WMS Industries Results Up

WMS Industries Inc. today reported net income of $7.7 million, or $0.22 per diluted share, for the Company's fiscal fourth quarter ended June 30, 2005, inclusive of net inventory charges of $3.0 million pre-tax ($1.9 million after tax) which had the effect of reducing diluted earnings per share by $0.05. The net inventory charges primarily reflect the rapid acceptance in the marketplace of WMS' Bluebird® gaming cabinets that has accelerated the transition from the Company's legacy product line. In the June 2004 quarter, WMS reported net income of $0.9 million, or $0.03 per diluted share. For the year ended June 30, 2005, the Company reported a significant improvement in net income to $21.2 million, or $0.62 per diluted share compared to a loss of $(0.9) million or $(0.03) per diluted share in fiscal 2004.

"Fiscal 2005 was a year of great accomplishments for WMS as we successfully completed our re-emergence and then focused our efforts on increasing operating margins and shareholder returns," stated Brian R. Gamache, President and CEO of WMS Industries. "Our open orders for new units and participation games remain among the highest in our history even as we recorded significant gains in unit shipments and gaming operation placements throughout fiscal 2005. WMS' products are clearly in demand by casinos and their customers which supports our confidence in our prospects for continued revenue growth.

"We also gained traction with our new mechanical reel product line and wide-area progressive placements," continued Gamache, "and we expect revenues from both of these product lines to be growing contributors throughout fiscal 2006. With the participation game installed base now exceeding 6,750 units, including more than 1,000 wide-area progressive units, we expect growing contributions from this business in the current quarter.

"In addition to our operating successes, WMS also made important additions, in fiscal 2005, to its intellectual property arsenal with internally developed concepts and through important agreements with companies such as Aruze, Harrah's and Cyberview Technology," stated Gamache.

Financial Guidance

WMS today updated its fiscal 2006 revenue guidance and initiated revenue guidance for the September 2005 quarter, historically the slowest period of the Company's fiscal year. The fiscal 2006 revenue guidance is based on current open orders for over 10,200 new gaming devices and CPU-NXT(TM) conversion kits and over 2,000 new participation gaming devices and game theme conversions. The current level of open orders remains among the highest in our history, even after the 80% growth in our new gaming units sold in fiscal 2005 and the almost 2,300 unit, or 54%, increase in the installed participation base since June 30, 2004.

Total revenues for the June 2005 quarter increased 64%, or $43.4 million, to $111.6 million compared to total revenues of $68.2 million in June 2004 quarter. Total revenues in the June 2005 quarter reflect an increase of $31.7 million, or 67%, in product sales revenues and an increase of $11.7 million, or 57%, in gaming operations revenue. The increase in total revenues from the June 2004 quarter was due to a 72% rise in new unit shipments to 6,252 units, a 14% increase in the average selling price of new gaming units to $10,804, a 49% increase in the average installed base of participation games during the period to 6,126 units and a 24% increase in the average revenue per day from participation games to $51.27.

New units sold in the June 2005 quarter included 5,589 new Bluebird gaming devices, 606 premium-priced dual screen units and 57 legacy units. The average selling price per new unit increased 14% from the prior year quarter to $10,804 in the June 2005 quarter reflecting increased sales of gaming devices housed in our Bluebird cabinet coupled with the benefit of orders for more premium-priced product offerings. Product sales revenues for the June 2005 quarter reflects a decrease of $1.4 million, or 11%, in parts, used games, OEM and conversion sales. We did not ship any OEM units in the fourth quarter of fiscal 2005 in comparison to 1,000 OEM units shipped in the fourth quarter of fiscal 2004. We shipped 1,126 conversion kits, including 1,057 CPU-NXT upgrade kits in the 2005 quarter.

The average installed base of participation gaming devices increased to 6,126 units in the June 2005 quarter from 4,114 units in the prior year quarter. The period end installed base grew by 2,299 units to a record 6,539 units at June 30, 2005 from 4,240 units at June 30, 2004 and grew by 556 units, or 9%, from March 31, 2005. Our wide area progressive, or WAP, games represented over 14%, or 943 units, of the Company's participation installed base at June 30, 2005, up from approximately 10% of the installed base at March 31, 2005, and these units continue to earn over twice the average daily revenue of our non-linked participation games. Accordingly, the average revenue per day increased 24%, or $9.88 per day, to $51.27 per day compared to the prior year period, reflecting the benefit of more new games in Bluebird cabinets and the greater percentage of higher earning WAP games in our installed base.

The success of new participation game themes continues to accelerate the transition of participation games from legacy cabinets into new games in Bluebird cabinets. We installed 1,687 new games in Bluebird cabinets in the June 2005 quarter and at June 30, 2005, approximately 80% of our participation installed base is in Bluebird cabinets.

Total gross profit increased 57%, or $20.6 million, to $56.8 million for the June 2005 quarter from $36.2 million in the June 2004 quarter. The gross margin on product sales revenues, inclusive of the impact of net inventory charges of $3.0 million, was 42% for the June 2005 quarter compared to 40% for the June 2004 quarter. The net inventory charges impacted the product sales gross margin by 380 basis points. Demand for Bluebird product continues to exceed our expectations. While this higher demand is a positive development for our long-term growth, it has accelerated the transition from our legacy product line. In response to this, we took steps to address the most challenging components of the legacy inventory including selling older model used games and used units configured with undesirable laminate colors, as well as selling back to suppliers excess quantities of certain legacy raw materials. As a result, we lowered the net realizable value on our books of legacy inventory.

We continue to expect that in the second half of fiscal 2006, the gross margin on Bluebird gaming devices will consistently approach the mid-40% range, as we realize the benefits from our strategic sourcing and value engineering initiatives, and continue to receive the benefits from leveling the production schedule throughout the quarter. Additionally, effective October 1, 2005, the Company is implementing a new pricing model to separately charge for hardware and software, which is expected to increase the list price by up to 8% when new hardware and software options become available in the second half of fiscal 2006. With our premium-priced product enhancements, such as marquees and round top cabinets, and an expanded number of dual screen games that command premium-pricing, we expect increases in average selling prices and product margin growth throughout fiscal 2006.

Gross margin from gaming operations was 73% and 83% for the June 2005 and 2004 quarters, respectively, with the June 2005 quarter reflecting the lower margin derived from our WAP games, higher spare parts usage, higher royalties payable to licensors and lower royalties earned from licensees. In addition, the gross margin was impacted by 13 WAP jackpot payouts in the June 2005 quarter.

Research and development expenses decreased $0.6 million, or 5%, to $11.8 million in the June 2005 quarter compared to $12.4 million in the prior year quarter. The decrease in research and development costs from the June 2004 quarter is due to lower headcount from our February reduction in force and May realignment of our research and development organization, partially offset by ongoing costs for technology development, and higher regulatory approval costs for a greater number of new game themes.

Selling and administrative expenses increased $3.4 million, or 22%, to $19.1 million in the June 2005 quarter compared to $15.7 million in the June 2004 quarter. These costs increased over the June 2004 quarter due to net additional headcount, higher commissions based on substantially higher revenues, and higher equity compensation costs.

In aggregate, research and development and selling and administrative expenses in the June 2005 quarter decreased by $1.9 million from the amount incurred in the December 2004 quarter, even as revenues increased by $17.6 million, or 19%. Also, research and development and selling and administrative expenses in the June 2005 quarter as a percentage of revenue decreased to 11% and 17%, respectively compared to 18% and 23% in the June 2004 quarter.

Fiscal 2005 fourth quarter depreciation and amortization expense increased $6.1 million to $14.0 million from the June 2004 quarter as the level of investment in participation gaming devices for gaming operations rose due to the installation of 1,687 new games in Bluebird cabinets during the June 2005 quarter and 5,187 new Bluebird cabinets during fiscal 2005. The Company invested $63.9 million in gaming operations machines in the twelve months ended June 30, 2005. At June 30, 2005, approximately 80% of our participation game installed base is in Bluebird cabinets. Investments in this area are expected to remain at higher levels through the calendar year as we address the market transition of our legacy gaming devices to new participation games in our new Bluebird cabinet.

WMS generated $11.9 million in operating income in the fiscal 2005 fourth quarter, inclusive of $3.0 million in net inventory charges, compared to $0.2 million in the June 2004 quarter. The improved operating performance in the fiscal 2005 fourth quarter resulted from a $20.6 million increase in gross profit, after the impact of the net inventory charges, and a $0.6 million decrease in research and development expenses, partially offset by a $3.4 million increase in selling and administrative expenses, and a $6.1 million increase in depreciation and amortization expense.

We incurred interest and issuance cost amortization expenses of $1.0 million in the June 2005 quarter primarily related to our 2.75% Convertible Notes, and recorded income tax expense of $3.3 million to reflect our annual effective tax rate of 30%.

"We continue to focus on capital allocation, including investing in future content and positioning WMS to drive industry innovation through the licensing of important intellectual property rights," stated Gamache. "Our recently announced agreements with Cyberview Technology again demonstrate our success in gaining access to critical intellectual property that will help us bring new innovative products to market in a timely and cost efficient manner.

"We generated $16.6 million of cash flow from operations in the June 2005 quarter and our combined cash and short-term investment balances increased by $2.5 million," stated Gamache. "Following several years of sustained investment in our technology and products, we expect that WMS will generate free cash flow in fiscal 2006. We will continue to evaluate various options to increase value to our shareholders, including cash dividends, share buybacks, pursuing additional intellectual property agreements and, if appropriate, mergers and acquisitions.

"I am very proud of the accomplishments the WMS team achieved in fiscal 2005," Gamache concluded. "We are now on an even playing field with our strongest competitors, able to compete at the highest levels in our industry and are well positioned to gain market share and take full advantage of the new jurisdictions coming on board in fiscal 2007 and beyond."