Scientific Games Extends Contract

Scientific Games Corp. ( SGMS - Analyst Report ) recently signed a five-year contract extension agreement with Georgia Lottery Corporation.

Under the terms of the contract, Scientific Games will serve as the primary vendor supplying instant tickets and related services including game design, marketing, warehousing and distribution up to 2018.

Scientific Games will continue to generate revenues based on a percentage of instant ticket retail sales. In fiscal 2010, Georgia Lottery Corporation generated over $3.6 billion in retail sales, of which $2.4 billion were derived from instant ticket game sales.

Instant ticket sales have been a steady revenue stream for Scientific Games over the last few quarters. At the end of fiscal 2010, Scientific Games was the leading supplier of instant tickets and related services to more than 35 US states.

In the first quarter ended March, 2011, the company earned revenues of $113.9 million, up 3.5% year over year. We believe the extended contract will boost instant ticket sales growth going forward.

In separate news, Sciplay International SARL, a joint venture between Scientific Games and Playtech Limited ( ) , was selected by the California Online Poker Association (COPA) to provide intrastate Internet poker services.

California is currently considering a legislation to authorize and license intrastate Internet poker offerings. As a part of this process, COPA aided by Sciplay is expected to launch a website in the latter half of 2011, which will provide players the opportunity to improve their skills for free.

We believe the agreement with COPA will augment the company’s revenue going forward. At the end of fiscal 2010, Scientific Games was the exclusive provider of online systems in approximately 10 US states. We believe that the Internet-based lottery business has strong growth potential and Scientific Games is well positioned to grab this opportunity over the long term.

Recommendation

We maintain our Neutral rating over the long term (6-12 months). We believe the divestiture of the racing business and large contract re-pricings will help Scientific Games to focus on its core business (lottery and gaming).

We also believe the company’s diversified product offerings; international development activities (China, Italy), recurring revenue business model and strong growth from the Internet-based business will drive the stock over the long term.

However, weak first quarter results, intense competition from International Game Technology ( IGT - Analyst Report ) , a leveraged balance sheet and a slowing trend in China will continue to temper near-term results.

Currently, Scientific Games has a Zacks #3 Rank, which implies a short-term Hold rating.