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Scientific Games Corp.’s (SGMS - Analyst Report) joint venture, Northstar New Jersey Lottery Group, LLC recently signed a long-term agreement with New Jersey Lottery to provide marketing, sales and other services. The agreement approximately spans a 16-year period, which starts from Oct 1 this year and ends on Jun 30, 2029.

Northstar NJ is a joint venture between Scientific Games (18.0% equity interest), GTECH Corporation (a subsidiary of Lottomatica Group S.p.A) and OSI LTT NJ Grantor Trust ("OSI"), an affiliated entity of OMERS Administration Corporation, the administrator of the Ontario Municipal Employees Retirement System pension funds (“OMERS”).  

Under the terms of the agreement, Northstar will provide a number of specialized services to strengthen the Lottery’s marketing, sales, game development as well as advertising functions.

In lieu of the services, Northstar will receive annual incentive compensation payments. The incentive is based on the extent the company is able to spur Lottery’s net income, above certain target levels, subject to a maximum of 5.0% of the year’s net income.

However, if Northstar fails to cross the target, the company will have to pay the shortfall from the set target, subject to a similar cap (maximum of 2.0%) and $20.0 million as shortfall payment credit. Moreover, Northstar will pay the state at least 30.0% of annual lottery ticket revenues.

Scientific Games and GTECH will supply Northstar NJ with instant lottery games, systems and equipment and related services. The company is expected to have a 30% economic interest and will also be responsible for 30.0% capital requirements for these supply arrangements.

Scientific Games continues to win contracts in the domestic market. Besides New Jersey Lottery, the company recently signed a five year contract with the South Carolina Education Lottery (“SCEL”) to provide instant ticket and cooperative services.

We believe that these contracts will further expand Scientific Games footprint going forward. These contract wins reflect Scientific Games strong position. It is likely to benefit from the ongoing transition in the domestic lottery industry, which involves increasing involvement of private vendors in state lottery management, higher prize payouts and introduction of tiered pricing for national jackpot games.

However, increasing investment for product development is expected to hurt profitability in the near term. Additionally, a significant increase in regulatory, professional fees and other expenses related to the WMS Industries (WMS - Snapshot Report) acquisition will hurt margins in the near term.

Further, stiff competition from the likes of International Game Technology (IGT - Analyst Report) and Bally Technologies Inc. is expected to hurt profitability, going forward.

Currently, Scientific Games carries a Zacks Rank #4 (Sell).

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