Jan 30, 2009
Operator
Welcome to the WMS Industries second quarter results conference call. During the presentation all participants will be in a listen-only mode.
Afterwards we will conduct a question and answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, January 29, 2009.
It is now my pleasure to introduce Bill Pfund, Vice President Investor Relations. Please go-ahead sir.
Bill Pfund
Thank you operator. Good afternoon and welcome to WMS Industries’ conference call to discuss our fiscal 2009 second quarter results With me are Brian Gamache, Chairman and Chief Executive Officer and Scott Schweinfurth, Executive Vice President, Chief Financial Officer, and Treasurer.
Orrin Edidin, our President has been in London this week heading our presence at the International Gaming Expo trade show or IGE, or perhaps better known under its former acronym of ICE. Although it has already been a long day for him, he is joining us to answer questions following our prepared remarks.
Before we start let me review our Safe Harbor language. 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 Risk Factors in the company’s annual report on Form 10K for the year ended June 30, 2008 and in our more recent reports filed with the SEC.
The forward-looking statements made on this call and webcast, the archived version of the webcast and any transcripts of this call are only made as of this date January 29, 2009. Now let me turn the call over to Brian.
Brian Gamache
Thank you Bill, good afternoon everyone. This afternoon we reported year-over-year quarterly revenue growth of 12% to $178 million, net income growth of 48% to $24 million, inclusive of a $5 million pre-tax benefit from the cash settlement of a trade mark litigation and 70% growth in quarterly cash flow from operating activities to $53 million.
These results achieved in the face of the overall economic challenges that we have all been aware of highlight our continuing ability to deliver steady growth in revenues earnings and cash flow. There are clear signs that WMS has the right Blueprint in place and the ability to execute on our strategies that develop products that casino customers and their players’ desire.
They are also demonstrating the powerful impact of our success in executing on our operating improvement in capital efficiency initiatives. The 70% increase in quarterly cash flow from operations and the significant progress in improving operating asset and liability efficiency boasted our already strong balance sheet further strengthening our foundation to support ongoing product development in other growth initiatives.
This consistent progress in achieving improvement in operating excellence is creating additional value for our shareholders. In particular, I would like to note our gaming operations revenues increased 16% and growth profit rose 20% year-over-year driven by 8% growth in our average installed base and 10% growth in our average daily revenue, reflecting the continued strong play levels for our unique products.
Our great content and innovative products also lead to continued new product units sales growth worldwide. North American shipments increased a healthy 8% and our international shipments grew 4% year-over-year.
As expected our average selling price rose 8% to $13,686 reflecting demand for premium priced products, particularly our new network ready Bluebird2 gaming machines, which accounted for approximately 17% of the new unit mix. WMS’ consistent growth in this difficult market is directly attributable through our expanding library of great products that out run our industry averages, which has lead to further market penetration.
We achieved solid revenue growth of 13% in the first half of fiscal 2009 by staying focused on our key priorities. While we expect continued growth in the second half of fiscal 2009, as anticipated will be a lower growth rate than the first half of 2009.
In today’s difficult economic environment, we are maintaining our commitment towards market share and financial growth, while remaining careful not to over extend or over reach, with the positive response by customers to our products at both G2E and this week at ICE and with the continuing operating improvements, we are reiterating our revenue and margin targets for fiscal 2009. With the solid results of our first six months under our belt let me show you some of the factors that support our expectations for the remainder of 2009.
First, the continued strength in play levels achieved in our participation business. Our installed base of our participation products increased by over 400 units since June 30, 2008 and with an installed base of 9,741 units at December 31, we enter the back half of fiscal 2009 with an installed foot print that is at the high end of the guidance we provided for the average installed base for fiscal 2009.
With the launch of exciting new products such as POWERBALL power seat on our Community Gaming platform two new wizard of hours games on our transit of real gaming platform and time machine on our sensory emergent platform along with the real men compete to win that utilizes the capabilities of our wide area network to provide unique gaming experience for our players. We expect a further momentum in our additions to our installed base in the coming quarters.
This is evidenced by the almost 2,100 open orders for new installs or game theme conversions an amount that is consistent with the level of open orders over the past 20 quarters. As such we are on track to exceed the high end of our guidance range for the average installed foot print of participation units for fiscal 2009.
The 10% year-over-year increase in daily revenue per unit in the second, a test of the continued strong play levels and player appeal for our participation products. The 3% quarterly decline in this metric reflects normal seasonal fluctuations.
Against the backdrop of the sluggish economy our daily revenue results for the first half averaged $67.66, which is 12% ahead of the comparable six month period a year ago. And thus far during the month of January, a wide area of progressive daily rate continues to demonstrate ongoing strong play levels in spite of the slow economy and that’s above the rate we achieved in the month of January last year and for this past December.
Given the strong first half results, we anticipate that we will likely beat the high end of our annual daily average revenue guidance of $63 to $64. Second, favorable customer response to new products.
Particularly the forth coming launch of the Bluebird II mechanical real gaming machine utilizing our transits of real technology continues to support our expectation for market share improvement. Taking together our results for the first six months and or open orders for another 10,000 units we only have to source about 5,300 additional units to reach our projected guidance of 29,200 to 30,000 units for fiscal 2009.
As our open orders are below the range of visibility we had this time last year, this may lead to being at or just below the low end of our annual unit guidance range offset by the expected upside from our growing gaming operations revenues. We continue to expand the breadth of our revenue base through the growth of our international business.
While economic challenges are evident in some regions our opportunities are broadly based across the globe. We have a talented sales and service team backed by a growing offering of high earning great products that customers want.
Last quarter I mentioned the opportunity presented by two meaning international orders, merely as an illustration of expanded range of opportunities we were executing on in the international arena. I am pleased to update you that we secured the first of those two orders and that we remain encouraged by the opportunity for the second order in the future.
As Bill mentioned Orrin has been in London heading our presence at the ICE trade show. I am pleased to report that our booth activity was brisk, customers came to the show prepared to buy, and we achieved our expectations.
Especially noteworthy was the customers’ favorable response to our new expanded Orion and SiP offerings. A contributing factor to the increase in total product sales revenues is the higher average selling price achieved, which largely reflects the favorable mix of premium products particularly the introduction of the fully digital Bluebird2 platform with its higher selling price.
At $13,686 for the December quarter, the average selling price was 8% higher compared to the prior year quarters ASP. Even with the challenges of the economy, we have seen very good demand for Bluebird2 with its higher price point.
Our Bluebird2 gaming machines represented 17% of our total new product shipments in the December quarter and now account for 35% of our open orders globally. The customer response to Bluebird2 has been extremely favorable and we expect this to have additional favorable effect on our midst of products.
Third, our gross margin is 61%, up 270 basis points and our operating margin is 17% up a 190 basis points demonstrate the ongoing benefits of the continuous improvement and strategic sourcing initiatives our team is successfully implementing. I could not be more pleased to the progress that the entire organization is making in improving our margins, which provides the opportunity to continue to fund new initiatives that will create entirely new revenue streams in the near future.
With the full scale launch of the Bluebird II cabinet in the December 2008 quarter, we achieved our target of keeping product sales gross profit margin in line with the September quarter of 50%. That is 230 basis points above a year ago despite the complexity of adding production for a new platform of its different products and components supply chain.
Cross functional teams from engineering, manufacturing, supply chain management, field service, development, and design have done exceptional job in bringing this fully digital network gaming platform from market amidst favorable reviews from our customers and players. With the significant learning curve and improvements we have attained since we first launched Bluebird gaming machines five years ago, I am confident we will continue to reap further benefits for the company’s ongoing continuous improvement initiatives and the benefits of higher volumes of Bluebird2 gaming machines going forward.
Notably, we achieved the operating margin improvement even as we increased spending in our R&D efforts by 48% on a year-over-year basis. With the operating leverage inherent in our organization infrastructure particularly as we more broadly implement our continuous initiatives throughout the organization.
We expect to continue to improve the operating margin even as we also fund accelerated R&D efforts to bring new products and revenue sources to market during the next few years. We continue to aggressively pursue development of further innovation, technological advancements and unique gaming experiences, the fundamental elements that enable unique new gaming products with high appeal to casino patents that are the basic drivers of our increased market penetration and revenue increases.
As a result, we expect R&D expenses will be at the high end of our original guidance range of 13% to 14% of total revenues in fiscal ’09. Even as we see R&D spending at the top of the range, we are reiterating our guidance for an operating margin of 18 to 18.5 for fiscal 2009.
As we achieved the fiscal 2009 operating margin target, we believe that we are well positioned to continue our progress to fiscal 2010 toward achieving our interim goal of a 20% operating margin. I would now like to turn the call over to Scott, who will provide some additional perspective on our progress of cash flow, improvement in working capital and other financial highlights.
Scott Schweinfurth
Thanks Brian and good afternoon everyone. Our record financial performance is directly attributable to our continued successful execution against the five key priorities that have and continue to support financial growth.
These priorities are, one, grow our North American market share by innovating differentiated products. Two, grow our gaming operations business, while investing our capital deployed in that business in a manner that optimizes return on investment.
Three, continue expanding our international business. Four, further improve gross profit and operating margins and five, increase cash flow.
The financial results discussed in our earnings release highlight progress related to each of these priorities, so ill focus my comments on a few other highlights. First, remember that our revenue base is diversified across the gaming universe both geographically and by customer.
Looking at our first six months, about 39% of our revenues are generate from the recurring revenue base of our gaming operations business which as Brian just noted is doing well even in this challenging environment due to the strong player appeal of our high earning games. Game conversion kits parts a new game sales account for another 8% of total revenues.
The remaining 53% of revenues come from new unit shipments. Of these shipments international customers in aggregate accounted for 37% of first half in fiscal 2009 with demand broadly based across a wide range of markets from Latin America to Asia to Western and Eastern Europe.
Additionally, about 25% of our new unit shipments are the Native American tribal customers, another well diversified customer base. Nevada casinos in total represent less than 10% of new unit shipments.
The remaining 28% are the casino operators in Canada, Mississippi and Louisiana, Atlantic City, Pennsylvania, Oklahoma, and the Midwestern River Belle markets. With our continued revenue growth and margin improvement, we are achieving meaningful progress in driving higher cash flow.
For the first six months ended December 31, 2008 our net cash provided by operating activities increased 45%, while net cash used in investing activities was essentially flat year-over-year for the comparable period. Significant improvement has been made in driving up the efficiency of working capital utilization and capital deployed in our gaming operations business even as we continue to grow that business.
The year-over-year improvements in working capital efficiency are quite visible on our balance sheet. Inventories are down 25 million from a year ago and 11 million since June 30, 2008.
This is particularly impressive as it includes the preparations for and launch of our new Bluebird II gaming platform in the December 2008 quarter with its different parts and components supply chain. This substantial achievement highlights the benefits from our use of lean sigma tools and the design of the cabinet in our cross functional collaborative team work efforts.
As a result of these improvements inventory turns have improvement 19% just 3.7 turns a year from 3.1 turns a year ago. Similarly our total current accounts and notes receivable are down 4 million or 2.5% compared to December 31, 2007 even as trailing 12 month revenues grew by over a 100 million or 17 – and more recently since June 30, 2008 total current accounts and notes receivable decreased 31 million, while revenues in the first six months 33 million of the comparable prior year period.
Additionally, for the December quarter we reduced day’s sales outstanding from a 105 days a year ago to 90 days, again particularly noteworthy in this economic environment where companies were looking to retain their cash longer. Importantly, we believe there are additional opportunities to improve processes and further improve our working capital efficiency even as we expect to grow our revenues.
As a result our balance sheet continues to be in excellent shape in this liquidity sensitive environment. At December 31, 2008 our cash, cash equivalents, and restricted cash totaled a 135 million an increase of 8 million from September 30, 2008, even as we continue to self-fund our capital needs for our growing gaming operations business expanded and further invested in our Chicago development and technology campus and repurchased approximately 711,000 shares of stock for $16 million at an average price of $22.34.
Since the inception of the company’s common stock repurchase program in January 2002, we have purchased approximately 7.6 million shares or 11% of fully diluted shares at an average price of $15.46 for a total expenditure of approximately 118 million. We presently have 85 million of availability of authorization for additional repurchases.
As we look at WMS’ continued evolution, I believe our cash flows demonstrate the balance we are achieving. If one were to look back over the last 12 months, arguably one of the most difficult economic environments we have seen, we repurchased nearly 2 million shares for about 56 million.
More importantly, we invested 50 million into our high return gaming operations business, another 50 million in capital expenditures for PP&E to support our operational improvement and our work environment for employees, invested 17 million in licenses for intellectual property and spent 94 million for internal R&D activities a total of 266 million, while total cash increased 53 million and we still have 400 million availability under our credit line. I reiterate what I said last call, in this challenging economic environment it is very comforting to have our strong cash flow, a rock solid balance sheet, a health cash balance, access to our 100 million credit line and prospects for continued growth.
With our strong balance sheet significant improvements and operating execution and customer service, coupled with our broader array of high earning products we are well positioned to work with our customers and find innovative and responsive solutions to their needs. With capital constrain for certain operators near-term we will more fully leverage our strength with appropriate discussion to help our customers get WMS’ must have products on their floors.
We’ve experienced several years of extremely low replacements in the industry and more recently the industry has been impacted by the slow economic conditions and a general reluctance by operators to over invest in last generational products knowing that server ready products are coming. With the launch of the Bluebird2 video gaming machine in the December quarter and the Bluebird2 mechanical reel product in the current March quarter, we believe we are well positioned to continue to grow our market share as the industry replacement cycle improves in future years.
Today, we reiterated our fiscal 2009 guidance for 10% to 12% revenue growth or a range of 712 million to 728 million based on the visibility and factors that Brian mentioned. For the March 2009 quarter, which we believe will be the most challenging of our fiscal year, we expect to achieve total revenues of 178 million to 185 million with much of the anticipated year-over-year improvement driven by growth in the gaming operations revenues.
As I noted last quarter, each of the last two fiscal years, our third quarter revenues have ranged from 25% to 27% of our annual revenue and our guidance for fiscal 2009 third quarter is consistent with that range. Our fiscal third quarter guidance takes into account that we expect the domestic marketplace to continue to be impacted by the slow replacement cycle a low level of new casino openings and expansions and the tough comparisons with the March 2008 results.
Remember unit shipment visibility in the year ago quarter benefited from the expansions at several native American Casinos in California that received expansion approval with its success referendum results plus exceptionally strong international growth. Our third quarter revenue guidance implies a fourth quarter revenue range of 204 million to 214 million representing year-over-year growth of 10% to 15%.
While the March 2009 quarter will have few new casino expansions or new openings. Based on customer scheduled openings, we expect an uptick in the June 2009 quarter.
Our guidance reflects our realistic assessment based on the visibility we have for existing organic growth trends as well as our sensitivity for typical seasonal influences on average daily revenue in our gaming operations business and the anticipated impact on consumer spending related to the economic environment. And with that let me turn the call back to Brian for final comments.
Brian Gamache
Thanks Scott. As we continue pursuing the operating priorities that Scott mentioned, each of which is contributing to our near-term success, I want to conclude by also reviewing those efforts that support our long-term vision.
Ever since we began articulating our three part technology improvement plan some seven years ago, we have been totally committed to creating, licensing, and acquiring intellectual property in advanced technologies to strengthen our competitive capacities to provide the sustainable growth opportunities in a next evolution of the gaming industry with the advent of network gaming. Unlike some WMS has pursued a development path that commercializes a unique server foundational product ahead of the full adoption of worldwide network gaming.
From the great success we have achieved with the foundational technologies deployed in our Community Gaming, Sensory Immersion, Transmissive Reels, and most recently Adaptive Gaming participation platforms for the launch of our Bluebird2 fully digital gaming cabinet, WMS’ approach has never wavered. The success of our product has enabled us to deepen our penetration across the casino floor and further differentiate WMS from our competitors.
We result this testimony to the benefits of the company’s bank-by-bank limitation plan focused on new products at each step along the technology path and we are now approaching the threshold for entering the next round of network gaming. In December 2008, WMS achieved two significant milestones that highlight our continued progress to add systems capabilities to our product portfolio.
First, our agreement to play customized Star Trek games at Harrah's properties. These games featured unique system capabilities allowing members in Harrah's total rewards program to log on to Star Trek games at Harrah's properties really by inserting their total rewards car into the player tracking reader on the gaming machine.
This feature is made possible through the system inter-phasing of Harrah's proprietary total rewards system with the server enabled capabilities of WMS’ wide area network. This is a small yet important example of the many possibilities available in networking gaming environment that align our product capabilities with our customers interest to deliver solutions that support these strategic efforts.
The second milestone was the approval by the Nevada Gaming Commission of the first generation WAGE-NET system, including the remote configuration and download of applications. This first version of WAGE-NET is GSA compliant and demonstrates our total commitment to support open architecture and standards based protocols that our casino customers want and should expect and will further be refined as we move toward the first commercialized network application enabled by WAGE-NET system, which we expect to introduce roughly a year from now.
While Nevada’s improvement has no immediate revenue implication for fiscal 2009, this is a very important milestone in our path towards selling systems applications in the network world. At G2E many of you saw our fifth and sixth foundational technology platforms.
Our account based WAGE-NET platform and the portal technology platform will provide significant personalization of the gaming experience for players. Both platforms are WAGE-NET enabled.
These systems applications are scalable and due to the significant flexibility of the WAGE-NET system can be implemented in both fully network casinos and in today’s SAS environments. These platforms will provide entirely new revenue stream opportunities for WMS and we expect them to generate applicable systems type margins.
WMS has often been characterized as not being in the systems business. Depending on the one separation of systems that may have been historically a true statement.
In addition to our wide-area progressive and local-area progressive systems and our Star Trek adaptive gaming system the approval of WAGE-NET is the meaningful step in changing the nature of our positioning in the future and in building the foundation for entirely new revenue streams from systems applications. Through the use of industry standard communication protocols and a truly open architecture our approach is aimed at creating and delivering high return benefits to our customers for which WMS has been know, while utilizing the increased power and capabilities on the service supported high-speed network to create exciting new gaming experiences for players.
Our network gaming R&D efforts over the past years have been dedicated to our wide-area network and our WAGE-NET system, and the new applications that will be enabled in a open architecture gaming environment. Coupled with our competitive strength for developing player appealing content, we believe we are in a strong competitive position to generate additional stockholder value.
As we look at 2010, we are optimistic about our prospects for our continued profitable growth. Not only will be begin to reap the benefits from our focus in investment in preparing for the network gaming with the new revenue sources, but as the economy stabilizes, we expect replacement rate for gaming machines North America will begin to improve.
Even as we remain grounded in our realistic expectation for near-term revenue growth, we continue to emphasis discipline improvements and are spending in investment for achieving sustained long-term profitable growth. We anticipate that with our focus and operating execution and the creation of intellectual property, we will build long-term value and yield rewarding results for our stockholders.
Now we will be happy to take your questions.
Operator
Thank you. (Operator instructions) Our first question coming from the line of Joe Greff, J.P.
Morgan
Joe Greff
Hi, guys, how are you?
Brian Gamache
Hi, Joe.
Scott Schweinfurth
Hi, Joe.
Joe Greff
First question for you. I think there might be some confusion.
I’m getting some emails here, but you are reaffirming full year revenue guidance though the composition of that has changed?
Brian Gamache
Right.
Joe Greff
Product sales are a little bit below where you guys had talked about earlier and that –?
Brian Gamache
We said that the guidance we gave, Joe, would be either at or low end of the guidance or slightly below.
Joe Greff
Okay.
Brian Gamache
But that will be offset by the gaming operations accelerating revenues.
Joe Greff
And that’s –?
Brian Gamache
Obviously, as you know that’s a higher margin business. So, the flow through in that additional revenue should be accretive.
Joe Greff
Right. And that’s on the win per unit per day and not on units, on the game up –
Brian Gamache
No, it’s not. Exactly.
Joe Greff
Okay. And based on what you see so far in January and what you are expecting in terms of mixed change, do you think that the levels that you did last quarter can carry through the next couple of quarters on a win per – unit per day?
Brian Gamache
The answer is, we are very optimistic based on the January result we’ve seen thus far. In addition, we have got some very exciting new products coming out this second half of the year POWERBALL Power Seat, Reel and then compete to win, Big Event, Poker, Time Machine.
We have two Wizard of Oz transmissive products. So, we have a fully array of products to be launched in the second half and we are already at the upper end of our guidance on the footprint.
So, we think that will board well for both the footprint and yield particularly in the fourth quarter.
Joe Greff
Okay. Great excellent.
And you also reaffirmed your EBIT margin guidance?
Brian Gamache
Yes.
Joe Greff
So, do you think by the end of June you at a sustainable 20% EBIT margin level?
Brian Gamache
That’s an operating margin, Joe that we reaffirmed.
Joe Greff
I’m sorry, operating margin. Yes.
Brian Gamache
Yes. We’ve been shooting for that 20% margin for a number of years.
I’m looking at Scott because it’s something we talk about every couple days. I think we’ll get there in the coming quarters and that’s going to be a combination of additional operating excellence, our process improvements in higher volume.
And I think we’ll get there in a very close range of achieving these goals.
Joe Greff
Okay. And then one housekeeping item for Scott.
Your EBITDA, you reported EBITDA for the quarter, does that $51.9 million, does that include the patent settlement?
Scott Schweinfurth
No, because the patent settlement is down in interests and other income.
Joe Greff
Okay. Great, thanks guys.
Scott Schweinfurth
Thank you.
Operator
Our next question coming from the line of David Katz, with Oppenheimer. Please go ahead.
David Katz
Hi, good afternoon.
Brian Gamache
Hi, David.
David Katz
So, my question is mostly about your SG&A. And I guess that’s one of the line items I spent a lot of time trying to figure out when the leverage to that really kicks in.
I know that R&D has continued to ramp up and the fruits of that investments are obvious. But on the SG&A side, if you could just talk about how you see that rolling out into the future and to the degree that you can discuss beyond the end of the fiscal year that will be helpful also?
Brian Gamache
Okay. I think the guidance we gave on the SG&A, David, is still consistent with where we think we are going to end the year.
I want to just reiterate that the first quarters of year Q1 and Q2 are traditionally our slowest two quarters. And as we ramp up in Q3 and Q4 as a percentage of revenue, that number will decrease.
So, I think the guidance we gave on the August call, a year ago is pretty consistent. Dave are you still there?
David Katz
Yes.
Brian Gamache
Okay.
David Katz
I’m all set. Thank you.
Brian Gamache
Okay.
Operator
Our next question from the line of Steve Wieczynski with Stifel Nicolaus, please go ahead.
Steve Wieczynski
Hi, good afternoon guys.
Brian Gamache
Hi, Steve.
Steve Wieczynski
A follow up on that SG&A question. You talked about bad debt expense increase in the release.
Can you go into that a little bit in detail?
Scott Schweinfurth
Sure. I think quarter-over-quarter was up by about $0.5 million, and that nearly represents, let’s say taking a bit harder look on what’s going on in the economy.
Brian Gamache
Again we are not saying that’s a hard number. We have been conservative as Scott said.
And when you look at our last several years we were less than one half of 1% on the bad debt expense. So, we’ve managed our bad debt here pretty carefully, and we don’t expect that problem going forward.
Steve Wieczynski
Okay. And there was a 15% jump there in daily fee games owned by casinos.
Anything we should be looking at there?
Scott Schweinfurth
No. I think that’s just based upon the popularity of the titles that we head out for that particular pricing model.
Steve Wieczynski
Okay. Got you.
And then finally, Brian, you’ve done a fine job in terms of where you have gotten your product sales margins but you are now there that creeping about 50%. Where do you expect those to go over the next couple of years?
Brian Gamache
Well, again I think I have said previously that we would not be satisfied until we got to the mid 50% range, which is where some of our large competitors have traditionally been. And we think that we could probably get to those levels sometime in fiscal 2010 given the leverage we have in our pricing and also the progress we make in our supply chain areas.
So, that’s something we have in our sights. And I think we can get this sometime in 2020.
Steve Wieczynski
Okay. Great.
Thanks guys.
Scott Schweinfurth
Could I just correct one thing? I had now gone back and looked at the EBITDA, and the question that Joe Greff asked about the settlement of the trademark, it was in EBITDA.
So, the tax affected number would be $3.5 million sitting in the EBITDA. And now we’ll take the next question.
Operator
Our next question from the line of Celeste Brown with Morgan Stanley. Please go ahead.
Celeste Brown
Hi, guys, good evening. Two questions for you.
First, how are you thinking about using your strong balance sheet to help your capital constrained customers’ and I guess how would that – how could we expect to see that flow through the revenue line? It’s not traditional straight out, part or –?
Brian Gamache
It’s good question, Celeste. I think the – we are a mid-Western conservative based Company, and we have a very strong feelings about having a strong balance sheet.
But that being said, when there are solid customers with a little bit of a pinch and don’t have the capital to spend who want our games, we will look at flexibility in our pricing mechanisms and we’ve got several things we are analyzing now, but we are never going to put ourselves in jeopardy. And the deals we are looking at would be very solid deals that would be incremental in our ability to gain market share floor space.
So, we think it could be a very significant part of our strategies here in the last half of ’09 and going into ’10. And it’s something again we are going to look at restrictive buckets of risk that we would take along these areas, but we think that the kind of customers we are talking about is very little risk and then it is something we can do to add incremental revenue.
Celeste Brown
And how it – I guess it’s preliminary, but how would those units flow through? Would we see them show up in participation or a purchase where we see the units and the revenues up front, but the cash flowing later?
Brian Gamache
Right. There are several things that we are looking at, Celeste.
One of the things, would just be merely, what I’ll say terms related and so, you may see – that impact would see DSOs going up some because we would be giving customers greater terms to pay the invoices over. We are also looking at our financing leases and under our financing lease that would have some what the same effect where we would be able to record the revenue that we wouldn’t be receiving the cash immediately, we would be paid over whatever the term lease may be.
We’ve looked at doing some operating leases. The operating leases would show up as capital in use of capital in the gaming operations business and it would sit on our balance sheet in our gaming operations capital and we would be getting lease payments over a period of time.
Scott Schweinfurth
I want to just interject here for a minute Celeste. This is a few thousand units.
We are not talking about going crazy here. This is a few thousand units that helps our more well capitalized customers get over the hump here and we will do that because of our relationship with them and again our ability to gain more presence on their floors.
Celeste Brown
I wasn’t concerned that you would stress your liquidity. So, I was just trying to understand how we expect to see it flow through.
And then the second question and you may not be willing to comment on it, but it’s a big boo ha, ha about the shares that some of the Redstone and we haven’t heard anything for a while. Can you give us an update as to your stand there if there are any plans to purchase those?
Scott Schweinfurth
We do not comment on National Amusements investment strategies. We have been in contact with Mr.
Redstone’s advisors and we read the same newspapers as you do. We have not received a indication of what their plans are related to WMS shares but just to remind everybody, we have an $85 million buy back plan in place and we obviously look at every opportunity presented to us to continue to build shareholder value.
Celeste Brown
Thank you.
Scott Schweinfurth
Okay.
Operator
Our next question from the line of Bill Lerner with Deutsche Bank. Please go ahead.
Bill Lerner
Hi, guys.
Brian Gamache
Hi, Bill.
Bill Lerner
Couple of questions. One, regarding the mix, I think you said 17% of your new year mix this year was Bluebird2 and you are guiding or you expect the full year to come in at – the full fiscal to come in at 35% or maybe that’s where you would be in the second half?
Brian Gamache
That’s the open orders, Bill, the 35%. Just to give you a little color on that.
That’s broken off by 47% in North America and the rest again it gets down to 35% globally. But that’s way above the 15% to 20% we had budgeted for totally in our fiscal ’09.
So, the response we are getting for Bluebird2 is beyond any of our expectations. So, we are very thrilled.
And again given the higher price point in the higher profitability in these games it could only be a good thing.
Bill Lerner
Okay. And so that’s really where I was going.
Guys, and may be this is a North American question, this depends on geography, but the premium in ASP is like 19%, 20% versus Bluebird 1%, may be this is again North America?
Brian Gamache
That’s about right.
Bill Lerner
Okay. All right.
And then I guess couple of other ones. Game ops you guys grew sequentially, you grew margins I think it was 90 basis points.
But interest rates are zero. So, is that all yield guys, or is there something else going on?
I guess the question is how an interest rate environment like this unfavorable to game ops do you actually grow your margins by nearly 100 basis points or 82% there?
Brian Gamache
We are different than our largest competitor and I think we’ve only had two jackpots that have been one over the term that payout over a period of years. So, movements in interest rates have absolutely no impact on WMS’ result.
Bill Lerner
Material impact?
Brian Gamache
Yes, because it’s such a small piece. So, yes, the increase is attributable to better performance.
Bill Lerner
Okay. That’s great.
And then just qualitatively what are customers asking for? Can you give us a sense of or sensible behavior, you guys have an IGT obviously grew game ops or participation units they are certainly relative to our expectations, higher or more than we anticipated.
But is it – what are people saying? I mean are they saying we want to keep the floor fresh, we have no capital budget to put in participation games or are they saying we are going to wait for some period of time, we think the games are fresh even though they are – anything qualitative that will help us get a sense of what your sales guys are experiencing, it will be helpful?
Brian Gamache
I think that the wider progressive percentage of point infield is still a challenge. It’s always going to be a challenge, but when you have a product like Wizard of Oz and Top Gun and other games that we’ve done so well.
It’s easier to gain that port space. We have, again people coming out if G2E are very excited about the reel to win compete to win product, they are excited about the POWERBALL, power seat products.
So, we’ve got great momentum. And I think that when you look at the power of our earnings of these games, we have over 1000 Wizard of Oz games out there today, and that’s beyond anything we ever thought possible.
So, and they are staying out there. So, I think it’s really about the strength of the content and if the games continue to hold up, people will look to the participating games to augment some of their capital issues to keep their floors fresh and keep their customers happy.
So, that’s has worked a little bit in our favor.
Bill Lerner
Okay. And the last one for me.
Brian or Scott I guess, free cash flow for the first six months or – it looks like you are run rating about $200 million of free cash flow and what everybody is seeing as the worst environment in memorable history of course for your business and many other things. So, that in the normal environment obviously will grow.
What do you with free cash flow? Obviously, you can buy back stock and you have very little, relatively speaking very little debt to consider.
Where there any gaping holes on the technology side that we may be – that we should be thinking about or what else you do with cash –?
Brian Gamache
That’s a great question, Bill. I think our balance sheet continues to grow stronger every quarter and the cash that we are accumulating.
And that $200 million run rate that you mentioned is an ambitious one, but we think eventually we’ll get there. That being said, there are a lot of things out there from an R&D stand point, from a technology standpoint, from a licensing standpoint, from a tuck-in acquisition standpoint that we could absolutely pursue in order to grow our revenue stream 3 years, 4 years, 5 years from now.
When you look at the development that we have done over the last 5 years, it’s really come to fruition now. The types of platforms, the complicated platforms that we bring to market, the reason we are doing so well, is they are unique and differentiated and they take years to incubate.
So, I’m very comfortable saying that my first choice of our cash is to continue and invest it internally and then obviously on opportunistic – when the opportunity arises to buy back stock prudently, and then other sources whether it be acquisitions or whatever it be there. So, we’ve got a lot opportunities out there to continue to stroke the pipeline of product innovation and I’m very excited about that.
Bill Lerner
Okay. All right.
Thanks guys.
Operator
Our next question from the line of Steven Kent with Goldman Sachs. Please go ahead.
Steven Kent
Hi, good afternoon.
Brian Gamache
Hi, Steve.
Steven Kent
Hi. Two questions.
First, did you see any trial off in orders for games as you ended calendar ’09? It doesn’t really sound that way, but I just want to once more make sure that you are not seeing that weakness that we are seeing in just about every other consumer segment.
And then the second question is just on R&D, just the dollar amounts, Brian, they keep on increasing and I’m just wondering if there are specific project or initiative that you are spending that money on that may be you could share with us or is that just continuing to focus on game creation?
Brian Gamache
All right, let me take the second question first. And that is there is a number of initiatives, there is a number of applications, there’s a number of different technology platforms that we are developing whether it be the company is featuring or the portal technology that we believe are essential for giving those value propositions of the customers.
And again these things all take time and headcount and this is nothing we hadn’t anticipated. So, I think going back to the original question, the $100 million guidance that we gave as a percentage of revenues is still good.
As I answered the first question about SG&A to David Katz, this too will smooth out in Q3 and Q4 as a percentage of revenues. We think we said today at the high end of 13% to 14% range, we’ll still be in there.
And again we think that’s the best return on capital we can give to our shareholders’ because we have proven that we can create that R&D investment into future revenue stream. I think that’s the best way to build shareholder value.
Did I answer your question, Steve?
Steven Kent
Yes, you did on the R&D, but again did you say anything about the trail-off in the orders?
Brian Gamache
The trail-off in orders, we didn’t see it in October. We did see it after January 1.
Typically most of our customers are around 12/31 fiscal year, and we would expect to see a cluster of orders, the first couple is in January because like every company they want to make sure when they have a capital they don’t lose it down the road. We are seeing a little bit more conservatism in the release of calendar ’09 capital and I think that’s why you see the backlog is lit bit slightly less than it was a year ago, but we anticipate that customers are being apprehensive in releasing the capital to their confident that the consumer sentiment in the economy is not going to get worse than it is today.
A majority of our customers are still doing okay. Some of our customers are struggling, but again a majority of our customers out there are still growing share and revenues.
So, we hope that that apprehension declines here in the next couple of weeks. But, it’s not something that we have seen before because typically the first part of January we are very busy writing orders and hope that’s going to pick back up here shortly.
Steven Kent
But that’s being more than offset as you said before by the shared revenue participation games?
Brian Gamache
Yes, I think in normal situations, Steve, we would be raising guidance today given the first half of the year we had. But unfortunately we are looking at the product sales as little bit of a bump in the road here, but we think because of the quality of our content in the products and the demand that we have coming out of G2E and ICE, this is a short live bump in the road.
Steven Kent
Okay, thanks, Brian.
Operator
Our next question from the line of Ralph Schackart with William Blair. Please go ahead.
Ralph Schackart
It’s Ralph Schackart. Good afternoon guys.
Brian Gamache
Hi, Ralph.
Ralph Schackart
Few questions. I’m sure you are waiting for all the day to come into the quarter, but let us know the big picture how ship share trended in the quarter, up, down year over year?
Brian Gamache
I think my gut tells me Ralph, because we won’t know until two other competitors announce. My gut tells me we are in the 23%, 24% range for the quarter.
But again that’s just our internal instincts. I think we are making progress particularly in the wheel spinning realm.
27% of our shipments over the last four quarters have been wheel spinning product and with our Bluebird2 mechanical reel coming out in Q4, we think that that’s going to be another opportunity for us to gain market share accretion. So, I think that we are still gaining market shares and albeit and the time is very difficult, we are getting a good percentage of our customers allocations.
Ralph Schackart
Right, that’s helpful and one more if I could. Brain you touched on this earlier about interest in new games.
May I spend a little bit of time on the new time machine game little bit different (inaudible) if you will from sort of the action, thriller and set game, can you talk about the pipeline and the new concepts that you showed at G2E and some further discussions I’m sure you had with customers beyond that, how they are thinking about the new games coming up?
Brian Gamache
Ralph, I’m going to ask Orrin Edidin to answer this. Orrin, can you jump in?
Orrin Edidin
Yes, Brian. The category strategy, form factor strategy has really been paying off dividends when we talk about Transmissive Reels, adaptive gaming, sensory immersion and the like, and we are continuing to exploit those form factors, while introducing entirely new categories.
And then over the remainder of this fiscal year, and you mentioned a couple of them time machine, that’s a wider progressive game in the sensory immersion format. MONOPOLY Grand Hotel, which is a bigger style game, it’s a three-room mechanical on Bluebird2, that’s also widely progressive.
Over the remainder of this quarter, we are also bringing out a Jackpot Party Keno, Multi-game another monopoly standalone game, a new form factor, which will be on reel – compete to win, which is sort of a nationwide tournament game on a widely progressive format coming out in early Q4. In addition to a new poker game in the bigger event format.
So, it’s a relatively deep portfolio on the participation side that – sure we will continue to grow that base no doubt over the remaining months of this fiscal year.
Brian Gamache
And the unique thing, Ralph what Orrin just mentioned is there’s nothing that’s me-too in all those two products. Those are all differentiated out of the box thinking product.
So, they are going to appeal to a broad base of customers out there. So, that’s why when I was asked the question early about, is the gaming ops going to benefit in footprint and yield and the answer is, yes.
We think it’s going to affect both parties and have a significant impact on our revenues particularly in Q4.
Ralph Schackart
Right. But you feel pretty good that as you are moving into new direction on the content side out of action, thrill that there is good initial response and the roll out hopefully should be pretty consistent with previous products?
Brian Gamache
One other things that we do pretty well here, Ralph, is we benchmark through market research all of our product launches. We have beta sites and so forth, and the products that Orrin mentioned, I just saw the report that they are testing very, very well and have performed above our expectations thus far for the first several of these product intros that are out there on test.
So, yes, I feel very good about the playing – to continue to give the value to our customers.
Ralph Schackart
Right. That’s helpful.
Thanks Brian.
Operator
Our next question from the line of Todd Eilers from Roth Capital Partners. Please go ahead.
Todd Eilers
Hi, guys, how are you? Just one question related to the international business.
I think he has mentioned the two large contracts, one of which you signed. Can you tell us whether you have included one or both of those pieces of business in your fiscal ’09 guidance?
Brian Gamache
Yes. One of them has been partially shipped and we’ll continue to ship into Q3 and the other is still I believe pending.
So, that is not in our guidance.
Todd Eilers
Okay. And if you were to sign it, do you anticipate to ship in fiscal ’09 or will that there be more of a fiscal 2010 event?
Brian Gamache
Obviously, the longer it takes to get it in the barn here, the least likely it is to ship in this year. So, we’ll update you more, but probably late Q4 if it all in ’09, but we got our fingers crossed.
Todd Eilers
Okay. And then aside from the two large contracts, can you maybe talk a little bit more about the international markets?
Brian Gamache
Sure.
Todd Eilers
What you are seeing out there have started to see a little bit of slow down somewhat to the domestic markets and if so which markets are those, and just in general what are your thoughts?
Brian Gamache
We still have plenty of opportunities internationally. And we believe that again internationally, our goal right now it’s about mid 30% of our shipped share over the last several quarters and we want to get that up to 50% of our box sales over the next several years.
So, we still believe that the opportunity for WMS to expand its revenue streams in international profitable markets is very high. With that being said, I believe Western Europe and Asia, which have typically been very good areas for us have seen a slow down since the fourth quarter of calendar ’08.
We are starting to see very good results in South and Latin America, Central America and Eastern Europe. So, there are certain spots that are equaling the weak spots of strength.
So, we continue to look under every rock out there and we are continuing to think that although the international continues to be challenged, we will have a very solid second half. I heard today we had a very good ICE show and the results from that will be very typical to the second half of this year.
And I think that we will make our goal albeit in a difficult manner that we had established.
Scott Schweinfurth
I would say another thing is we have been surprised at the initial acceptance of Bluebird II international market because for the most part that group isn’t thinking about network gaming at this point in time. But there’s been great interest –
Brian Gamache
– in typically markets that is very price sensitive. Certainly the oil price resists their product, that’s very encouraging as well.
Orrin Edidin
And Brian, we would be less not to mention the reception we’ve had to the Orion product at the show with the new enabling operating system in Twinstar2 platform. The feedback has been terrific and it is building backlog there as well.
Brian Gamache
Great. Thanks Orrin.
Todd Eilers
Okay. Great, thanks guys.
Operator
Speakers’ there is no further questions at this time, you may continue with your presentation or closing remarks.
Brian Gamache
Operator, thank you very much. Thank you for joining us on the call today.
We look forward to reporting our additional progress on next call, which we will have discussed our March 2009 quarter results. Have a nice evening.
Operator
Thank you ladies and gentlemen this does conclude the conference call for today We thank you all for your participation and kindly ask that you please disconnect your lines. Have a good evening everyone.