Scientific Games Loss Narrows Y/Y, Beats Revs - Analyst Blog

Scientific Games Corp. SGMS posted a loss of 1 cent per share in the fourth quarter of 2013, which was well behind the Zacks Consensus Estimate of earnings of 5 cents. The quarterly loss was however narrower than a loss of 15 cents per share reported in the year-ago quarter.

Revenues

Revenues surged 62.8% year over year to $401.9 million and convincingly beat the Zacks Consensus Estimate of $340.0 million. The year-over-year increase in revenues can be attributed to strong growth across all the segments.

During the quarter, Scientific Games completed the acquisition of WMS Industries. The company realigned its operating structure into three groups, Lottery operations (comprises instant products and lottery systems), Interactive gaming group (social gaming, real money online gaming, content publishing and distribution) and Gaming group (Williams Interactive and legacy Scientific Games UK, Mexico, Caribbean server based gaming businesses and video gaming business).

Gaming segment revenues jumped to $181.9 million from $43.7 million in the year-ago quarter attributable to the revenues earned from WMS Gaming acquisition ($145.0 million). Services contributed $110.1 million of the revenue while product sales chipped in with the remnant $71.8 million.

Instant Products Group revenues increased 8.3% year over year to $140.3 million. The results were primarily driven by an increase in revenues from the company's licensed properties business and cooperative services and the percentage of sales customers. Out of the total Instant Products Group revenue, about $137.0 million came from Instant Games while the remnant $ 3.3 million was the contribution of Product Sales.

Lottery Systems Group revenues increased 8.4% year over year to $79.7 million, reflecting higher sports betting revenues and revenues from new customers, including the launch of iGaming for the Delaware Lottery. Services chipped in with $57.2 million of the revenue while Product sales contributed the remnant $22.5 million.

Instant ticket sales of the company's U.S. customers increased over 4.3% in the quarter.  Retail sales of Instant games in Italy declined 1.2% year-over-year.

During the quarter, Scientific Games entered into contracts to begin providing instant games in Panama and the Dominican Republic. Also, it terminated the contract to operate in online gaming site in Belgium as well as divested certain non-core assets which included the selling of its investment in Sportech.

Margins

Attributable earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $89.9 million in the year-ago quarter to $130.5 million in the reported quarter.

Depreciation & amortization (D&A) expense increased 83.0% year over year to $91.3 million in the quarter. Selling, general & administrative expense (SG&A) increased from $48.9 million in the year-ago quarter to $127.3 million in the reported quarter.

Research & development expense increased from $1.5 million to $21.3 million year over year while restructuring expense increased from $0.8 million in the year-ago quarter to $22.4 million in the reported quarter.

Operating loss was $67.5 million compared to income of $10.1 million in the year-ago quarter. Scientific Games reported a net loss of $3.5 million compared with net loss of $24.7 million in the year-ago quarter.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with $153.7 million in cash and cash equivalents compared with $73.5 million in the prior quarter. Total debt increased to $3.2 billion from $1.45 billion at the end of the previous quarter.

Recommendation

Scientific Games reported decent fourth quarter 2013 results, with a narrower year over year loss and revenues exceeding the Zacks Consensus Estimate.

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, going forward.

However, the company faces stiff competition from the likes of Computer Sciences Corp. CSC, GTech S.P.A. (GTKYY) and Bally Technologies Inc. BYI, which is expected to hurt profitability, going forward.

Currently, Scientific Games has a Zacks Rank #3 (Hold).