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WMS Industries Q2 Revenues Rise

WAUKEGAN, Illinois -- (PRESS RELEASE) -- WMS Industries Inc. (NYSE:WMS) today reported net income of $3.9 million, or $0.12 per diluted share, for the Company's fiscal 2005 second quarter ended December 31, 2004 compared to a net loss of $0.4 million, or $0.01 loss per diluted share, for the December 2003 quarter. Total revenues for the December 2004 quarter increased 83%, or $42.5 million, to $94.0 million compared to total revenues of $51.5 million in the December 2003 quarter. The increase in total revenues was due to a 102% quarter-over-quarter improvement in new unit shipments to 5,811 units, an 18% increase in the average selling price of new gaming units to $9,938, a 4% increase in the average installed base of participation games to 4,712 units and a 20% increase in the average revenue per day of participation games to $46.30.

WMS' fiscal 2005 second quarter total revenues exceeded the Company's guidance for revenues of $85 million to $90 million, and new unit shipments of 5,811 units also surpassed the Company's guidance for 5,100 to 5,300 new unit shipments for the December 2004 quarter. In addition, the average selling price for new units exceeded the average selling price in the fiscal 2005 first quarter, as anticipated by the guidance. The installed base of participation games as of December 31, 2004 was 5,021 units and in-line with the anticipated installed base of between 4,900 to 5,100 units contemplated in the Company's guidance. As expected, average revenue per day for participation games continued to grow over the average revenue per day achieved in the Company's quarter ended September 30, 2004.

Financial Guidance

WMS today raised its fiscal 2005 guidance and initiated fiscal 2005 third quarter guidance for revenue and other financial metrics as outlined in the table below. The fiscal 2005 revenue guidance is based on current open orders for over 7,800 new gaming devices and over 2,100 participation gaming devices. The Company expects that higher research and development, selling and administrative, and depreciation and amortization expense - which are largely related to higher unit sales and participation game placements - will partially offset the increase in gross profit from the higher revenues.

New units sold in the fiscal 2005 second quarter included 5,684 new Bluebird® gaming devices, 90 hybrid units and 37 legacy units. The average selling price per new unit increased 18% from the prior year quarter to $9,938 in the December 2004 quarter reflecting the benefit of increased sales of gaming devices housed in our Bluebird cabinet, which generated an average selling price per unit of $10,025 in the fiscal 2005 second quarter. The increase in total revenues for the December 2004 quarter also included an increase of $4.9 million, or 73%, in OEM, parts, used games and conversions revenues resulting from shipment of 1,500 OEM units to Multimedia Games, and greater conversion sales, as we shipped 1,102 conversion kits, including 969 CPU-NXT(TM) upgrade kits in the quarter.

Gaming operations revenues of $24.6 million increased by $3.9 million in the December 2004 quarter compared to the December 2003 quarter. The average installed base of participation gaming devices increased to 4,712 units in the December 2004 quarter from 4,549 units in the prior year quarter. The period end installed base grew 535 units to 5,021 units at December 31, 2004 from 4,486 units at September 30, 2004, as we continued to roll-out four new participation games in the Bluebird cabinet: MONOPLY(TM) Money, MONOPOLY Once Around Deluxe®, MEN IN BLACK(TM), and MATCH GAME(TM). The success of these new games has accelerated our transition from participation games in legacy cabinets to new games in Bluebird cabinets as we installed 1,271 new games in Bluebird cabinets in the December 2004 quarter and at December 31, 2004, approximately 40% of our participation installed base is in Bluebird cabinets.

Since December 31, 2004, we have added over 200 additional participation gaming devices resulting in a current installed base approaching 5,250 units. We expect growth in our installed base and average net revenue per day of gaming operations machines in future quarters as we continue to install new participation games in our Bluebird cabinet. As of today, our open orders for conversions and new participation games exceed 2,100 games of which over 1,600 are for new gaming devices with the balance for conversion of existing gaming devices. This current level of open orders remains among the highest in our history, even after the growth of the installed base footprint by over 1,000 units, or 25%, since June 30, 2004.

The average revenue per day for participation gaming devices in the December 2004 quarter increased by $7.87 per day, or 20%, from the December 2003 quarter and by $4.35 per day, or 10%, from the September 2004 quarter to $46.30. The Company believes this increase reflects the favorable response from casino patrons to the introduction of new game themes in the new Bluebird cabinet and the increase in placements of our wide-area progressive (WAP) gaming devices which generated a higher revenue per day than our non-linked participation game offerings. Our $46.30 average revenue per day includes both WAP and non-WAP games. Based on game refreshes, new game themes and the inclusion of the WAP product offerings, we expect the positive trend in average revenue per day to continue throughout fiscal 2005.

Total gross profit increased 58%, or $16.9 million, to $46.2 million for the December 2004 quarter from $29.3 million in the December 2003 quarter. The gross profit margin on product sales revenues was 38% for the December 2004 quarter and 39% for the December 2003 quarter. The gross margin percentage this quarter was impacted by the product mix as well as overtime and temporary help costs as a result of a high portion of our unit shipments occurring in the month of December. We continue to expect that in the future, the gross margin on the Bluebird gaming devices will approach the mid-40% range, as with greater production volumes we expect larger volume discounts from our suppliers, particularly with respect to electronic components, and with a leveling of production throughout the quarter we anticipate a reduction in the use of overtime and temporary help. In addition, the recently increased list price is expected to support margin growth. The gross profit margin on gaming operations in the December 2004 quarter decreased to 80% from 84% in the December 2003 quarter reflecting lower margins on WAP games and higher royalties payable to licensors, partially offset by higher royalties received from licensees.

Research and development expenses increased $3.3 million, or 32%, to $13.5 million in the December 2004 quarter compared to $10.2 million in the prior year quarter. These costs were up $1.4 millon over the September 2004 quarter due to higher regulatory approval costs incurred for implementing the final approvals of CPU-NXT and Bluebird, for a greater number of new game themes and for the final legacy operating system upgrade in GLI territories, plus headcount increases to fully staff international game development studios and increased staff for the long-term portion of the technology improvement plan.

Selling and administrative expenses increased $5.8 million, or 43%, to $19.3 million in the December 2004 quarter compared to $13.5 million in the December 2003 quarter. These cost increases resulted from higher commissions based on substantially higher revenues, additional headcount, overtime and temporary contract labor for game installs, participation placements and certain administrative areas due to increased demand and the timing of shipments and additional trade show and marketing costs to continue to support the simultaneous launch of three new product lines, and higher equity compensation costs.

Depreciation and amortization expense increased $2.7 million from the December 2003 quarter as the level of investment in participation gaming devices for gaming operations increased with the installation of 1,271 new games in Bluebird cabinets during the December 2004 quarter. We expect the level of investment in gaming operations equipment will continue to increase throughout fiscal 2005 due to the on-going placement of new participation game themes, including WAP game themes, in our new Bluebird cabinet.

WMS generated a $5.1 million improvement in results from operations in the December 2004 quarter compared to the December 2003 quarter. The improved operating performance in the fiscal 2005 second quarter resulted from a $16.9 million increase in gross profit, partially offset by a $5.8 million increase in selling and administrative expenses, a $3.3 million increase in research and development expenses and a $2.7 million increase in depreciation and amortization expense.

We incurred interest and issuance cost amortization expenses of $1.0 million in the December 2004 quarter primarily related to our 2.75% Convertible Notes. Offsetting this, we recorded $1.5 million of pre and post-tax income related to final settlement of tax advances with our former subsidiary, Midway Games, which we had previously fully reserved. We also recorded a tax provision of $1.6 million in the December 2004 quarter reflecting the impact of our revised estimated annual effective tax rate of 32.5%.

"The December 2004 quarter revenues demonstrate that demand for our products continues to surpass our expectations for both gaming device sales and participation game placements," stated Brian Gamache, President and Chief Executive Officer. "Its been just over a year since we started shipping our new Bluebird cabinets powered by our CPU-NXT operating system and it's become increasingly clear to those following the gaming industry that our casino customers and their patrons alike have strongly embraced these new products. The increasing demand we are experiencing for our products validates that perception. At the same time, we continue to manage the Company with a long-term horizon with market share growth a primary objective. Hence, costs were incurred in the December 2004 quarter in several areas to ensure timely unit shipments, increased participation game placements and customer satisfaction.

"Since shipments of Bluebird cabinets and CPU-NXT upgrade kits began in December 2003, we have shipped an aggregate of 15,912 new units and 5,398 upgrade kits," continued Gamache. "The high earnings performance of our new games and the success of our award-winning cabinet has led to our open orders remaining strong at over 7,800 new Bluebird units and over 1,000 CPU-NXT upgrade kits, providing us with greater visibility to future results. We met or exceeded every revenue performance metric we provided as guidance for the December quarter and our revenue visibility for the March 2005 quarter is very good. As a result of this increasing visibility, this morning we are raising our fiscal 2005 revenue guidance to a range from $370 million to $395 million.

"Perhaps the strongest evidence of the acceptance of our product is demonstrated by our announcement today of the extended relationship with our Russian distributor, Unicum. At a minimum of 24,000 new units over the six-year term beginning July 1, 2005, this represents the largest single customer arrangement in our history. As reported in the industry, the Russian market is the fastest growing legalized market in the world. Teaming up with the market leader provides an excellent opportunity to further strengthen our penetration in this growing market. This extended arrangement is expected to result in a stream of gross profit dollars at about double our current volume of Russian business over the term of the agreement.

"Late last week we launched our first two Clint Eastwood-based games on A FISTFUL OF DOLLARS(TM) wide-area progressive jackpot in Nevada and Native American casinos," stated Gamache. "The product has met with unprecedented demand, as before we even launched the jackpot, our open orders amounted to over 600 games. The great game content our designers have created validates the investments we have made and expect to continue to make in licenses.

"We recognize the need to show greater improvement in our operating margins," continued Gamache. "We have attempted to balance increasing our operating margins and meeting customer delivery expectations while at the same time ramping up for the dramatic growth we are now experiencing. The success we had at G2E and the fact that customers accelerated their purchasing decisions in advance of the January 1, 2005 price increase, resulted in a tremendous concentration of quarterly activity in the month of December. We have implemented new processes and changed our production planning to make us more efficient throughout each quarter. In this regard, we are cautiously optimistic as we manufactured 34% of our expected March quarterly production in January 2005. We clearly recognize that we have to manage for greater profit and the actions we have taken are expected to help us achieve this objective.

"Looking back on the last twelve months and the two years of development before that, we are delighted with the level of acceptance and excitement that our products have now achieved," concluded Gamache. "During these three years, we proved that we could deftly manage the development and approval process. In re-launching the Company, we came to realize that the operational requirements to handle the ever-increasing demand were greater than expected. As such, we have implemented action plans to improve the efficiencies of our operations and expect to see initial benefits in the current quarter. We are clearly focused on dramatically growing our market share and further distinguishing ourselves from others in the industry to ascend to the position as North America's second largest provider of gaming devices."

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