response by customers to the strength and diversity of products demonstrated at the recent G2E Q2 trade show, we expect to achieve a quarterly sequential improvement in total revenue in the December 2011 quarter.

With additional new product approvals expected during the remainder of the fiscal year and the cost savings achieved from an our restructuring and realignment actions, we expect to achieve further sequential improvement in both revenues and operating margin during the second half of our fiscal 2012 that will also lead to the anticipated resumption of year-over-year growth in the March 2012 and June 2012 quarters.

Given the results of our fiscal first quarter and our anticipation of second quarter growth, we now expect our annual revenue in fiscal 2012 to be modestly below the prior year with a higher year-over-year operating margin. We continue to expect that our growth in the second half of the fiscal year will be driven by WMS improvement initiatives, modest growth in our gaming operations business and the expected improvement in new unit demand related to new casino openings and expansions in calendar 2012.

Finally, given favorable market conditions for borrowers and the syndicated banking market, we recently renegotiated our bank credit facility which now provides a total credit line of $0.5 billion consisting of 400 million revolving credit line provided by eight banks plus an additional 100 million according feature.

And our current leverage ratio of less than one turn, the stress over LIBOR interest rates and unborrowed commitment fees declined by 44% and 20% respectively and we’re able to obtain greater flexibility in financial and non-financial covenants which should position us as well for future growth. And with that let me turn the call over to Orrin for his comments.

Orrin Edidin

Thanks, Scott. In the September quarter, we made significant progress in our development and product management reorganization efforts including focusing on creating great contents across an array of more diverse math models and prioritizing products in the customers’ near-term needs plus we achieved success in realigning our supply chain organization. We’ve more to do, but our path is clear and we have identified opportunities for further improvement.

By focusing on our strength for creating great games, in this fiscal year we expect to introduce a larger number of underlying new math models, more than we had in aggregate for the last three years supporting a greater number of new games themes and these products clearly respond to customer’s needs in today’s environment.

By developing and producing products that fit customer’s current needs, we’re more directly supporting opportunities to maintain and grow our ship share in coming quarters. This is true of both the US and international markets. We also attracted an organization realignment of our supply chain management. Today our entire supply chain sourcing, procurement, planning, production and distribution is all under the unified leadership of Mike Rutz who joined WMS in July. His fresh leadership approach and extensive best practices experience has already invigorated our organization and our focus on Lean Sigma continuous improvement.

We believe there remains meaningful potential for the further enhancement of our operational execution and margins. In our gaming operations business we pursued initial approvals and recent release for five innovative new participation games including the Wizard of OZ, Journey to Battleship based on the iconic board game of the same name.

In the December quarter, in those jurisdictions where these games are approved we are installing to refresh our installed base replacing those games as performances declined over time and are now nearing the end of performance life. With the focus on refreshing the installed base this quarter, we expect most of these replacements will be replacements and not incremental to our footprint in the December 2011 quarter, but they will be a key factor in stabilizing both our foot prints and average revenue per day by the end of the quarter.

As we continue to receive approvals and other jurisdiction and for additional new games scheduled for launch in the March 2012 and June 2012 quarters, we expect to resume growth in the installed base and average revenue per day in our second fiscal half. In addition to our renewed focus on our core participation per sale business, we are also fully nurturing our emerging growth opportunities in portal applications and in the online arena with Jackpotparty.com and players wide web services.

Our online UK gaming site Jackpotparty.com continues to add new players while growing its online presence. Based on panel discussions in G2 in various industry news announcements, it’s clear that most industry participants are focused on how to approach the online world. We believe we’re well positioned to supply our LAN-based gaming machine customers with proven online interactive gaming solutions and services.

Regarding players like web services, clearly one of the hits of G2E was our new poker product brand as My Poker that includes player like capabilities. We had enthusiastic interest in this platform from a variety of customers, local and strip casinos in Las Vegas, regional and tribal operators and international customers. In addition, during the fiscal 2012, we expect to launch additional participation products who will feature the benefits of players like web services such as the upcoming CLUE, and SUPER team games.

Regarding network gaming, while still very early in its rollout, we’ve increased our presence across the U.S. and Canada and we just recently had our first installations in international casinos.

From approximately 300 network gaming machines running at 14 locations, at the time of our August conference call, we now have our three portal applications and over 480 gaming machines and including our WAGE-NET system with remote configuration and download functionality, we’re now either at full commercialization or trial at a total of 29 casinos globally and over 700 gaming machines.

The enhanced performance that comes from adding portal applications measured against similar non-portal units with the same base game theme in these locations continues to be extremely encouraging.

With three application themes now approved in several jurisdictions and an additional application expected to be approved in the near future, we expect to continue expanding our presence like casino slot floors around the world.

Internationally, our WAGE-NET networking solutions with remote configuration and download functionality was recently installed at two casinos in Europe and we expect to begin to expand that to all of these customers casinos in coming months.

In addition to implementing our product and personal re-alignment, we also have been busy with several strategic initiatives that we move forward since our August earnings call.

We recently extended our contract with our Australian distributor, eBet on a rolling five-year basis and we laid the path for the possible extension of Queensland in Victoria, pending appropriate regulatory approvals. eBet has been a terrific partner in establishing our presence in New South Wales, and as we worked through the transition to propose new national regulatory standards in Australia, it’s great to have them as our on the ground partner.

We were also recently notified by the Alberta Gaming and Liquor Commission that we were selected to participate in the review of new replacement initiatives, and we signed an agreement with Caesars Entertainment to be our launch partner for our new CLUE game once we receive expected approvals in mid calendar 2012.

Now let me turn the call over to Brian for some additional perspectives.

Brian Gamache

Thanks, Orrin. Over the past several months by taking actions to address the challenges we faced in fiscal ’11 we are in course to achieve meaningful progress in our operations and resume long-term revenue growth in margin enhancement in the second half of fiscal ’12 and beyond. While not making light of the work still to do, during this transition period, we have significant opportunities ahead of us, and we are focused on achieving our cost savings and additional operational improvements, accomplishing a more even flow of prior approvals and capturing the revenue potential existing in our industry. Important opportunities do exist in the quarter in years ahead for growth both domestically and internationally.

As we prepare to enter calendar 2012, we expect industry wide demand in the US and Canada from new casino openings, new jurisdictions and casino expansions to double from calendar 2011 including the first casinos in Ohio, Revels Atlantic City facility and native American tribal properties.

We expect WMS to achieve our fair share of these new casino floors and the potential for further growth in calendar 2013 and 2014 exists as a result of new expansion opportunities here in Illinois with VLPs, the Ohio VLP, the race tracks and VLPs in Italy, along with new jurisdiction of growth for the possible early openings in Massachusetts and replacement demand expected in Canada and Oregon for VLPs.

Likewise, we continue to see significant longer-term growth in international markets. Although more variable on a quarter-to-quarter basis with a growing portfolio of products in the small existing installed base than in the US markets, like Australia, Asia and Latin America are expected to contribute to continued growth internationally for WMS. WMS will continue to approach each market in an expeditious manner and if conditions change, we’ll evolve in a depth to find the proper balance between risk and return.

The approvals for the new for-sale and participation games received in the last two months, coupled with earlier approval of WAGE-NET in our first portal applications gives us confidence that a large gem of new products has begun to break and we are moving toward a more normal and ratable schedule of product introductions. While, important to both our for-sale business and in capturing our fair share of opportunities, the steady follow of innovative new products is particularly critical to our gaming operations business in order to refresh our installed participation footprint near-term and resume growth in both the footprint and average revenue per day.

With each passing quarter, we strengthen and grow our position and success in the online gaming world where our portal applications and players like. As we continue to expand these exciting businesses and monetize their potential, I am highly excited about their ability to dramatically reshape our longer-term revenue and margin capabilities.

The past several quarters have been challenging from financial results perspective, but we have acted to make the necessary changes to our organization to achieve sustainable future growth. Following our strategic review earlier this year, in addition to refining our product portfolio and pipeline, we also reduced staffing in our cost structure. Those benefits are seen in our first quarter results even as we also emphasize efforts to retain talented people and hire key people to alleviate our future performance. With their fresh eyes and best practice experience, I have been very pleased with their immediate contributions.

With our creative culture of innovation, our breadth of talent and strategic vision and our sound financial foundation, we remain confident that WMS is poised to move forward and we expect to get back to full speed ahead in the second half of fiscal ‘12.

We’ll be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steve Wieczynski with Stifel Nicolaus. Please go ahead.

Steve Wieczynski - Stifel Nicolaus

So when you guys reported back in August, you talked about 3% to 5% of revenue growth. I think you gave six kind of assumption basically as to why you thought it was going to be 3% to 5%. Now you’re going back and saying it’s going to be negative year-over-year just after one quarter. So I understand that the quarter’s a little bit tougher than you expected, but off the six assumption and I don’t remember them all at the top of my head, but I think they were Class II opportunities and international opportunities; as any of those changed between August and now?

Brian Gamache

I think that the quarter turned out to be about as we thought it would; it was a little lighter than we thought for revenue perspective, Steve, so we’re just really truing up the first quarter for the rest of the year. Everything else that we’ve thought was going to happen in Q2 and the rest of the year, the visibility we have is about as we thought it would be in August, but again, Q1 was a little softer than we anticipated.

I think that one of things when you get these approvals, these product approvals, and you get the approval say in GLI and you predict the other approval sequentially, it’s typically for month one to month five or six and so we’re just trying to navigating some of those project approval things as they develop, but I think all-in-all there hasn’t been a whole lot different in our business since August; it’s just truing up that first quarter.

Steve Wieczynski - Stifel Nicolaus

And then second and last question, on the margin side, I guess you know my perspective it seems like it would be a little bit difficult here to drive operating margins when your revenue base is still coming down. I guess the question is, on the R&D front would you guys I mean as – will R&D be sacrificed here in order to keep margins up?

Brian Gamache

I can assure you that R&D is a last place we’re going to cut. R&D is basically our umbilical cord to our market share and it’s in our DNA and we believe innovation is inherent in our ability to gain share we maintain shares. So no, you won’t see us – all we’ve done here is really restructure the project priority list and so we put some things in the back-burn but for the most part we’re still working full steam ahead in our innovation model.

I still continue to believe we have the most talented people in the industry working with us and fiscal 2011 was a little bit of a challenge because of our innovation kind of didn’t get launched and brought to market on time, but lot of the things that were are now rolling into fiscal ‘12 and I think you’ll see in our second half Steve we’ll be back in business here.

But our margins are really a reflection on the mix of business, the average selling price and our supply chain initiatives. And we’re making progress in all of those; we’re still getting healthy ASP, I think when you see the difference in year-over-year in our margin improvements, a lot of that is not being as visible as we like because of the last couple of quarters, all the write-downs. So, we’ve taken the charges, we’ve taken the going forward. You will see our margins get back to the 53% to 55% over the second half of the year.

Operator

Our next question comes from the line Dennis Forst with KeyBanc. Please go ahead.

Dennis Forst - KeyBanc

Scott could you go into a little more detail on that write-down of receivables from Mexico, what prompted it and what you’re doing about that? Just give more detail.

Scott Schweinfurth

Sure. At the end of August, there was a tragic fire at the casino in Monterrey and stemming from that, the Mexican, various agencies of the Mexican government have been looking at safety measures in casinos, import documents related to gaming machines that were brought in to the country, because as you know, casinos that are operating there are licensed and there’s some that are not licensed. So, we are generally not doing business with the ones that are not licensed obviously.

But as a result of that, there have been a couple of casinos that have shuttered some, one at least have said that they’re not going to reopen. We’ve been monitoring the situation very carefully and for our couple of customers, we felt it appropriate to set aside some reserves at this point.

I want to tell you that coming out of this I think is going to be a much more regulated regime down there. So, for the long term it will be better. We’re just having, I’ll say a little bit of a challenge as the government continues enforcement actions there.

Brian Gamache

And Dennis, to further that, we issued credit down there in a very careful, case-by case basis and most of our customers in Mexico are large multinational companies that are publicly traded and are not located, headquartered in Mexico and we've had a long history of them particularly in Europe. So we are not concerned about the Mexican market. We just thought this will be prudent given the few casinos that we are taking initiatives that we have talked about.

Dennis Forst - KeyBanc

Okay did you give up trying to recover the machines that were sold? I assume they were either sold on time or you got participation machines down there that you are not sure you are going to get back.

Scott Schweinfurth

Absolutely, we have not given up on that. But there's still process to go through in order to get the machines back and that was a part of our evaluation on setting up the reserve.

Operator

Our next question comes from the line of Carlo Santarelli from Deutsche Bank. Please go ahead.

Carlo Santarelli - Deutsche Bank

I just had two questions. First of all, in the gaming op segment could you guys maybe, I think that's really where the biggest delta came for me versus my numbers and then I would assume for most but could you guys maybe walk through in some granular fashion the changes that maybe we have seen over the past six months within that business and maybe what we will see over the back I guess three quarters of this year and then a follow-up as to how you are thinking about maybe using some leverage here to buy back some stock and if you've been able to have any conversations with your board around that issue. Thanks.

Brian Gamache

Okay, so let me go into the gaming ops first. I think that if you are talking about WMS’s gaming performance, it’s just the games have been out there for extended period of time and as you know the longer they are out, the performance drops off and so the ripple effect of that is obviously the game units and the win per day dropped significantly and the fact that it’s only dropped off 6% is quite you know quite frankly a miracle. But we do have the cavalry on the way. As we mentioned, we got Pirate Battle and Journey to Oz and Leprechaun’s Gold and BATTLESHIP and MONOPOLY Party Train, all out there today and hopefully by the December it will be in all the jurisdictions.

The second half of the year is really where I would call it the tempo [prax], start to take whole. In addition to the themes I just mentioned, in Q3 we have Epic MONOPOLY, we have CLUE, THE LORD OF THE RINGS, CASTLE KING, Super team and Aladdin and these are all what I would call huge launches for us and the response we got at G2E gives us great anticipation for the second half of this year.

And particularly the Aladdin scene that we have received tremendously back from our customers. So I believe gaming ops is well positioned once we get through this next quarter. I would not look for any improvements in Q2 as Scott mentioned, it is really replacement market, stabilized the installed base in the win per day. Then in second half we should see an uptick in both the footprint and win per day and that’s where we are focused on.

Second part about the share buyback, we prudently bought a lot of stock back, we have purchased over 15% of the outstanding shares over the years. We will continue look at opportunities to buy the share, but we also balance that with growing our business and you know we are very physically conservative company. We’ve proven that we cannot have maintained the solid balance sheet in good times and in bad and we’re going to continue to watch for a unique opportunities to buy the stock and also balance it with organic and inorganic growth opportunities to future, to better position us for the future. So we are all about returning value to the shareholders. We just have to look for the right spots and we’ll continue to report back to you.

Operator

Our next question comes from the line of Mark Strawn with Morgan Stanley. Please go ahead.

Mark Strawn - Morgan Stanley

Hi, a follow-up on Carlos question a little bit on the game op side, do you have a tangible backlog today for some of those games you referenced coming out next quarter.

Orrin Edidin

Yes, we do.

Mark Strawn - Morgan Stanley

Is there numbers you could provide there?

Orrin Edidin

We’ve not given guidance on that for quite some time and don’t plan for competitive reasons to do so, but we’re very excited at the backlog and I think that you’ll see some tangible results here in the December and the March quarter.

Mark Strawn - Morgan Stanley

Okay and one quick follow-up on the new unit shipments, it looks like they ticked up year-over-year, can you give us an idea what jurisdictions those units shipped to?

Orrin Edidin

Yes, we shipped games to both of the new properties in Kansas, so the [Penn] property and the Kansas Star property and the Miami highlight and then also included in that number is expansion. So it’s new in expansion, so there’s a variety of different expansion opportunities that we shipped units through this quarter.

Mark Strawn - Morgan Stanley

Okay so could give us some rough idea what share was to those new openings?

Orrin Edidin

Yeah, so I think the share for the [Penn] property was at 20% and the other two were just a little below that.

Operator

Our next question comes from the line of Joseph Greff with JPMorgan. Please go ahead.

Joseph Greff - JPMorgan

Scott, you mentioned in fiscal 12 that you’d expect operating margin improvement. Can you talk about what year you were referring to as base 2012 operating margins assuming that’s an EBITDA margin not a gross margin and I have a couple of other questions?

Brian Gamache

I was actually talking about operating margin and for 2011 I am backing out of that the impairment restructuring and other charges that we had incurred in that period and I am doing the same things for 2012 backing out the charges that we are looking at improving our operating margins year-over-year.

Joseph Greff - JPMorgan

Got you. That’s helpful. And you touched upon on Mark’s question about ship share to some these newer expanding markets what do you estimate we have IGT reporting tomorrow night, but what do you estimate as your domestic ship share for the quarter?

Brian Gamache

I think we are probably in the 18% to 20%, Joe, which is about what we thought would be.

Joseph Greff - JPMorgan

And then what -- so if I am looking at your fiscal ‘12 revenue estimates, and I am trying to piece together all the qualitative pieces that you talked about, I am getting something like high- single digit, low double digit revenue growth, overall revenue growth in the second half of fiscal 2012 versus second half of fiscal 2011, which to me is kind of a healthy growth rate enabling our new products, how much of that is baking in increased ship share from all this stuff that you are introducing in, if you can help us understand that, that would be helpful?

Brian Gamache

Actually, we are a little bit probably gunshot here because we are going through a tumultuous 12 months. So we are taking a very conservative approach to our guidance and expectations, and you know, we want to get all virtues behind this before we start celebrating and raising the flag, but as I said I do believe we’ll reach the inflection point and going into the second half of this year and heading into fiscal ’13, I believe you will see us regain a leadership position and we will be guns blazing.

Operator

(Operator Instructions) Our next question comes from the line of Todd Eilers with Roth Capital Partners. Please go ahead.

Todd Eilers - Roth Capital Partners

Good afternoon, guys. Scott, question on game sale gross margins, nice improvement in the quarter, I guess the kind of a combination question, your conversion kits were also up really well in the quarter. First of, I guess, on the conversion kits, did you guys do anything special in the quarter, were there any special deals, any price increases?

And then, secondly, I know those are higher margin items, if we kind of adjust it, for kind of more of a quarter that was typical for previous quarters, what would the gross margin have been, I guess, I am trying to get a feel for how much of gross margin improvement came from strong conversion kits versus cost reductions etcetera?

Scott Schweinfurth

I think, Todd, I’d answer that by saying that for the improvement that we saw, that probably 50% of that came from a higher conversion revenue and the other 50% of that came from lower cost on BB xD and BB2. So, it’s kind of a two-pronged approach.

Todd Eilers - Roth Capital Partners

And were there any sort of special deals or price increases or anything like that or just strong demand?

Scott Schweinfurth

There wasn’t any price increases and we did have some special deals, you know, where we typically in advance of G2E are trying to start up what the remaining capital is that the people have there and that may have driven some of the advance for the quarter.

Todd Eilers - Roth Capital Partners

Okay. Great and then second question, you guys, mentioned being selective to participate in the Alberta VLT replacement, can you give us a sense for how many games, I guess, the province is looking to replace and maybe market share, how many units you expect to supply as part of that?

Brian Gamache

We can't but we can say that it’s a significant opportunity, similar to a new opening of a property type of opportunity. So, we are just delighted to have been selected to the shortlist, and we will continue to give you information on that as it becomes available. And we are anticipating replacing their footprint over a period of time.

Todd Eilers - Roth Capital Partners

Okay and then I don't know if it was, I thought I heard in the closing remarks a mention of the Oregon lottery, was that meant to refer to the Alberta or is Oregon also replacing VLTs?

Brian Gamache

No, I don't believe I mentioned Oregon.

Todd Eilers - Roth Capital Partners

Okay, I might have misread that. Sorry. Thanks, guys. I appreciate it.

Operator

Our next question comes from the line of David Katz with Jefferies & Co. Please go ahead.

David Katz - Jefferies & Co.

Hi. Afternoon all. If I can just ask one detail, when I look at the last press release I think there were some units included in game ops that we didn't get this time, and I apologize if you've already talked about this but there were, there used to be casino owned daily fee units and, I don’t see those in the release this time or they and there is --?

Brian Gamache

They look good say but -- and they are not in the participation in small things.

David Katz - Jefferies & Co.

They never were in there?

Brian Gamache

They never were in the participation installed base. And we had -- filed our K to exclude that discloser and so we have just carried that for ball – in other gaming operating revenue, other gaming operations as read by --.

David Katz - Jefferies & Co.

Other game ops revenue. Okay. Helpful. Second I just wanted to make sure on taking the commentary properly and not that we should all be focusing on the December quarter, but in terms of the installed days and the win per day on it, am I hearing correctly that perhaps the decline in units should either recede or stop in the next quarter or should -- are we are talking about one more year-over-year or sequential decline before it starts to go back up again, and I guess the same question regarding the win per day is the 71, the bottom, or could we have one more decline before it starts going back up as far as you can tell?

Brian Gamache

Well, I think the seasonality wise Q2 is always a challenge with the holiday season and so forth although Christmas is a great week, the month of December is not a great month. So, I would guess that I would use the word stabilize, David to describe what I would look forward in Q2. I would look forward some of these launches that we’ve already taken out to start to take hold, but I think Q3 is going to be the first quarter that we see any meaningful uptick.

David Katz - Jefferies & Co.

And I wanted to ask one last one about R&D. And just thinking about the balance between managing cost and making sure that we’re being efficient with it and the issue of really getting new product traction back, again which I presume would be to some degree in part a function of R&D spending. What updated thoughts you have about your R&D management strategy?

Orrin Edidin

Well, I think it only goes to how judiciously you apply certain functionality, particularly I think it’s always in network gaming across your entire product line, your bread and butter product line, your gaming operations products and the dependencies that we have on timely introductions. Brian referred to ratable introductions of new titles and that’s something we’re really emphasizing and to the extent we may have to de-scope certain functionality for certain products, doesn’t impact our R&D roadmap, the R&D investments that we’re making or anything else. Obviously, it has to be balanced against the business as Brian pointed out; those investments are being maintained as a key to our innovation future.

Brian Gamache

I think hindsight being 2020 David, we wouldn’t have been as aggressive and rolling all these technology out and all these platforms out of once we would had done in a more manageable approach and we learned our lesson, but I think when you look at the aggressive growth company, these are the mistakes that get made and I think we’ve learned our lesson and we’re going to be better as a result going forward. We’re not going to stop swinging, we’re going to keep swinging for the fences and we’re going to keep you know, do what we do best and that’s innovating.

Operator

Our next question comes from the line of Joel Simkins with Credit Suisse. Please go ahead.

Joel Simkins - Credit Suisse

A couple of questions here, first one, you gave some color on the portal apps in terms of the installed base. At this point, can you speak a little bit about some of the economics on these games and whether they are generating some revenue for you at this point?

Brian Gamache

I would say that the revenues de minimis at this point is as Orrin said we’ve got about 700 games in 29 casinos which is a doubling since the August call, we are starting to get the handle on rolling these out. Our goal is to have 100 casinos network by the end of June and that’s going to be an aggressive schedule but that’s our internal goal here. And going forward, you will see some meaningful revenue beginning in fiscal ‘12 and beyond.

One of the most important things to realize is that in addition to the revenue it’s going to create, these three terrific enablers for us to sell more games. If these things are giving the operators 20% to 30% of additional coming in and when that’s a significant reason to buy more WMS products and that’s what we’ve been seeing thus far. So the customers that have it installed so far are very complementary, now when we continue to get the new applications rolled out, it’s getting very exiting for our customers and for our shareholders.

Joel Simkins - Credit Suisse

One other follow-up; in terms of the installed base, can you quantify who you think you might be loosing that forward share to? And then secondly, you’re obviously in the good times when every game you were putting out was earning, you know tremendously above house average. You probably, I think the gripe I heard from some customers, that the company got a little bit aggressive on some of the pricing and rev-share economics. As you look to sort of reinvigorate that installed base, do you anticipate, have any guilt or more aggressive on pricing and discounting?

Brian Gamache

You know pricing and discounting in the game apps business is a daily thing we go through. It’s hand-to-hand combat out there. I think our competitors are doing better, producing better products and there is probably the most robust competition it’s been in the 12 years I have been here. But you know a lot of people would still like to have the $71 rate per day, I mean we’re still 50% above our nearest competitors.

So at the end of the day, gaming apps I think is a more challenging business today with all of our competitors operating in all cylinders. But there is still room for people who can innovate and produce top like content. And I believe the things we talked about here are going to give us our mojo back. And again, a very important focus of management right now is to get our momentum back in this business, because this is huge margins and it’s a huge opportunity for us to regain our growth.

Operator

(Operator Instructions) Our next question is a follow-up question from Dennis Forst with KeyBanc. Please go ahead.

Dennis Forst - KeyBanc

I wanted to get a clarification from Orrin. Orrin, you made a comment that the second half for game apps was going to involve a better yield and an increase in the footprint. Were you talking sequentially from this kind of trough first and second quarter or were you talking year-over-year?

Orrin Edidin

Sequentially, second half over first half. These as Brian mentioned, some of these jurisdictional approvals are phased; so they’re now coming in. That backlog is being broken up; the products are getting on the floor. It can’t help but enhance our installed base and win per day which we fully expect to see on a more material basis in the second half.

Dennis Forst - KeyBanc

Any comment year-over-year in the second half?

Brian Gamache

I don’t think we’re giving guidance relative to that at this point. I would just say we would be disappointed if we didn’t show some progress. Okay, how that’s?

Dennis Forst - KeyBanc

Some progress from the first half?

Brian Gamache

From year-over-year.

Brian Gamache

Thank you for joining us today. We are encouraged by the success we have achieved to date from simplifying our product portfolio to address near-term revenue opportunities and with our reorganization realignment to lower our cost structure. The new and expanded opportunities with eBet, Alberta and with Caesars Entertainment to be our launch partner for CLUE also demonstrate the ongoing global demand we have for our innovative products and game content which lay the foundation to demonstrate once again the revenue and earnings growth potential of WMS. We look forward to updating you on our continuing progress on our next call in January. Thank you.

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 line.

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