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WMS Industries Inc. (NYSE:WMS-OLD)

F3Q12 Earnings Call

May 3, 2012 04:30 pm ET

Executives

Bill Pfund - VP, IR

Brian Gamache - Chairman & CEO

Scott Schweinfurth EVP, CFO & Treasurer

Orrin Edidin - President

Analysts

Carlo Santarelli - Deutsche Bank

Steven Kent - Goldman Sachs

Joe Greff - JPMorgan

Mark Strawn - Morgan Stanley

Harry Curtis - Nomura

Steven Wieczynski - Stifel Nicolaus

Joel Simkins - Credit Suisse

Bill Lerner - Union Gaming

Dennis Forst - KeyBanc

Todd Eilers - ROTH Capital Partners

Operator

Thank you for standing by and welcome to the WMS Industries fiscal 2012 third quarter conference call. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in the question-and-answer session. As a reminder today's conference on April 30, 2012 is being recorded. I would now like to turn the call over to Bill Pfund, Vice President of Investor Relations for WMS Industries. Please go ahead sir.

Bill Pfund

Thank you, operator. Before beginning the review of our financial results and operating progress, I'd like to remind everybody that our call today contains forward-looking statements concerning the outlook for WMS and future business conditions. These statements are based on currently available information and involve certain risks and uncertainties. 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, April 30, 2012.

This afternoon, Brian Gamache, Chairman and Chief Executive Officer, will provide an overview of recent milestones and of the third quarter results followed by Scott Schweinfurth, our CFO and Orrin Edidin, WMS' President and then we will open the call up for your questions.

Now, let me turn the call over to Brian.

Brian Gamache

Thanks, Bill, and good afternoon, everyone. WMS' fiscal third quarter results demonstrate further operating progress and quarterly sequential improvements in financial results. For the March 2012 quarter WMS generated total revenue of $176 million compared to a $193 million a year ago. Our revenues increased 9% or $14 million on a quarterly sequential basis. With a significantly improved gross profit margins and continued cost containment our operating margin grew sequentially to 18% and was about flat with the March 2011 quarter on less revenue. As a result both operating income and diluted earnings per share increased almost 50% on a quarterly sequential basis from the December 2011 quarter, with EPS excluding the $0.02 per share second quarter benefit of litigation settlement going from $0.27 per share to $0.40 per diluted share.

And cash flow confirms our operating progress as cash flow generated from operating activities is up 6% for the nine months for the comparable period a year ago. Our fiscal third quarter operating results reflect ongoing progress consistent with the sequential goals we set earlier this fiscal year. But investors should also note several key milestones that occurred during the quarter. We believe these milestones highlight the meaningful ongoing progress we are making with our strategies to build a foundation for steady and sustainable long-term growth.

These include, our quarter end installed participation base increased by more than 100 units or 1% from the December 31, 2011 quarter reversing the trend of the past seven quarters and our average revenue per day also increased. Our new CLUE themed wide area progressive game was launched in the March quarter at numerous Caesar Entertainment properties in Nevada and Atlantic City, New Jersey with open order for now over 2100 units and five new participation games expected to receive their regulatory approvals this quarter.

And with our improving product performance, we expect further growth in the installed participation base and revenue per day in June quarter and beyond. Next our new unit sales continue to increase on a quarterly sequential basis with 600 more units sold for replacements on casino floors in US and Canada compared with the December 2011 quarter. Contributing to this improvement was the successful launch of the Bluebird2e cabinet which adds emotive lighting to the Bluebird2 cabinet. We shipped more than 1500 of these units in the March quarter.

And that's particularly noteworthy, we improved product sales gross margin by 320 basis points over the prior year to 52% which is up 170 basis points sequentially from the December quarter. Ongoing benefits from our cost containment and continuous improvement initiatives more than offset the roughly $1100 decrease in average selling prices that primarily reflected a greater mix of lower price VLT sales, the impact from higher discounts given our larger volume orders, fewer premium for sale of units and the continued impact of a competitive market place.

Next our ongoing cost containment efforts coupled with the savings program instituted earlier this fiscal year resulted in a R&D and SG&A expenses in aggregate being $8 million lower than the prior year period. Next the operating leverage inherent in our balance model was once again validated, as we increased unit sales volumes roughly 480 basis points increase in operating margin on a quarterly sequential basis.

The $11 million quarterly increase sequential and gross profit contribution when tax affected, largely dropped straight through the bottom line. I think it is plainly evident that since we implemented the organizational realignment and revised product commercialization plan early in fiscal 12, WMS achieved measurable progress in our core business, but we still have much to achieve and our opportunities to assist customers and grow remains plentiful. Most importantly the flow of new game approvals is back to a normalized rate. This is a significant milestone as it begins to revalidate our historical consistency for bringing innovative new products to market and these new games are expanding our portfolio of the unique innovative gaming features in a more diverse range of math models.

In our product sales business more than 90% of the new games have received initial jurisdiction approval incorporated new math models. All these new games are on casino floors in steadily increasing numbers and generating great performance. We expect overtime to recapture ship share and reestablish our fair share of the market. With the addition of a number of new participation products this quarter and the jurisdictional approvals that Orrin will discuss shortly, we believe that WMS has turned the corner at efforts to restore growth in our gaming operations business.

Looking out over the next two quarters, we expect a normalized flow of innovative new products for our product sales and participation operations scheduled for launch during the next 12 to 24 months. In particular I am excited by the prospects to reenergize our customer slot floors with the innovation and potential that will come with the launch of our first games, our next generation CPU-NXT3 operating system which has six times the CPU performance of our present generation and operation system and 20 times the 3D graphics capabilities. W. We are on track to commercialize the new operating system on the Sensory Immersion 2.0 platform with the initial approvals and launch of the Aladdin and Magic Quest games in the latter part of the June quarter.

Another driver of revenue by the end of the calendar 2012 will come from the expected launch of My Poker video platform, Video Poker platform demonstrated at G2E in October 2011, development work on this project has continued largely on track and this new platform has gotten strong interest from several influential casino operators. Looking forward with WMS's product vision our deeply embedded culture of innovation and our core underlying strength intact we are confident that the fiscal 2012 progress will build a strong foundation for fiscal 2013 as we remain the gaming industries’ innovation leader. Let me now turn the call over to Scott.

Scott Schweinfurth

Thanks Brian and good afternoon everyone. I will briefly add perspective to our financial performance and trends. For the March 2012 quarter we generated revenue from the sale of 5993 new gaming machines of which 4598 units were in the US and Canada. We recognized revenue on 759 of the 957 for new casinos that shipped in the December 2011 quarter.

After several years of declining shipments for new casino openings it's highly encouraging for our industry to realize growth from this element of market expansion. For WMS gaming machine sales for new casino openings and expansions in the US and Canada totaled approximately 1800 units more than double the number of units shipped a year ago and includes among other shipments to the Ohio Properties and Maryland Live. As previously stated our floor share for new casino openings this year is expected to be in the high teens. New replacements units were approximately 2800 units in the US and Canada representing a 600 unit quarterly sequential improvement and just 200 units below a year ago.

Internationally we sold 1395 new units comprising 23% of total global unit shipments compared with 2338 units or 39% of total units a year ago principally reflecting lower shipments in the sluggish European market along with lower unit shipments in the Mexican and Australian markets both of which had provided significant sales activities during the last two years. It's encouraging that we received approval recently for the sale of our Bluebird xD cabinet and the number of new games themes in New South Wales, Australia. The average selling price was $15,233 compared with $16,325 in the December 2011 quarter reflecting a higher mix of lower price video lottery terminals, the impact from higher discounts on large volume orders, fewer premium for sale units and Bluebird xD cabinets making up 24% of new units shipped compared to the 34% in the December quarter, coupled with the realities of our competitive marketplace.

Despite this decline in price, we improved our product sales margin to 52% which is certainly noteworthy. Other product sales revenue were about flat primarily reflecting lower used gaming machine revenues attributable to lower prices and fewer units compared with the year ago mostly offset by higher year-over-year revenue from the sales of more than 3,900 conversion kits compared to 2200 conversion kits in the comparable year ago period.

For the nine months, we have recognized revenue on approximately 14,400 conversion kits, nearly 2.5 times of 6,000 kits in the comparable nine months period a year ago. We believe there's no better indication of high earnings performance of our latest games than the growth in the sale of conversion kits for the large and still growing installed base of Bluebird 2 and Bluebird xD units already on casino floors which combined now total over 67,000 units globally. This continued upgrade of customer casino floors to the conversion of new game themes and new math models is a critical factor in re-establishing WMS’ legacy for providing premium or wide earnings performance which should contribute to long term shipped share gains.

Having refreshed a significant portion of our installed base this year, our participation footprint increased on a quarterly sequential basis marking the first increase in the last seven quarter. Our installed base was 9,389 gaming machines as March 31, 2012 compared to 9,282 at December 31, 2011 and increasing 107 units.

Average daily revenue increased modestly during the quarter reflecting our refresh install footprint along with the positive influence from quarterly seasonality. Average daily revenue per unit was $68.06, up from $67.62 from December 2011 quarter but down $76.14 a year ago, which reflects the cumulative impact from the prior lack of new product been available that is now improved.

Other gaming operation revenues rose $2.7 million on quarterly sequential basis and were up $5.2 million compared with the March quarter last year, reflecting the growing contributions from our network gaming applications, our online casino and other social gaming applications as well as higher royalties from licensing our proprietary intellectual property technologies and gaming content.

Turning to margins, building on the progress established in the prior two quarters, our product sales gross profit margin of 51.8% improved 320 basis points from the comparable prior year period and by 170 basis points on a quarterly sequential basis.

The improvement reflects the benefits from product mix, higher sequential quarterly unit volumes and ongoing improvement to reduce product costs despite a lower average selling price and is line with our expectations. Our gross margin on gaming operations revenue was essentially flat at 80.7% compared to 8.8% in the prior year quarter.

Operating margin in the March quarter improved on a quarterly sequential basis by 480 basis points. Our selling and admin and R&D expenses as a percentage of revenues improved relative to December 2011 quarter reflecting the revenue growth coupled with our cost containment efforts and savings from the restructuring initiatives which contribute to the improved operating leverage.

As a result savings from restructuring and realignment actions along with our ongoing focus on cost management, total R&D and selling and admin expenses for the nine months ended March 31, 2012 declined by 23.6 million compared with the comparable year ago period.

As anticipated depreciation and amortization expense was higher year-over-year on the March 2012 quarter principally due to the step up in the depreciation associated with the continued transition of our participation base to Bluebird 2 and Bluebird xD units and amortization associated with our investment in our network gaming and online gaming initiatives following their commercialization during the last 12 months.

Having vigorously upgraded our installed participation base during the last several years to Bluebird 2 and Bluebird xD gaming machines, we expect that deployment of capital for these efforts to begin decline in fiscal 13. However, we anticipate the placement of VLTs in Illinois and Italy, which we expect to begin in fiscal 2013 may result in a greater amount of operating leases which will require gaming operation capital. With our upgraded footprint of installed participating units, future game changes can more often be accomplished through conversions on the Casino floor thereby enhancing the capital efficiencies in coming years on the investment for the past few years.

Net cash provided by operating activity improved by 6% or $6 million for first nine months of fiscal 2012 over the comparable period a year ago to $107 million. While net income was down year-over-year for the nine months, operating cash flow increased primarily due to a substantially smaller increase in operating assets, liabilities, higher depreciation and amortization and higher other non-cash charges partially offset by lower share-based payment cost and tax attributes. Net cash used in investing activities was up $9 million year-over-year reflecting the aforementioned capital deployed to upgrade and transition our gaming operations and install base and a modest increase in additions to property plant and equipment.

Looking to fiscal 2013, we expect capital expenditures for property plant equipment to decline as we’ll complete two significant projects over the next few months. During the March quarter we purchased just over six million of our common stock bringing the fiscal 2012 year-to-date total to $43 million or 2.1 million shares representing about 4% of the outstanding shares at the beginning of fiscal 2012. We now have just over $55 million shares outstanding and approximately a 155 million remaining on our repurchased program authorization.

Total cash and cash equivalents were $88 million at quarter end. In the June 2012 quarter, we expect to continue to demonstrate ongoing progress with a quarterly sequential improvement in revenues and operating margins over the March 2012 quarter. While our progress has been meaningful as we focus on ensuring that lay a solid foundation for sustained growth in the years ahead, our rate of revenue improvement is less than what we expected earlier in the year. As a result, we expect total revenues in the June 2012 quarter to be modestly below year ago June quarterly revenues, while our operating margin is expected to improve on a year-over-year basis adjusting out the net impact of structuring impairment and other charges in the prior year.

Looking to fiscal 2013, as we prepare our budget and update our three-year plan our primary focus continues to be on improving our operational execution and driving steady and consistent revenue and operating progress from more our core business while expanding our technology and innovation leadership in the industry. Economic conditions and the gaming industry sentiment appeared to be modestly better. However we believe it will take several more quarters of improving general economic conditions before we see operator confidence build to a point where they notably increase annual capital budgets. Accordingly, our current view on the replacement market remains unchanged and our growth in the replacement market is therefore expected to be driven by consistent shipped share gains.

Regarding new casino openings and expansions, our fiscal 2012 will have benefited from a meaningful number of new casino openings and expansions. In fiscal 2013, we will continue to benefit from shipments to two additional casino openings in Ohio and a few other openings but a larger portion of new unit shipments will be the VLT markets in Illinois and Ohio along with replacement shipments to Canadian provincial VLT operators. Additionally, in Illinois we expect VLT shipments will include new units supplied both on an operating lease basis as well as on a product sale basis.

Now let me turn the call over to Orrin for his comments.

Orrin Edidin

Thanks Scott. Our focus during the March quarter was to build on the operating progress established during the preceding two quarters with particular emphasis on reversing the erosion in our participation business. As you can see, we achieved this goal by successfully growing our installed footprint by more than 100 units over the modest improvement in average daily revenue. Also noteworthy is that much of this increase was represented by new wider progressive games and new games on a proprietary adapted gaming platform and as a result our installed footprint of coining games was only modestly below the all time high achieved a year ago. As with the December quarter and following the break in the [lock jam] of new product approvals that began in September we continue to aggressively refresh our installed participation base in the March quarter to convert that portion which should become sale and reach the end of its lifecycle.

Cumulatively, in the December and March quarters we updated about a third of our installed base. Despite this high level of product refreshes which were somewhat attributable to needed catch-up, our open orders remained strong in nearly 2100 units. This demonstrates the excellent customer interest in our latest participation offerings.

To put this in perspective, our open orders represent about 1.5 to 2.25 of a normal rate of installations. With several of our latest new products generating strong results from our customers, the first CLUE game and latest games for some of our more established series such as the Wizard of Oz, Journey to Oz and Epic Monopoly games, and two new mechanical reel versions of The Lord of the Rings Games coupled with the strength of our existing base of participation games, we're confident that the unusually high number of refreshes in the last several quarters will moderate over the next several quarters and slowly return to more historical rates which will lead to more incremental placements to increase the installed base.

Looking to the June quarter, the next wave of unique and differentiated participation games are on-track, beginning with a new the Wizard of Oz, the Great and Powerful Oz game that has already received initial jurisdictional approval.

This will be followed by the first approval for the Monster Jackpots game featuring the classic Universal Studios Monsters, the introduction of our new Gone With the Wind game and the Aladdin & the Magic Quest game perhaps our most anticipated release of the year utilizing the amped up powering features of our new third-generation CPU-NXT3 operating system and new Sensory Immersion 2.0 platform with the synchronized chair movement provided by the innovative D-BOX motion technology.

Our upcoming Super Team game also utilizes the new more powerful CPU-NXT3 operating system. With this strong launch schedule, you can better appreciate our confidence and excitement about the portfolio offering. This is the most robust participation games launch schedule that I can recall filled with high-quality, high potential products.

The new CLUE game illustrates our strategy to help create new opportunities for our customers to build a stronger relationship with players both at the casino and now outside the casino walls. The CLUE game utilizes our proprietary second generation adaptive gaming technology that saves the players progress and is interoperable with our award winning cloud based Players Life Web Services online games and [meter boards].

By integrating Players Life Web Services into the CLUE game, players can login at the casino to play the game with their favorite character and then have the option of extending the game excitement outside the casino to track their bonus accomplishments and enjoy free for play entertainment wherever they are by using their unique login online.

WMS collaborated with Caesars Entertainment our launch partner to create a unique interface using Caesars Total Rewards System that enables their patrons to log on to the game and to save their progress simply by using their Total Rewards Player Card.

Our team also created an innovative, custom online, Mystery Challenge Tournament application that can be enjoyed by Total Rewards players outside of the casino.

The CLUE game represents the next step forward in creating a communal gaming experience on the slot floor while simultaneously providing a personalized player experience, all of which we believe will help increase players enjoyment and keep players coming back to the game over and over again.

We continue to grow our global presence in network gaming installations as well. Our bank-by-bank rollout strategy continues to gain traction on casino floors around the world. Building on the success established in the first six months of the fiscal year, we now have our WAGE-NET system connecting 1280 gaming machines at 64 casinos worldwide, generating continued strong play performance.

In fact, during the March quarter, we had our first cloud based application of WAGE-NET system installed on more than 80 games across 12 Casinos Austria properties. With cloud based remote configuration and download capability, the WMS networked gaming solution delivers unprecedented gaming experiences, while leveraging industry standard protocols to give Casinos Austria increased flexibility across their casino floors.

In our core product sales business, the cadence of new product introductions has returned to normal as we continue to receive initial jurisdictional approvals in the March quarter on new products, coupled with additional jurisdictional approvals for products that had received their initial approval in earlier quarters.

Importantly, as Brian noted, over 90% of the new game themes launched in the March quarter have new map models. Our newest products such as Colossal Reels and G+ 5x4 series in particular, are continuing to demonstrate superior player appeal and high earning performance on customers' casino floors. It's of course, still early in the rollout, so we need to get more of these new innovative high earning games installed on more customer slot floors to reestablish our legacy for creating great content.

Additionally, we successfully launched the Bluebird2e cabinet during the March quarter. This enhanced version has an emotive lighting future that was first introduced to the industry on BluebirdxD cabinet and which has proven highly appealing to both players and operators.

Approximately 26% of our units in the March 2012 quarter were Bluebird2e cabinets, and these new products contributed to the quarterly sequential increase in new unit shipments.

As Scott mentioned, we also will have several exciting opportunities in fiscal ‘13 provided by VLT markets. In addition to Alberta, where the lottery authorities expect to replace and ultimately upgrade their entire installed base of 7,000 VLTs, we also expect favorable opportunities from replacement VLT initiatives planned by other Western Canada Provincial Authorities.

Additionally, we expect to have an additional opportunity to earn software revenues for future development in game sets.

In Illinois, we are presently just about to undergo technology interoperability testing and review with the Central Monitoring System, and we expect to make our first shipments in the back half of calendar ‘12 with additional shipments continuing over the next several years.

I would note that in the case of Illinois VLTs given the number and different needs of the route operators going forward, we are likely to report a combination of both product sales and operating lease agreements.

As we look a little further out, in addition to the new casinos in Ohio and VLTs at the State's race tracks, we believe several recent developments fueled by the challenging economic situation could expand our revenue opportunities over the long-term.

In US legislatures have passed or are considering enabling new or expanded gaming legislation in Illinois, Kansas, Kentucky, Iowa, Maryland, California, New Hampshire, New York, Florida, Maine and Massachusetts.

Internationally, expansion is underway in the Philippines and legislation has been passed to discuss in Greece, Brazil, Japan and Taiwan that could open new market opportunities although the timing of any such openings is uncertain.

While we can't predict a timeframe, all of these will contribute to a further expansion for the industry and likely addition upward bias to the replacement base.

In our interactive gaming initiatives, we also continue to advance our growth opportunities in the online social and casual gaming arenas, initiatives had began several years ago.

By leveraging our understanding of players’ entertainment needs and preferences with our expertise in creating compelling content solutions, we've made significant progress in our development of a technology and entertainment content base that will help our customers unlock emerging online opportunities.

Our announcement last Friday of an agreement to provide a hosted B2B online casino site for Groupe Partouche in Belgium is really exciting. This is the first step in now unlocking the value we begun to create over the last several years with our development of online interactive gaming.

Our online strategy is unique compared to a number of our peers. We first developed and demonstrated the robustness of WMS' online technologies and end-to-end gaming and back end management capabilities with Jackpotparty.com in the UK and now we're expanding into additional markets by providing a full array of business-to-business products and services to those land based casino operators that are ready to move forward online gaming offerings for their patrons on either a for money gambling basis where allowed or a play for free basis.

WMS is committed to assisting our customers in establishing strong interactive gaming relationships with their patrons in the casino, at home or on their mobile devices.

With the success and experience we have in interactive gaming through our award winning UK based Jackpotparty.com online casino that continues to add new players each month, our popular player appealing Lucky Cruise social casino found on Facebook that has above average conversion rate of free play to paid play, and our classic slot contents for mobile and other casual play users, WMS is well positioned to help our customers move forward with confidence and unlock the future potential with proven on line interactive gaming solutions and services.

Now let me turn the call over to Brian for his thoughts on our priorities as we continue to move forward.

Brian Gamache

Thanks Orrin. We are making solid progress in restoring WMS' growth momentum and our priorities for the near term and into fiscal ‘13 remain crystal clear.

First, growing our installed participation product base and improve our daily average revenue by developing and introducing innovative player appealing games in new form factors with particular emphasis on increasing the mix of (inaudible) progressive units and our proprietary adaptive gaming technology units.

Second, garner increased ship share in our global product sales business by developing differentiated high earning games, game content and products for our customers worldwide coupled with world class customer service.

We placed an extraordinary emphasis on creating value for our customers. The performance we reported today along with our other milestones clearly indicate that customers value, the innovation and strength of our product pipeline.

Throughout the organization, WMS is committed to and strongly positioned to serve customers with innovative, high performing gaming products enabled by advanced technologies that are redefining our industry.

Third, maintain our industry leading investment in research development and other organic growth initiatives at levels relative to revenue that are above our competitive set. We believe that effective R&D remains the key to our long-term growth and as such I am really energized by this year's upcoming G2E event for WMS.

With a full complement of innovation and gaming content, also new licenses and an exciting new platforms and form factors in our participation product and product sale businesses I believe we will demonstrate to the customers a depth and breadth of new offerings that will be among the best of my 12 year tenure at WMS.

And fourth aggressively pursue ongoing improvements in our continuous improvement efforts. Despite the significant improvement that had been achieved by the WMS team of last several years, we expect further progress. We believe these initiatives will deliver greater cost efficiencies and effectively in our supply chain and provide an organizational structure that will enable WMS to earn higher products sale, gross margins helping us reach our long-term operating margin goal.

By concentrating on growing our revenues and improving our margins, our efforts should then also result in increasingly operating cash flows and strong returns on capital. This in turn will enable us to continue to fund our wider array of ongoing potential growth initiatives in the future. In the significant growth opportunities presented by the convergence of online and LAN based gaming for our existing customers.

So the full complement of online wagering, mobile, casual and social gaming capabilities. Our extensive research indicates that this future gaming content conversions will present significant growth potential for both our customers and WMS. Our commitment to build a full complement of products, services and gaming solutions will enable WMS to work with our customers to monetize the attractive growth opportunities. Now we will be pleased to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line Carlo Santarelli with Deutsche Bank. Please go ahead.

Carlo Santarelli - Deutsche Bank

Brian, I just had two bigger picture questions and then Scott I had just one follow up. Brian could you talk a little bit about the domestic environment what you are seeing in ASPs, obviously down sequentially down year-over-year. Could you talk a little bit bigger picture about that and then if you wouldn’t mind, just qualitatively walking us through what you are seeing in the international space as well on the product sales side?

Brian Gamache

Sure. Two separate issues. I will deal with the ASP question first Carl. I think there our ASPs year-over-year as we mentioned on the call, we are down due to a mix issue. It didn’t have as many premium for sale products, the VLT units, new large orders that were more competitive than normal orders and then just the competitive market pressures in general. I would think that from a modeling standpoint, you probably want to use the last three quarters or so as a more typical ASP price going forward.

I think given the competitive pressures, you are not going see us have great pricing leverage in the next two to three quarters. But I think it will be a more normalized run rate going forward, Carl the $16000 range. But we are, there is no question. There is competitive pressures out there unlike we have ever seen before. And as far as international, there were four jurisdictions that we really haven’t done a lot of business with, this year that we have done.

Mexico, I would say that that market is now stabilized. It is certainly not a growth market as it was in the lot of previous couple of years. Australia, Singapore and Switzerland are all undergoing national standards. In Europe, the European market is very similar to the US market which is very challenged economically right now. So I think internationally it is more of a timing issue as anything. Australia, Singapore and Switzerland will be resolved from an OS standpoint in the next couple of quarters, but I think the international risk is challenged as well right now.

Carlo Santarelli - Deutsche Bank

Scott, I just had one question. If you look at the end of period installed base after the fiscal 2Q as well as end of the period installed base after the fiscal 3Q your average installed base for this quarter was obviously meaningfully below both. Could you talk a little bit of may be the timing in the period and obviously some others late orders came on and did you have some product offer a good period of the fiscal 3Q. I assume that's the case but may be could you walk us through how that calculation turns out?

Scott Schweinfurth

Yeah sure we started the quarter with 9282 units in the installed base and during the first half of the quarter, the installed base shrank from that number and then in the last half of the quarter with new approvals on new games particularly the Clue game that got approved in March. We were able to accelerate installs of product at that point. So we ended the quarter with 9389. So the 9115 is just merely an average taking the installed base at the end of each day in the quarter and dividing it by the number of days in the quarter.

Brian Gamache

As Scott mentioned Carl we touched about 20% of our installed base during quarter which was a huge number for us and yet our backlog went up quarter over quarter. I think our backlog last quarter was 1900 units. It's now nearly 2100 units and during that timeframe we've touched a lot of products. So we continue to get our gaming operations business back in order and I believe that as we mentioned this is the most prolific stable of products we ever launched in any one quarter. This is Q4 and I think heading into Q1 of fiscal 2013 we are going to be back in business here and it's going to, we are going to have some tailwind for once.

Operator

Our next question comes from the line of Steven Kent with Goldman Sachs. Please go ahead.

Steven Kent - Goldman Sachs

Can you just talk a little bit about the average selling price decline in the quarter, did you ship any of the Maryland units. If you exclude the VLTs in each quarter what were the average selling prices. Just some discussion about that and then also can you talk about your tax rate this quarter? It looks like it's about $0.01 - $0.015 or so. Is that the tax rate we should be using for the balance of this fiscal year?

Brian Gamache

Let me deal with the ASP question first Steve. We are backwards $1100 year-over-year and as I said earlier I don't believe that's going to be the case in Q4 and Q1. I believe that it was a set of circumstances here that were a little bit unique. We did ship games in Ohio and we did ship games in Maryland. We are not going to break those out for competitive reasons. But any time you go backwards of $1100 and your margin goes 320 basis points you are obviously doing some pretty good work.

Our supply chain guys are breaking their backs right now to get us best of class margins and in fact we just recently eclipsed in Q3 60% on our Bluebird2 and Bluebird2e product which has been an internal milestone of ours for quite sometime. So we will continue to make great progress there and as we get to a more normalized environment I believe you will see our margins be best of class.

Scott Schweinfurth

And then Steve on the tax rate yes they were us some discrete tax items in the quarter that should not be recurring. So the tax rate should be in a sort of more normal 36% to 37% in the first quarter. Now that's all a subject to find some miracle, the R&D tax gets pushed through Congress and signed by the President by June 30, that would have a positive benefit, but we don’t think that is likely to happen.

Operator

Our next question comes from the line of Joe Greff of JPMorgan. Please proceed.

Joe Greff - JPMorgan

Hi, guys first question on the ASP, Brian and in the first question you mentioned ASPs look a the last three quarters or anything look at the last three quarters as an average for what we should be looking at ASPs going forward.

Brian Gamache

That’s probably a good benchmark Joe. I think the last three quarters we look at that average of those three timeframes will give you a good benchmark going forward.

Joe Greff - JPMorgan

The quarter over quarter you know backlog in game ops, that’s great. How do you think about cannibalization or net additions to the installed base going forward from here. Should we see it better than where it has been historically or if you can answer that and then I have one follow up.

Scott Schweinfurth

I think any time you can put two out and take one back it’s a good trade. We’ve not been there because as I mentioned in the past couple of calls, there was such a pent up demand for our refreshes. I think that going forward we will get back to that 241 trading cycle but we are not there yet. I think that Q4 probably, the first point we can start making some progress there on accretive footprint. All of our products aren’t meant to compete with one another. We have different little segments we are going after in this participation floor, Joe. So I think you are going to start to see some meaningful impacts in these new product launches in Q4 and Q1.

Joe Greff - JPMorgan

Okay. Great, and then Scott, I think you mentioned earlier anybody quite grasp the details of it. With regard to your fiscal 4Q, revenue guidance, they are a little bit lower than what you talked about a few months ago. Can you drill that on what drove that place? I think you said slower adoption but you can clarify with those details or that would be great. Thank you.

Scott Schweinfurth

Yeah. Just I would say, we were at 13, let’s say a quicker uptake on some of the new products out there. We have had great success in getting game conversions out of the floor and by having those game conversions out in the high performance of those games, that’s always a good metric and indicator for future game sales. That’s just taking us, I would say longer.

Orrin Edidin

That’s the one thing we missed calling it here Joe, is we thought it was going to be a three quarter turnaround, because of the capital issues, we have three different series of product, the Colossal Reels, Power Spins, and G+Deluxe 5x4 spinning streak, and they are doing all phenomenally well and unfortunately can’t get them up fast enough because of the capital constraints. So this will take a little bit more time when we gave guidance back in August but we are on track. We are making the traction that we had expected we make. It just take a little bit longer than we had hoped and I think that when you see the continued progress in Q4, you’ll see why we are so excited.

Joe Greff - JPMorgan

Okay and then one final question, Scott, CapEx for the fiscal Q4 that’s up sequentially and up a little bit year over year on aggregate basis. Can you help us provide details there?

Scott Schweinfurth

I am sorry. Are you asking about Q3 or Q4?

Joe Greff - JPMorgan

The June quarter.

Scott Schweinfurth

June quarter? Yeah, it is likely that CapEx in gaming occupations is going to be at or a little above what it was in Q3 as we now get to the point as we are incrementing the installed base, that means we are going to have to put more capital out to grow that installed base and then on the PPNE side, that too is likely to be at or little above what it was in the March quarter as we sort of getting towards finishing off two large projects we have been working on.

Operator

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

Mark Strawn - Morgan Stanley

One question on game ops yields. Just trying to get a sense of how we should expect the yields on sales, the trend going forward. It looks like the year-over-year decline has accelerated a little bit but is there anything that’s changed on pricing or should we expect as you get more games on the floor those yields should start to improve?

Brian Gamache

I think that’s exactly the case, Mark. I think one of the things is, we have had Wizard of Oz out there for a number of years now and that game is held up extraordinarily well and the onus is on us now to create a follow-on Wizard of Oz which we think we have in one of these games we’re launching this quarter and that will hopefully make up to that shortfall. But yes, the more these new games you get it out there, the popularity of those launches will certainly make up for any shortfall or declines.

Mark Strawn - Morgan Stanley

And has anything changed in the way that you say pricing that new iteration and Wizard of Oz or is it still in the same general ballpark?

Brian Gamache

Same general ballpark. The other thing is we've had great success with some of our more fixed lease products in the last year and so its really a mix of business issue there as well but you will see the up tick in Q4 as we have been expecting all year.

Operator

And next question comes from the line of Harry Curtis with Nomura.

Harry Curtis - Nomura

Brian, a quick question on the decline in ASPs. It seems like a ubiquitous question. But what gives you confidence that if Konami, for example has been undercut by say $500 to a $1000 a machine that they are not going to lower their prices just to maintain their competitive pricing edge and creating a negative cash gain there.

Brian Gamache

Call me old fashion, Harry, but I still believe the content matters. And if we put the content out there as its earning today, we don't have to worry about ASP. It will take care of itself. ASP only becomes a problem when you are living on a content that's not performing as we expect ours too. So I think that going forward you are going to continue to see us be at compatible pricing. I wouldn't use the word aggressive but we are going to be competitive. I think there was some good prudent decisions we made in Q3 that allowed us to get more share by being more aggressive than normal but I think that these are the competitive realities that we are in right now and at the end of the day, the fact that one of the analysts had a 22% ship share for the quarter. I think that's pretty good given that we've been through and how we are wrapping back up. I would expect this to get back to a more mid-20s here in fiscal 2013 based on the performance of our content and we are very excited. We wish G2 were here next week to be honest with you.

Harry Curtis - Nomura

So is it safe to say that you just don't think that ASPs is going to leak much more if at all?

Brian Gamache

No I think it's going to as I said before, it's probably going to stay in that $16,000 range for a period of time and before the business becomes stabilized and then I think you will see it go from there at some point in time. But right now when you look at our margins, we are able to reduce our prices and increase our margins. That's a really good trend and continue to have that kind of success in our supply chain, we are going to continue to try to leverage that.

Harry Curtis - Nomura

Okay and my second question was really trying to get a sense of your body language for product sales in 2013, you mentioned that 2012 benefited from some strong new openings and that there would be two more openings in Ohio plus larger shipments to VLTs, but the VLT markets tend to be lower ASP markets and so is that kind of a subtle way of saying and then you also mentioned perhaps a higher mix of lease games. Is that a subtle way of saying that 2013 could be a difficult comp year as far as product sale revenues.

Brian Gamache

No, I don't think we said that Harry. I think it's too early for us to give any directional guidance. We are still in the process of creating our three-year plan and our annual budget for the board and I think we will have more to comment on that in August. But again I think that the market is sequentially better than it was a year ago, but it's still somewhat challenged and we are going to continue to fight hard, we are going to continue to innovate and I think when you see the products we are going to bring to G2E, new platforms, new form factors you know new licenses you are going to see us coming with both guns ablaze. So we are not out of woods yet but it's better than it was.

Operator

Our next question comes from the line of Steve Wieczynski with Stifel Nicolaus. Please go ahead.

Steven Wieczynski - Stifel Nicolaus

So I can do this right and you add back kind of $800 kind of ASP and you get to that 16,000 range and that would essentially take your product margins up to kind of the 53% to 53.5% range is that a pretty good you know kind of indicator going forward and you know how much higher can you get those margins if you there is really not going to be a much more on the price side?

Brian Gamache

I think that's directionally a pretty good area to focus on Steve. The whole thing will depend on our mix of business as it usually does. We have several you know premium for sale products coming out in fiscal 13 that we hope will drive ASP. We have some different kind of form factors that we are going to be bringing to market that hopefully will drive some ASP, but you know given this competitive marketplace you know we are very sensitive to our pricing right now and I would rather focus on the margin aspects on the supply chain excellence than on the ASP area. But we will make up whatever we can make up in the ASP category we will make it up and through a continuous improvement.

Steven Wieczynski - Stifel Nicolaus

And then Scott, in the quarter did you ship to two Ohio properties or just one in the quarter?

Scott Schweinfurth

Both of the Ohio casino properties, yes

Operator

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

Joel Simkins - Credit Suisse

A couple of quick questions; Brian, obviously, we've spoken in the past about a video poker; we did talk earlier on the call about some optimism for this segment. Can you just give us a sense of what we can expect and what would sort of be a success for you guys in the next year or two in the segment?

Brian Gamache

I think if you looked at the video poker, we've got somewhere in the 5% to 10% of the installed base out there in the next couple of years Joel, that would be a huge home-run for us. Poker is a market that is you have to have a lot of patience and you have to have some good product, because the poker players are very kind of predictable, they like what they play and they're used to playing a certain product.

So to get them to switch brands, and get them to give you the trial, it's not going to happen overnight. So we're not good for a grand-slam here, we're just looking for a good single or double and that would be very accretive to our share.

Joel Simkins - Credit Suisse

And in terms of your social gaming interactive business, obviously, you've got Jackpotparty.com now; you've got this Lucky Cruise game and then it looks like it has ramped quite a bit, and then today you recently announced this Groupe Partouche deal. When do you guys think you'll need to be able to grow or when will you breakout this business in terms of some more color on or operating metrics etcetera?

Brian Gamache

Well, we're doing a lot of things under the radar here Joel, and we get asked a lot of questions about when are we going to have more color on that? And I believe that we'll probably give the Street more color and guidance on interactive business sometime between now and the end of Q4.

There is a lot of things, very exciting things that are being developed here organically and inorganically and we’re anxious to share that with you, but we believe this is a very important part of our business going forward.

We were the first ones in our industry to have the online gaming in a legalized jurisdiction given the fact that we're doing this B2B model with Partouche is a very exciting announcement as well. So there is a lot of things that we want to clarify and share with you in the months ahead.

Operator

Our next question comes from the line of Bill Lerner with Union Gaming. Please go ahead.

Bill Lerner - Union Gaming

A couple of questions or a few questions; one, for the Bluebird2e, what's the ASP premium relative to Bluebird2, I guess probably the way of asking and then I have a couple of follow-ups?

Brian Gamache

We don't break that out Bill, but its margin neutral, if that gives you any help.

Bill Lerner - Union Gaming

So it's about driving demand?

Brian Gamache

Yeah exactly. This is a hybrid product between our, we view the Bluebird2e Bill, as a hybrid between our Bluebird2 and our Bluebird3 so to speak, that's down the road.

Bill Lerner - Union Gaming

And then what maybe for Scott, what percent, Brian, you called it backlog or open orders, but what percentage of your open orders generally convert to revenue and generally over what timeframe; is it the majority or is it all?

Scott Schweinfurth

Yeah, substantially all of them because these are orders that customers have signed up for and I'll say a bit rare for customers to cancel an order once they've signed it; if they want to get that order out on the floors as (inaudible) as they can.

Brian Gamache

And I think as far as we consider Bill, a 100 units installed per week is a good velocity that's when we're really clicking and we have it’s actually more than that during Q3. So we're starting to get that footprint really where we wanted to be and going into Q1, we should have a dramatic reset of expectations going forward.

Bill Lerner - Union Gaming

So it's less than six months or less it sounds like?

Brian Gamache

I would say it's really two to three quarters, yes.

Bill Lerner - Union Gaming

And guys last one; Brian, maybe you could talk about this, in terms of rate of change in your business, obviously there is a lot of focus for obvious reasons on sequential improvement.

But Brian when you look at the metrics that you are focused on internally, whatever they are, whether it's external improved product approvals, whether it's how well you are budgeting relative to how well you were in prior months or quarters. How does sort of April look relative to January across all the metrics that Brian that you particularly care about?

Brian Gamache

April I think is, typically we see our Q4 ramping up to be our seasonally busiest quarter of the year; it goes Q4, Q3, Q2, Q1, and so I think the month of April is a little bit softer than we would like in our gaming operations business; but, that doesn't mean it's not a huge difference; it's just slightly off of what our forecast was, but our order book is building dramatically; so that kind of offsets that.

As far as our gaming approvals and so forth, everything that we are bringing out in the quarter is on time and on target. So from that perspective, I look at that very carefully.

As far as our game development, you know it used to take us about 15 to 18 months to get the game to the pipeline from conception to final approval. We are now less than the six months and that's taken a lot of working hard, process improvement, deliverables in our product development folks to make those kind of improvement.

So we are able to do things quicker and more nimbly and our expenses are less year-over-year. So we are driving a lot of things that haven't really made the radar yet from an operational perspective, but I think we’ve done a really good work on.

Operator

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

Dennis Forst - KeyBanc

Yes, I wanted to ask about launches for the June and September quarters; Brian you had just a second ago mentioned that everything is on time. Can you give us the names of some of the new product that's going to be in the pipeline over the next six months?

Brian Gamache

Sure, our Q4 Dennis we’ve got Aladdin, Super Team, Gone With The Wind, Monster Jackpots, Life of Luxury-2, and Wizard of Oz, Great and Powerful. So we have some significant strength coming into this quarter.

Now again, as Scott mentioned earlier, it's not going to all be in from day one. It kind of evolves over about a two month period when we get these things launched properly, but it will triple into Q1 and you'll see some impact here particularly in the month of May and June of these games hitting the floor.

Dennis Forst - KeyBanc

And then my other question was about VLT sales; where were some of the major properties or markets where you did significant VLT sales during the quarter just finished?

Brian Gamache

We sent some to Maryland in the quarter and that's the biggest component.

Dennis Forst - KeyBanc

And anything else significant in the quarter from?

Scott Schweinfurth

No, minor here and there; nothing significant that we would compare to Maryland.

Operator

And our last question comes from the line of Todd Eilers with ROTH Capital Partners. Please go ahead.

Todd Eilers - ROTH Capital Partners

Just two questions, first on the gaming ops, off the I guess 107 net adds at the end of the quarter, can you just give us a sense for how much of that was related to new openings or new properties versus maybe the existing footprint?

And then also can you give us a sense for which brand kind of drove the increase in the quarter, was it Epic Monopoly or CLUE just be helpful to kind of give a sense for maybe what drove the growth there?

Brian Gamache

On your second question on the game themes, yes it was CLUE which got its first approval right at the beginning of March and then we got a second one closer to the end of March and that was an element of the increase.

Second, I would say was Epic Monopoly, which we had received initial approval for in the December quarter and as demand built we fulfilled that demand.

And then third we came out with two new mechanical reel games for our Lord of the Ring series and that too helped drive demand there. And Todd I don't have in front of me what related to specific new casino openings, but certainly the Ohio properties and Maryland Live didn't open during that quarter and I just don't recollect what…

Brian Gamache

I think it's mostly existing casinos.

Brian Gamache

I think that's a fair estimate.

Todd Eilers - ROTH Capital Partners

And then just last question on new opening sales, you had mentioned Maryland VLTs in the quarter and I know Maryland Live I guess is opening in two phases. Can you give us a sense; did you shipped all of that order in the quarter or should we still expect more of that to come with the second phase?

And then second question related to that I guess is you had mentioned you shipped 759 of the 957 previously shipped games last quarter that you didn't recognize revenue on. Do you expect to recognize the balance of that in 4Q?

Brian Gamache

Yes, for related to Maryland we shipped the preponderance of the games for that opening in the March quarter. And relative to the units that we still have yet to recognize revenue on our belief is we will be able to recognize revenue on those in the fourth quarter.

Operator

There are no further questions at this time; I would now turn the call back to you.

Brian Gamache

Thank you for joining us this afternoon. As you can tell from our comments we're encouraged by the success of our latest products and the efficiencies being realized from our reorganization and realignment actions. We look forward to updating you on our next call in early August regarding our ongoing progress and the opportunities to grow in fiscal ‘13. Thank you.

Operator

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

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