Scientific Games Reports Loss – Analyst Blog

Scientific Games Corporation (SGMS) reported a loss for the fourth quarter of 2009 versus the analysts’ expectations of a profit, primarily hurt by lower instant ticket and service revenue, which caused the shares to slide after the company released its results. Shares fell 8.11% (or $1.37) and closed at $15.52.

 

One-time accounting charges related to write-down of assets associated with the sale of its Racing and Venue Management businesses, the non-cash impairment of certain Lottery Systems contracts and transaction and restructuring-related expenses reduced its profits by $45.2 million or 49 cents in the quarter.

 

Earnings, excluding the impact of one-time items, were a loss of 5 cents per share, versus a profit of 18 cents per share reported in the year-ago quarter. This was significantly down from the Zacks Consensus Estimate of earnings of 19 cents per share.

 

The reported loss was primarily due to a loss on a foreign currency hedge, higher net interest expense and a higher effective tax rate. However, earnings partially benefited from reduced operating loss in the quarter and higher equity earnings from joint ventures.

 

 

Net operating revenues declined 11.8% year-over-year to $232.9 million, driven by declines in all of its three segments: Printed Products (-13.6%), Diversified Gaming Group (-11.7%) and Lottery Systems Group (-8.5%).

 

A major contributor to the revenue decline was the shift in China instant ticket sales to Scientific Games’ joint venture, which led to lower instant ticket revenue, which fell 11.4% year over year. Moreover, Service revenue fell 8.1% due to revised lottery contract terms pricings, negatively impacting revenue.

 

In addition, revenue was negatively impacted by lower Sales revenue, which was down 27.7% year over year driven by lower phone card sales and planned changes to Scientific Games business model in U.K. pubs related to the shift from analog to digital terminals.

 

However, increase in revenue related to the start-up of two instant ticket lotteries, higher sales from licensed properties and increased systems revenue in China contributed favorably to the top line, offsetting some of the decline.

 

 

Gross margin expanded 640 basis points year over year to 39.5% in the quarter, as a result of the company’s focus on reducing expenses. A major contributor to the margin improvement was the cost benefits from restructuring actions taken in previous years.

Scientific Games reported an operating loss of $69.5 million for the quarter, compared to an operating loss of $82.2 million in the year-ago period. The lower operating loss was due to $6.7 million of cost improvements from the previously announced Profitability Improvement Program, which also helped reduce operating loss and improve margins.

 

Scientific Games has generated cost savings of $23.9 million for the full-year 2009 from the Profitability Improvement Program initiated in the fall of 2008, exceeding its goal of $15 to $20 million in cost savings. The company has undertaken a global procurement initiative designed to leverage its purchasing power and outsourcing, which will further help in cost containment efforts.

 

Adjusted EBITDA increased to $77.1 million from $69.8 million in the year-ago quarter. EBITDA margin improved to 33.1% in the quarter from 26.4% a year ago. The increase was due to higher SG&A savings, increased earnings from joint ventures particularly in China and Italy, higher Lottery Systems Group income from China and increased profitability on software and hardware sales, partially offset by the impact of the revenue decline in the quarter.

 

Scientific Games expanded the retail customer base to over 150,000 in China in the reported quarter, while China Sports Lottery achieved quarterly retail sales growth of 32% year over year. Although management remains cautious due to the difficult economic environment, the company claims to witness signs of improving retail sales in its core businesses.

 

 

Free cash flow in the reported quarter was down $9.1 million from the previous quarter to $12.6 million, but was up $11.5 million from the year-ago period. Scientific Games generated free cash flow of $108.5 million for the full year 2009, compared to negative free cash flow of $21.4 million in 2008. Free cash flow exceeded management’s own target of $100 million.

 

The improvement in free cash flow was driven primarily by improved working capital management and lower capital expenditure. Capital expenditure reduced to $112 million in 2009 from $230 million in 2008. Scientific Games generated $220.1 million in cash from operations in 2009, up $11.5 million from 2008. We remain confident of the company’s growing cash flow.

 

Scientific Games exited the quarter with $260.1 million in cash and cash equivalents versus $213.1 million in the previous quarter. The company had $1.37 billion in long-term debt (including current portion) versus $1.12 billion in the previous quarter.