Scientific Games Corp. (
reported disappointing second-quarter 2014 results. The company
posted an adjusted loss of 40 cents per share in the second quarter
of 2014, much wider than the Zacks Consensus Estimate of loss of 22
cents and the year-ago loss of 14 cents per share. Since Aug 5,
share price has declined 14.5%.
Second-quarter adjusted loss per share included 31 cents related to
loss on the early extinguishment of debt, 9 cents related to
Scientific Games' share of an estimated net shortfall accrual
recorded by its Northstar Illinois joint venture, and 6 cents in
employee termination and restructuring expense.
Revenues surged 77.4% year over year to $417 million and were in
line with the Zacks Consensus Estimate. The year-over-year increase
in revenues can be attributed to strong growth across all the
- Revenues soared to $209.1 million from $40.6 million in the
year-ago quarter, due to revenue contribution by WMS Gaming ($169.6
million), acquired in Oct 2013. Revenues from services jumped $92.8
million year over year, while product sales revenues increased
$75.7 million from the year-ago quarter.
Services revenues benefited from additional WMS revenues and
favorable foreign currency translation in the company's U.K. gaming
business. Interactive services revenues were $32.3 million driven
by higher growth in the average Daily Active Users (DAU) in the
The Blade game machine continued to perform well during the
quarter. Scientific Games expanded The Gold Fish Social Slots game
app (launched in March) on multiple mobile platforms during the
quarter. The company also entered into five game content agreements
with online operators, and went live on several sites, including
Bwin.party sites in Europe and online casino sites in New Jersey.
Instant Products Group
- Revenues increased 6.5% year over year to $138.5 million in the
quarter, driven by 7% increase in revenues from instant games,
partially offset by 11.4% decline in product sales. This was
primarily due to higher lottery retail sales by the company's U.S.
and certain international customers.
Revenues also benefited from sales of instant games to Northstar
New Jersey joint venture. Scientific Games began selling instant
games in Greece in May 2014. The company has a 16.5% equity
interest in Hellenic Lotteries, the joint venture that operates the
Greek State Lotteries, for which it has exclusive responsibility
for design, production and supply of instant games.
Total instant game retail sales of the company's U.S. customers
grew 4.9%, led by higher retail sales in those jurisdictions where
Scientific Games provides instant games and value-added services on
a participation basis.
The Multi-State Lottery Association (MUSL) announced the first ever
$5 national draw game, the Monopoly Millionaires Club, developed by
Scientific Games. The game is expected to launch in the fourth
quarter of 2014 and includes plans for an associated national TV
Scientific Games won a contract to be the exclusive supplier of
both instant lottery games and the lottery system to the consortium
that won a 10-year concession to operate the Turkey National
Lottery Systems Group
- Revenues increased 7.6% year over year to $69.3 million,
reflecting higher sports betting revenues and product sales
revenues. Services revenues climbed 2.6%, while product sales
revenues improved 24.5% from the year-ago quarter.
During the quarter, the company amended a contract with the
National Lottery of Panama to provide the country's first online
lottery game, Pega 3, a Pick 3 game, expected to launch later this
Attributable earnings before interest, taxes, depreciation and
amortization (EBITDA) increased from $84.5 million in the year-ago
quarter to $132.1 million in the reported quarter.
Gaming Segment Attributable EBITDA increased from $17.0 million to
$72.8 million in the quarter. Instant Products Group Attributable
EBITDA inched up 1.3% from the year-ago quarter. Lottery Systems
Attributable EBITDA declined 7.6% on a year-over-year basis.
Operating expenses increased from $89.2 million in the year-ago
quarter to $216 million in the reported quarter. This was mainly on
account of an increase in research & development expenses (up
$23.4 million year over year), selling, general &
administrative expenses (up $50.5 million year over year) and
depreciation & amortization (up $52.9 million year over year).
Gaming Segment operating loss was $1.8 million much narrower than a
loss of $8.4 million reported in the year-ago quarter. Instant
Products Group operating income increased 12.2% from the year-ago
quarter. Lottery Systems operating income declined 45.2% on a
Consolidated operating income (excluding employee termination and
restructuring expenses) plunged 31.5% year over year in the
Scientific Games reported a net loss of $33.8 million or 40 cents
compared with net loss of $11.9 million or 14 cents in the year-ago
Scientific Games Corporation - Earnings
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Balance Sheet & Cash Flow
Scientific Games exited the second quarter with $101 million in
cash and cash equivalents compared with $169.1 million in the prior
Cash flow from operations was $23.8 million. Free cash outflow was
$31.3 million in the reported quarter compared with $23.7 million
in the previous quarter.
Scientific Games recently announced that it will acquire
slot-machine maker, Bally Technologies (
) for $3.3 billion in cash ($83.30 per share). Including
refinancing of Bally's existing net debt, the purchase price would
amount to $5.1 billion. The transaction is expected to close in
Scientific Games expects to achieve $220 million of cost synergies
and $25 million of capital expenditure savings by the end of the
second year post acquisition. The company expects to incur $75
million of costs to achieve the cost synergies and $40 million in
capital costs to complete the integration of the companies.
The domestic lottery industry is undergoing a transition, which
involves increasing involvement of private vendors in state lottery
management, higher prize payouts and the introduction of tiered
pricing for national jackpot games. All these are expected to add
impetus to the sagging U.S. lottery industry. We believe that
Scientific Games is well positioned to benefit from these
transitions in the long run.
The acquisitions of WMS Industries and Bally Technologies will
diversify Scientific Games' product portfolio and expand its global
footprint. The addition of WMS expands Scientific Games' footprint
in interactive business, which will boost the top line over the
The acquisition of Bally Technologies eliminates one of the nearest
competitors, which will help in expanding market share. Further,
the company is expected to gain a number of synergies from this
acquisition, going forward.
However, we believe that this acquisition will put Scientific
Games' balance sheet under further pressure, as the company is
opting for debt financing for the buyout. This may hurt
profitability due to lower top-line growth.
Sluggish casino market that continues to face weak consumer
spending and increasing competition from Internet-based game
providers is expected to remain a major headwind in the near term.
Further, Scientific Games' legacy business continues to disappoint
amid significant competition from the likes of Computer Sciences
) and GTech S.p.A. (
) in the long run.
Currently, Scientific Games has a Zacks Rank #3 (Hold).
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