Scientific Games Corp. (SGMS) reported a profit on a non GAAP basis for the second quarter of 2010, beating the Zacks Consensus Estimate by a penny.
Earnings, excluding one-time items, came in at 14 cents per share, edging past the Zacks Consensus Estimate of earnings of 13 cents per share. This compares with a profit of 21 cents per share reported in the year-ago quarter.
Although results were down year over year, the quarter benefitted from an increase in U.S. lottery retail revenues, cost containment efforts, strategic growth initiatives and improved margins.
During the quarter, Scientific Games’ subsidiary, Global Draw, won a four year contract to provide approximately 7,600 terminals to Ladbrokes’ U.K. terminal estate. The contract is the largest in the Global Draw’s 13-year history and is expected to roll out in early 2011. Moreover, Games Media was awarded 250 pub sites by Enterprise Inns in the U.K. The company is likely benefit from its robust portfolio of existing contracts and new contract pipeline in the lottery and diversified gaming businesses, going forward.
Further, Scientific Games in conjunction with GTECH submitted a joint bid for Illinois lottery Private Management Agreement. Scientific Games acquired GameLogic, a provider of technology and marketing and development resources for Internet gaming and player loyalty programs GameLogic’s assets and personnel will play a key role in Scientific Games’ revenue growth.
Revenue
Net operating revenues increased 3.6% year-over-year to $233.0 million, driven by the strength in two of the three segments: Printed Products (+5.4%) and Diversified Gaming Group (+5.3%), partially offset by a decline Lottery Systems Group (-2.6%). Revenues were above the Consensus Estimate of $222.2 million.
A major contributor to the revenue increase was higher instant ticket revenues, which increased 5.0% year over year. Revenues were also positively impacted by higher Sales revenues, up 100.5% year over year. However, Service revenues fell 4.2%, negatively impacting overall revenues. Scientific Games’ U.S. instant ticket and lottery systems customers’ retail sales upped 1.8% and 3.5% year-over-year, respectively, in the quarter.
By segment, Printed Products Group revenues were up primarily due to a rise in instant ticket revenues as a result of higher volumes to existing customers, new contracts in Arkansas and Puerto Rico, transition to a percentage-of-sales contract with the customers in the U.K. and a favorable foreign currency translation. This was partially offset by a decline in sales of instant tickets to Italy and the loss of cooperative services contracts in Ohio and Arizona.
Lottery Systems Group revenues increased primarily due to higher sales revenues of hardware and software, partially offset by lower service revenues due to contract terminations in West Virginia and South Dakota. Moreover, lower international Lottery Systems revenues were partially offset by improved U.S. retail sales.
China Sports Lottery retail sales inched up 4%, but were below management’s expectation primarily due to an increased competition from the Shanghai World Expo tickets offered by the China Welfare Lottery and slower-than-anticipated implementation of the marketing plan. However, the company expects to benefit from the introduction of higher price point instant tickets in China, the development of the retailer and validation network and the growth in mobile phones.
Diversified Gaming Group revenues fell due to lower service revenues in the Global Draw business as a result of revised contract terms in the U.K. and decreased revenues from the Austrian over-the-counter product, partially offset by an underlying terminal growth and an increase in gross win per terminal in the U.K. Management said that the closing of the sale of its racing and venue management businesses to Sportech Plc remains pending due to the ongoing regulatory approval process.
Operating Performance
On a GAAP basis, the company reported a loss of $4.3 million, or 5 cents per share, compared with a net income of $20.3 million, or 22 cents per share in the year-ago period. This was primarily due to a loss on a foreign currency hedge, higher net interest expense, lower joint ventures equity in earnings and a higher effective tax rate. Moreover, charges related to racing and venue management business impacted the bottom line.
Scientific Games reported an operating income of $26.5 million for the quarter, flat compared with the year-ago quarter. The operating margin of 11.4% was slightly down from 11.8% in the year-ago period due to a non-cash charge related to the held for sale racing and venue management businesses and higher selling, general and administrative expense, offset by a more profitable revenue mix and a lower depreciation and amortization expense.
Adjusted EBITDA increased slightly to $81.5 million from $81.0 million in the year-ago quarter. EBITDA margin was 35.0% in the quarter versus 36.0% in the prior-year period. The decrease was due to a decline in earnings from joint ventures, particularly in Italy.
Balance Sheet and Cash Flow
Free cash flow in the reported quarter was $31.4 million, down from $46.4 million in the year-ago quarter. The reduction in free cash flow was due to an increased interest expense and the loss on settlement of a foreign currency hedge related to the Italian instant ticket tender process.
Scientific Games exited the quarter with $151.5 million in cash and cash equivalents and $1.38 billion in long-term debt. The company had $164.3 million available under its revolving credit facility. The company repurchased approximately 2.6 million shares for $26.3 million, or an average of $10.02 per share.
Currently, Scientific Games has a short-term Zacks #3 Rank (Hold) rating.
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