Scientific Games Corp. (SGMS) signed a contract with Colorado Lottery, after winning a competitive procurement process in October 2010. Under the contract, Scientific Games will become the primary vendor for instant ticket games and related services to Colorado Lottery.
Terms of the agreement were not disclosed. However, Scientific Games said that the contract extends through June 2014 and includes three one-year options. Scientific Games’ revenue will be based on a price per thousand instant tickets sold.
Scientific Games has been a Colorado Lottery vendor since 1983. The Colorado Lottery recorded retail sales of $501.2 million in fiscal 2010, with $328.1 million coming from instant ticket sales.
Scientific Games remains focused on developing its presence in the worldwide instant ticket and online lottery markets. Scientific Games reported revenue of $882.5 million in fiscal 2010, with Instant Ticket sales comprising 53% of the total.
This strong growth from instant ticket sales was primarily driven by various ticket lottery contract wins in Louisiana, Ontario, Iowa and Kentucky. We also believe that these contract wins will strengthen Scientific Games position over its nearest rival International Game Technology (IGT).
In January 2011, the Scientific Games joint venture, Northstar Lottery Group, LLC, was selected as the private manager of Illinois Lottery for the next ten years. Northstar is a joint venture between Scientific Games and GTECH Corporation, a subsidiary of Lottomatica Group S.p.A. Scientific Games owns a 20.0% equity interest in the joint venture.
Northstar will look after the lottery game development and portfolio management, whereas Scientific Games will be responsible for the design, development, manufacturing, warehousing and distribution of instant lottery tickets and will be compensated on a percentage-of-retail-sales basis. Scientific Games will also be entitled to its pro rata share of Northstar’s earnings.
Although Scientific Games reported weak top-line growth in fiscal 2010 (down 4.6% year over year), instant ticket sales increased 2.6% year over year. We expect strong growth from instant ticket sales to drive revenue growth going forward. Moreover, international development activities, especially in the Netherlands, Germany, Italy and China are expected to drive top-line growth over the long term.
Recommendation
We maintain our Neutral rating over the long term (6-12 months). Currently, Scientific Games has a Zacks #5 Rank, which implies a short-term Strong Sell rating.
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