Back to top

Analyst Blog

Scientific Games Corp. (SGMS - Analyst Report) reported third quarter 2011 earnings per share (EPS) of 8 cents, which comprehensively beat the Zacks Consensus Estimate of 5 cents. However, EPS in the reported quarter declined 20.0% from 10 cents per share in the year-ago quarter.

Operating Performance

Attributable EBITDA rose to $81.7 million from $75.0 million in the year-ago quarter. Joint venture EBITDA was $22.8 million in the reported quarter compared with $15.0 million in the prior-year period, primarily due to higher EBITDA generated by the company's Italian and Chinese joint ventures.

Operating income in the quarter was $22.4 million (including stock-based compensation but excluding employee termination and restructuring costs) compared with $24.5 million (including stock-based compensation but excluding employee termination and restructuring costs, write-down of assets held for sale) in the year-earlier quarter.

The slight decline in operating income was on the back of higher selling, general and administrative expense (SG&A), which increased 30.8% year over year to $47.7 million in the quarter. The increase in SG&A expense was driven by headcount, consultant and incentive compensation expenses in the quarter.

Revenue

Total revenue (excluding racing business, which was divested in October 2010) increased 16.7% year over year to $222.7 million, primarily driven by strong instant ticket sales and higher sales of lottery systems and terminals, which fully offset lower service revenues. Including racing business, total revenue inched up 0.7% year over year in the quarter.

Instant ticket revenues rose 9.2% year over year to $126.7 million, while sales of lottery systems and terminals increased 18.7% year over year to $14.6 million. However, service revenue decreased 12.3% year over year to $81.4 million.

Scientific Games' U.S. instant ticket retail sales increased 5.6% year over year in the quarter. U.S. lottery systems customers' retail sales spiked 0.5% year over year in the third quarter. China Sports Lottery instant ticket retail sales surged 24.1% year over year, while instant ticket retail sales in Italy jumped 10.8% in the reported quarter.

Segment-wise, Printed Products Group revenues climbed 11.0% year over year to $129.6 million primarily due to higher contribution from U.S. customers ($7.3 million), higher sales to international customers ($0.9 million), and favorable foreign exchange ($2.5 million).

Lottery Systems Group revenues increased 12.9% year over year to $59.6 million primarily due to higher sales of software and hardware to international customers ($2.0 million), increased hardware sales in the U.S. ($0.7 million) and favorable foreign currency translation ($0.8 million).

Diversified Gaming Group revenues (excluding racing business) surged 59.0% year over year, driven by a 42% year-over-year growth in global installed base of server-based gaming terminals. Incremental revenue from the Barcrest acquisition ($2.8 million) and favorable foreign currency ($1.6 million) also boosted growth during the quarter.

Balance Sheet

Scientific Games exited the quarter with $86.9 million in cash and cash equivalents compared with $127.3 million in the prior quarter. Total debt remained flat year over year at $1.39 billion.

Total capital expenditures in the third quarter were $24.2 million. Free cash flow in the reported quarter was $30.8 million versus $26.6 million in the previous quarter.

During the quarter, Scientific Games acquired Barcrest for approximately $48.4 million in cash. The acquisition will expand Scientific Games total installed base to over 35,000 server-based terminals worldwide.

Recommendation

We 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 (IGT - Analyst Report) 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 the domestic market and 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.

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
RPC INC RES 24.91 +8.35%
LITHIA MOTO… LAD 94.59 +4.60%
DELTA AIR L… DAL 39.15 +3.90%
FLAMEL TECH… FLML 14.51 +3.50%
SOUTHWEST A… LUV 28.87 +2.92%