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Scientific Games Corp. (SGMS - Analyst Report) reported breakeven results for the fourth quarter of 2011, way below the Zacks Consensus earnings Estimate of 10 cents. Earnings in the reported quarter also declined from 3 cents per share in the year-ago quarter.

Quarter Details

Total revenue increased 12.7% year over year to $239.1 million, primarily driven by strong instant ticket sales, higher sales of lottery systems and terminals and better-than-expected service revenues.

Instant ticket revenues rose 0.6% year over year to $122.3 million, while sales of lottery systems and terminals surged 50.3% year over year to $22.3 million. Service revenue increased 24.9% year over year to $94.4 million.

Scientific Games' U.S. instant ticket retail sales increased 8.5% year over year in the quarter. U.S. lottery systems customers' retail sales climbed 2.7% year over year in the fourth quarter. China Sports Lottery instant ticket retail sales jumped15.7% year over year, while instant ticket retail sales in Italy was flat in the reported quarter.

Segment-wise, Printed Products Group revenues inched up0.8% year over year to $125.2 million, primarily due to higher contribution from U.S. customers ($3.8 million), which offset lower sales to international customers ($3.6 million).

Lottery Systems Group revenues increased 10.0% year over year to $69.5 million, primarily due to higher sales of software and hardware to international customers ($2.6 million) and increased hardware sales in the U.S. ($3.1 million).

Diversified Gaming Group revenues shot up79.7% 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 ($11.5 million) also boosted growth during the quarter.

Attributable EBITDA rose to $80.3 million from $77.7 million in the year-ago quarter. Joint venture EBITDA was $19.5 million in the reported quarter compared with $19.3 million in the prior-year period.

Operating income in the quarter was $18.3 million (including stock-based compensation but excluding employee termination and restructuring costs) compared with a loss of $11.0 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 increase in operating income was driven by higher revenues.

Scientific Games exited the quarter with $104.4 million in cash and cash equivalents compared with $86.9 million in the prior quarter. Total debt remained flat year over year at $1.39 billion.

Recommendation

We believe that 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 highly leveraged balance sheet, lower lottery revenues, loss of contracts and a slowing trend in the domestic market as well as inChina will continue to temper near-term results.

We maintain our Neutral recommendation over the long term (6-12 months). Currently, Scientific Games has a Zacks #5 Rank, which implies a short-term Strong Sell rating.

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