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Scientific Games Wins New Contract

SGMS IGT

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Scientific Games Corp. (SGMS - Analyst Report) signed a new contract with New York Lottery, after winning a competitive procurement process in May 2011. Under the contract, Scientific Games will become the primary vendor for instant ticket games and related services to New York Lottery.

Scientific Games stated that the contract extends through 2018 and will generate revenue based on the price per thousand instant tickets sold.

Under the terms of the agreement, Scientific Games will also receive a percentage of net sales after deducting prizes for instant ticket game management and marketing. The company will be entitled to earn incentive awards based on the lottery achieving benchmark levels of performance.

Instant ticket sales have been a steady revenue stream for Scientific Games over the last few quarters. The New York Lottery recorded retail sales of $6.8 billion in fiscal 2010, with $3.5 billion coming from instant ticket sales. At the end of fiscal 2010, Scientific Games was the leading supplier of instant tickets and related services to more than 35 U.S. states.

During the second quarter ended June 2011, the company earned instant ticket revenues of $118.4 million, up 10.1% year over year. We believe the new contract will boost instant ticket sales growth going forward.

Scientific Games remains focused on gaining traction in the worldwide instant ticket and online lottery markets. In the first half of 2011, Scientific Games won contracts in Colorado and Georgia, which are expected to drive its top-line growth going forward. We also believe that these contract wins will strengthen Scientific Games’ position as compared to its nearest rival International Game Technology (IGT - Analyst Report).

We expect strong instant ticket sales to drive revenue growth going forward. Moreover, international development activities, especially in the Netherlands, Germany, Italy and China are expected to drive top-line growth over the long term.

Recommendation

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, intense competition from International Game Technology and privately held Intralot S.A. and Lottomatica S.p.A, a leveraged balance sheet, lower lottery revenues, loss of contracts and a slowing trend in China will continue to temper near-term results.

We maintain our Neutral rating over the long term (6-12 months). Currently, Scientific Games has a Zacks #3 Rank, which implies a short-term Hold rating.

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