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Scientific Games Posts Profit in 1Q

SGMS

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After a disastrous fourth quarter result, Scientific Games Corp. (SGMS - Analyst Report) bounced back in the first quarter of 2012, reporting a profit of 2 cents. This also compared favorably with a loss of 8 cents per share in the year-ago quarter. However, earnings in the reported quarter fell well short of Zacks Consensus Estimate of 5 cents.

Quarter Details

Total revenue increased 19.3% year over year to $234.6 million, primarily driven by strong instant ticket sales, higher sales of lottery systems and terminals and better-than-expected service revenues. Reported revenue also surpassed the Zacks Consensus Estimate of $228.0 million.

Instant ticket revenue rose 8.3% year over year to $123.3 million, while sales of lottery systems and terminals soared 131.7% year over year to $21.0 million. Service revenue increased 22.4% year over year to $90.3 million.

Scientific Games' U.S. instant ticket retail sales increased 12.2% year over year in the quarter. U.S. lottery systems customers' retail sales climbed 15.8% year over year in the first quarter. This strong growth fully offset a sluggish 0.7% increase in China Sports Lottery instant ticket retail sales and a 4.0% decline in instant ticket retail sales in Italy during the reported quarter.

Segment-wise, Printed Products Group revenues were up 8.5% year over year to $125.5 million, primarily due to strong retail sales in the U.S. (particularly in Illinois and Florida) and certain international jurisdictions, mainly in Ukraine and U.K.

Lottery Systems Group revenues increased 14.3% year over year to $64.5 million, primarily due to higher sales of software and hardware to international customers and higher U.S. service revenue.

Gaming revenues surged 81.1% year over year, driven by a 17.0% year-over-year increase in Global Draw’s installed base of server-based gaming terminals and 5.8% year-over-year increase in Global Draw’s U.K. gross win per machine per day. Incremental revenue from the Barcrest acquisition ($13.1 million) also boosted growth during the quarter.

Attributable EBITDA rose to $86.7 million from $75.0 million in the year-ago quarter. Joint venture EBITDA was $23.1 million in the reported quarter compared with $21.2 million in the prior-year period.

Operating income in the quarter was $25.1 million (including stock-based compensation but excluding employee termination and restructuring costs) compared with $14.4 million in the year-earlier quarter. The increase in operating income was driven by higher revenues.

Scientific Games exited the quarter with $100.4 million in cash and cash equivalents compared with $104.4 million in the prior quarter. Total debt remained flat year over year at $1.39 billion. Free cash flow at the end of the quarter was $0.1 million compared with $26.8 million in the year-ago quarter.

Recommendation

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

Further, the domestic lottery industry is undergoing a transition phase, 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 the sagging U.S. lottery industry. We believe that Scientific Games is well positioned to benefit from these transitions going forward.

However, we believe that these measures will take some time before it starts to boost the overall results. Hence, we prefer to remain on the sidelines. We maintain our Neutral recommendation over the long term (6-12 months). Currently, Scientific Games has a Zacks #2 Rank, which implies a short-term Buy rating.

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