NEW YORK -- (PRESS RELEASE) -- Scientific Games Corporation (SGMS) ("Scientific Games" or the "Company"), a leading diversified supplier of games and technology to the gaming and lottery industries, today reported financial results for the first quarter ended March 31, 2014.
"First quarter revenue rose to $388 million reflecting the first full quarter of contribution from the WMS acquisition and 7% revenue growth in our lottery business," said President and Chief Executive Officer David L. Kennedy. "Although we are seeing challenging gaming industry conditions that have negatively impacted our gaming product sales results, we believe that Scientific Games is relatively well positioned due to the diversity of revenue streams in our lottery and gaming businesses and the opportunities created by our integration efforts.
"Our first quarter results included a $60 million year-over-year increase in cash flow from operating activities and a $37 million year-over-year increase in free cash flow, reflecting the benefit of the WMS acquisition, favorable working capital changes, distributed earnings from our equity investments and our return-focused approach to capital allocation," Mr. Kennedy commented. "We continued to accelerate our integration initiatives in the 2014 first quarter and believe we remain on track to achieve at least $60 million of cost savings on an annualized run-rate basis by the end of 2014."
Merger Integration Update
Following the completion of the WMS acquisition on October 18, 2013, Scientific Games began executing its detailed integration plans aimed at making operations more effective and reducing the Company's cost structure. Based on the progress of its integration-related actions to date and further integration efforts planned for 2014, the Company continues to expect to achieve at least $60 million of cost synergies on an annualized run-rate basis by the end of 2014. The Company continues to expect to achieve a total of $100 million in cost savings on an annualized run-rate basis by the end of 2015. Included in the expectations for annualized cost synergies is at least $55 million of annualized cost synergies from actions already initiated or completed.
"Our comprehensive integration initiatives have generated significant cost reductions," said Scott D. Schweinfurth, Executive Vice President and Chief Financial Officer. "Across our global operations, we are focused on generating additional efficiencies, executing our strategies to capitalize on new revenue opportunities and identifying additional opportunities to increase free cash flow."
As previously announced, in the 2014 first quarter, the Company took actions to strengthen its focus on its core businesses, including by:
Divesting its equity interest in Sportech PLC for cash proceeds of $44.9 million, which resulted in a $14.5 million gain; and
Selling its online real-money U.K. B2C gaming operation and exiting its managed services online gaming business in Belgium, which resulted in $3.4 million of employee termination and restructuring costs and a gain in other income (expense), net, of approximately $1 million.
Gaming Segment First Quarter Financial Highlights
Revenue increased $155.6 million principally due to $156.6 million of revenue from WMS, partially offset by a decline in services revenue of our U.K. gaming business ("UK Gaming")
Services revenue increased $92.7 million, reflecting $93.4 million of revenue from WMS and a benefit of $1.1 million from favorable foreign currency translation, partially offset by a decline in our UK Gaming business
Our average installed base of 9,142 WAP and premium participation gaming machines generated average daily revenue of $70.13 per unit, a 1% increase over the amount reported by WMS in the prior-year period, despite the casino industry challenges. The increase in the average daily revenue reflected the positive performance of new games and the shift in the installed footprint to more WAP units. The installed base of WAP and premium participation units as of March 31, 2014 included 3,775 WAP and 5,301 premium participation units compared to 3,346 WAP and 6,238 premium participation units for WMS as of March 31, 2013
Our average installed base of other leased and participation units rose to 28,989 units, reflecting the addition of 2,609 other leased units within the WMS footprint and an increase in the total average installed footprint of UK Gaming customers. The average daily revenue from other leased and participation units decreased from $11.75 to $11.47 per unit
Services revenue from our interactive gaming business increased to $30.8 million reflecting the acquisition of WMS; social gaming revenue is reported on a gross revenue basis before platform fees reflecting a change in the payment settlement process by Facebook®, which change represented $6.1 million of the interactive services revenue in the 2014 first quarter and an equal amount in cost of services
The growth in revenue from social gaming activities largely reflected the approximately 1.3 million average DAU for the Company's social casinos in the 2014 first quarter compared to the approximately 0.6 million average DAU reported by WMS in the prior-year period, partially offset by a decline in ARPDAU reflecting the impact of a significantly larger player audience and growth in players on mobile platforms
Product sales revenue increased $62.9 million, primarily reflecting $63.2 million in revenue from WMS. New gaming machine sales reflected shipments of 2,036 new WMS gaming machines to U.S. and Canadian customers, comprised of 1,247 replacement units for casino operators, 405 Illinois video gaming terminals (VGTs) and 384 units for new casino openings and expansions. The 1,478 new unit shipments to international customers included 1,197 WMS units. Other product sales revenue increased by $16.4 million principally due to $16.3 million from WMS, which included sales of conversion kits, used gaming machines and parts, as well as game content subscription revenue
New unit shipments for WMS declined to 3,233 units compared with 5,263 WMS units in the prior-year period; shipments for WMS in the prior-year quarter included 2,732 replacement units for U.S. and Canadian casino operators, 259 units for new casino openings and expansions in the U.S. and Canada, 628 VLTs for Canadian customers, no Illinois VGTs, and 1,644 units shipped to international customers
Unit shipment declines reflected challenging gaming industry conditions, including lower casino revenue in many U.S. regional gaming jurisdictions, which we believe has resulted in constrained capital spending by casino operators along with increased competition; in addition, we believe our ship share declined modestly from that achieved in the December 2013 quarter; the decline in international new unit shipments was due in part to import limitations in Argentina
The average selling price for WMS gaming machines declined by $297 per unit from the prior-year period, primarily reflecting lower average prices on international Bluebird®2 lite units and a shift in the mix of product sales that included a greater number of lower-priced VGTs
New unit shipments included 1,576 Blade™ gaming machines, which represented 49% of total WMS global new unit shipments
With more than 40 video game themes now available for the Blade™ cabinet, including four game themes developed specifically for Asian markets, the Blade gaming machines continue to perform strongly, with the original six game themes outperforming casino house average by approximately 20% one year after launch, as reported by customers
Operating loss increased $12.7 million principally due to higher expenses:
Selling, general and administrative expense increased $36.8 million primarily from WMS
Research and development expense increased $24.9 million primarily from WMS
Employee termination and restructuring costs reflected $5.2 million of charges associated with integration-related cost savings actions
Depreciation and amortization increased $52.6 million, of which $50.9 million was from WMS, including incremental depreciation and amortization related to purchase accounting associated with the acquisition. During the March 2014 quarter, we revised the depreciable lives of certain acquired intangible assets from a range of four to ten years to a range of three to eight years, which increased depreciation and amortization by $3.7 million in the 2014 March quarter
Gaming Segment Business Development Highlights
In late March 2014, we launched our new 3-reel mechanical Blade Stepper gaming machine and shipped 135 units to customers, with favorable initial customer feedback and performance
Launched the Gold Fish Social Slots game app, a second social gaming site
Entered into several new online gaming content agreements for real-money gaming services, including with bwin.Party digital entertainment.
Instant Products Segment First Quarter Financial Highlights
Instant games revenue increased $3.4 million, inclusive of an unfavorable impact from foreign currency translation of $0.6 million, which reflected:
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