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Scientific Games Corp. (SGMS - Analyst Report) posted earnings of 5 cents per share, which beat the Zacks Consensus Estimate by a penny in the third quarter of 2013. Earnings per share improved significantly from a loss of 22 cents per share reported in the year-ago quarter.

Revenues

Revenues increased 4.4% year over year to $234.4 million, but lagged the Zacks Consensus Estimate of $239.0 million. The year-over-year increase in revenues can be attributed to improvement in the sales and Instant Ticket segment.

Instant ticket revenues increased 4.2% year over year to $129.7 million. Instant ticket sales of the company's U.S. customers increased over 4.0% in the quarter, while sales of draw-based games grew nearly 8.0% compared with the year-ago quarter.

During the quarter, Scientific Games also secured a number of contract extensions which include Florida Lottery and Missouri Lottery, wherein the company will continue to serve as the primary instant game provider. Moreover, the company announced a new contract with Ladbrokes.

Segment-wise, Printed Products Group revenues increased 4.2% year over year to $132.7 million. The results were primarily driven by an increase in revenues from the company’s licensed properties business along with revenue growth from the company’s cooperative services and percentage of sales customers.

Lottery Systems Group revenues increased 11.5% year over year to $69.0 million, reflecting higher international hardware and software sales while the increase in service revenues can be attributed to higher international revenues in Powerball jackpots.

Gaming revenues declined 7.3% year over year to $32.7 million. The year-over-year decline was primarily due to lower sales of gaming terminals.

Margins

Attributable earnings before interest, taxes, depreciation and amortization (EBITDA) margin increased 256 basis points (bps) from the year-ago quarter to 39.2%.

Depreciation & amortization (D&A) expense declined 1.2% year over year to $35.2 million in the quarter. Selling, general & administrative expense (SG&A) increased 7.4% year over year to $46.9 million.

Operating margin was 10.9% compared with 7.3% in the year-ago quarter due to lower depreciation & amortization expense.

Scientific Games reported net income of $3.9 million compared with net loss of $19.6 million in the year-ago quarter.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with $73.5 million in cash and cash equivalents compared with $78.1 million in the prior quarter. Total debt declined to $1.45 billion from $1.46 billion at the end of the previous quarter.

Recommendation

Scientific Games reported mixed third quarter 2013 result, with earnings exceeding zacks consensus, while revenue lagging behind the same.

The domestic lottery industry is undergoing a transition, which involves increasing involvement of private vendors in state lottery management, higher prize payouts and introduction of tiered pricing for national jackpot games to add impetus to the sagging U.S. lottery industry. We believe that Scientific Games is well positioned to benefit from these transitions, going forward.

However, the company faces stiff competition from the likes of International Game Technology (IGT - Analyst Report), GTech S.P.A.(GTKYY )and Bally Technologies Inc. (BYI - Snapshot Report), which is expected to hurt profitability, going forward.

Currently, Scientific Games has a Zacks Rank #3 (Hold).

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