Scientific Games Corporation (SGMS) announced that it has been awarded a five-year contract by the Sachsische LOTTO-GmbH in the German state of Saxony to supply instant tickets and cooperative services.
The contract begins from January 2010. Scientific Games will be the exclusive supplier of instant tickets and will be also provide consulting services such as marketing support, training and production related matters to Saxony.
Scientific Games continues to grow through international development activities, especially in Germany and China. In Germany, the company runs 20 active Deal or No Deal games and instant ticketing with 6,000 retailers. In 2008, the company signed four new contracts in Germany to provide pari-mutuel wagering systems, terminals and services.
The agreement with Sachsische LOTTO is the sixth cooperative services contract that Scientific Games has won in Germany, and further validates the company’s growing initiative in international expansion.
Based in New York City, Scientific Games is a global IT systems and services company that provides instant ticket and online lottery products, systems and services to lottery authorities and gaming markets worldwide.
We believe that Scientific Games benefits from its strong and growing presence in the worldwide instant ticket and online lottery markets, and has made significant in-roads into international markets that have traditionally been dominated by GTECH Holdings Corporation.
Scientific Games’ third quarter of fiscal 2009 results were down from the year-ago quarter. However, earnings beat the Zacks Consensus Estimate and benefited from a lower tax expense and lower non-cash deferred financing fees, offset by higher interest expense.
The company remains well on track to meet its stated goal of $15 to $20 million cost savings for the full year 2009, and expects additional cost savings of $10 to $20 million beginning in 2010.
However, Scientific Games is dependent on the renewal of long-term contracts, which could lead to loss of revenue if major contracts are not renewed or are taken away by competitors.
In late 2008, the company lost three online lottery contracts: in South Carolina, West Virginia and South Dakota. The loss of these online lottery contracts decreased licensed property revenues by $15.5 million in the first nine months of 2009. The company’s contract with its largest customer, Celsion Corp. (CLN) – 20% equity ownership – is scheduled to expire in 2010, which will hurt the company’s top line.
Further, high debt is a major concern for Scientific Games. As of September 30, 2009, Scientific Games net cash (cash less debt, including current portion) is a significant deficit of $976.4 million or about $10.53 per share (long-term debt to total capitalization ratio of 68%).
We maintain our Neutral rating on the stock.
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