WMS increased its interactive operations

Net income and diluted earnings per share in the September 2012 quarter reflect higher year-over-year research and development expenses to support the growth of interactive products and services as well as for the ongoing development and commercialization of a greater number of new participation and for-sale games and cabinets.

Reflecting these factors, research and development expenses increased us$ 3.2 million year over year and us$ 3.3 million on a quarterly sequential basis. Diluted earnings per share in the September 2011 quarter included impairment and restructuring charges of us$ 0.12 per share, primarily for facilities closure and separation-related costs, and us$ 0.05 per share to write down receivables from certain customers in Mexico.

Recent highlights:
•Gaming operations revenues increased both year over year and on a quarterly sequential basis primarily reflecting growth in revenue from interactive products and services and the third consecutive quarter of growth in the installed participation base to 9,632 gaming machines, which led to the first installed base increase over the prior-year quarter in the last eight quarters, partially offset by lower gaming operations daily revenue per unit.

•Product sales revenues rose modestly reflecting sales of 693 new video lottery terminals (VLTs) for the Canada and Illinois VLT markets. Product sales revenues also include higher other product sales revenues including one-time software revenues of a VLT game set and higher revenues from used gaming machine sales, which more than offset the anticipated lower industry-wide shipments for new casino openings and expansions and a lower average selling price reflecting the higher mix of lower-priced VLTs and the competitive marketplace.

•Gross profit increased us$ 4.1 million reflecting a 120 basis point improvement in gross profit margin due to higher product sales margin and a greater mix of gaming operations revenues. Product sales gross margin was 53.1%, a fiscal first quarter record, reflecting the mix of business, ongoing benefits from the company's continuous improvement and supply chain management initiatives, and the VLT game set software, which more than offset the impact of a lower average selling price and the seasonally lower unit volumes for the September quarter that typically impacts margin.

•Adjusted EBITDA increased 24% to us$ 52.9 million as EBITDA margin improved 570 basis points.

•Cash flow provided by operating activities for the quarter ended September 30, 2012, was us$ 21 million, a year-over-year increase of 60% or us$ 7.9 million.
•WMS was selected by the Manitoba Lotteries Corporation to join two incumbent suppliers to replace existing VLT units throughout the province. WMS was previously selected by the Alberta Liquor and Gaming Commission to participate in their VLT replacement initiative.

•During the quarter, Jackpot Party Social Casino was launched and became one of the five largest and most popular social casinos on Facebook, as measured by the number of daily active users and monetization rates.

•In September, the company's first-of-its-kind interactive, casino-branded Play4Fun Network went live at a tribal casino in Iowa, enabling the casino's players to access multiple play-for-fun slot and casual games online, all under the casino's own brand association.

•At G2E, WMS showcased more than 100 new games, including 22 new games leveraging the advanced capabilities of the next-generation CPU-NXT3 operating platform and 87 new games for WMS' successful CPU-NXT2 platform.

Also on display were five distinct cabinet configurations, including the revolutionary new Gamefield xD cabinet for participation games, the all-new My Poker video poker dedicated gaming machines and the next-generation Blade cabinet, WMS' latest upright cabinet, as well as the ever-popular Bluebird®2e and Bluebird xD cabinets. WMS also featured the Williams Interactive branded products and services for online wagering and play-for-fun social, casual and mobile gaming opportunities.

"WMS' progress with the commercialization of new innovative game content and products is evident in both the year-over-year growth of domestic replacement units shipped and solid demand in the Canadian and Illinois VLT markets," said Brian R. Gamache, Chairman and CEO. "Following a period of transition and re-focus on the development of products that address customers' near-term needs, our newest for-sale and participation games continue to re-establish WMS' excellence in the creation of differentiated content and games that deliver value to our customers. Over the next three quarters, we will begin to commercialize our latest games and platforms which were introduced to broad acclaim at the recent Global Gaming Expo. We believe these products are among the most exciting new games and cabinets we have brought to market and expect them to provide casino operators with new must-have products for their players.
"In addition, we are generating very exciting revenue growth from our interactive products and services as we continue to invest in attractive long-term growth opportunities," continued Gamache. "We are extremely pleased by the initial success we are achieving in leveraging the value of our library of proven gaming content into the interactive markets, including social, casual and mobile entertainment. This success is reflected in the us$ 9 million year-over-year growth in revenue from interactive products and services, and we anticipate a range of us$ 35-to-us$ 40 million in annual revenue for fiscal 2013 from these revenue streams. While the costs needed to build a sustainable foundation for interactive products and services impact near-term operating profitability, we believe this investment favorably positions WMS to participate in the attractive, high-margin growth potential of these opportunities that can lead to the creation of new value for our shareholders."

Gamache concluded, "With improved product sales ship share, terrific titles and platforms for our gaming operations business and momentum with our interactive products and services, we fully expect to generate further progress across our worldwide business in the coming quarters."