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HOME > NEWS > Investor News > Scientific Games reports Q1 2014 results

Scientific Games reports Q1 2014 results

10 May 2014

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:

  • a $3.9 million increase primarily as a result of higher lottery retail sales by our U.S. and certain international customers to which we supply instant games on a participation basis, as well as the benefit from the first-year sales of instant games to our Northstar New Jersey joint venture and our new customer in Panama;
  • a $2.4 million decrease primarily from international customers, including Italy, to which we supply instant games on a price-per-unit basis; and
  • a $1.9 million increase in licensing and player loyalty revenue, primarily driven by promotional and linked games

Total instant game retail sales of our U.S. customers grew 3.7%, while our revenue from these customers grew by 7.7%, led by higher retail sales in those jurisdictions where we supply instant games on a participation basis

Operating income increased $1.7 million reflecting higher revenue and $0.8 million in lower depreciation and amortization, partially offset by an $0.8 million increase in selling general and administrative expense

Instant Products Segment Business Development Highlights

Entered into a three-year price-per-unit instant games contract to continue serving as the primary supplier to La Francaise des Jeux ("FDJ"), the operator of the French National Lottery and the second largest instant game lottery in the world, which includes options for FDJ to extend the contract for three additional one-year periods

Recently commenced sales of instant games in Greece; we have a 16.5% equity interest in the operator of the Greek State Lotteries, for which we have exclusive responsibility for game design, production and supply of instant games

Our instant games contract with Loto-Quebec expired in January 2014; we expect to continue to supply instant games to this customer under the previous contract terms until a new contract becomes effective in the second quarter, which will represent a significantly smaller proportion of the customer's business

Completed the installation of a new, state-of-the-art instant games printing press at the Company's Alpharetta, Georgia facility, which provides increased production capacity for our instant games

Lottery Systems Segment First Quarter Financial Highlights

Lottery systems revenue increased $9.9 million, inclusive of a favorable impact from foreign currency translation of $0.5 million, which reflected:

A $2.3 million increase in services revenue, primarily reflecting an increase in sports betting service revenue from international customers, and

A $7.6 million increase in product sales revenue, primarily reflecting higher hardware and software sales to international customers

Operating income was essentially flat as the $9.9 million increase in revenue and $1.0 million of lower research and development expense was offset by a less profitable revenue mix and a $1.7 million increase in depreciation and amortization

Lottery Systems Segment Business Development Highlights

Entered into a three-year contract extension with the Delaware Lottery to continue our supply of lottery and central monitoring and control systems, which contemplates the placement of a minimum of 450 VLTs at charitable gaming organizations, which will be reflected in the gaming segment

Entered into an eight-year contract with the North Dakota Lottery, an existing customer, to provide an online lottery system, related services, marketing support and the Sciplay interactive platform, which includes systems for internet subscriptions and player rewards programs, with an additional two-year extension held by the lottery
Earnings and EBITDA from Equity Investments

Earnings from equity investments decreased $0.6 million, as a small increase in earnings from LNS was offset by decreases in earnings from our other equity investments
The $1.1 million increase in EBITDA from equity investments was primarily attributable to increased EBITDA from LNS and RCN, partially offset by lower EBITDA from CSG
Liquidity and Capital Resources

At March 31, 2014, cash and cash equivalents were $169.1 million, an increase of $15.4 million compared to December 31, 2013

Total debt of $3.2 billion at March 31, 2014 was essentially flat compared to December 31, 2013
Net cash provided by operating activities increased $60.1 million, reflecting a $17.4 million increase in net earnings after adjustments for non-cash items and $26.7 million of favorable working capital and other changes, both primarily due to the acquisition of WMS, as well as a $16.0 million increase in distributed earnings from our equity method investees
Free cash flow was $23.7 million, an increase of $36.8 million compared to the prior-year period, principally reflecting the improvement in net cash provided by operating activities, partially offset by a $23.3 million increase in capital expenditures

Total capital expenditures increased $23.3 million, primarily due to the inclusion of $36.5 million of capital expenditures by WMS, partially offset by a reduction in lottery and UK Gaming capital expenditures
As previously announced, based on existing contractual obligations and planned investments, we currently expect to invest up to $280 million in capital expenditures in 2014.

The Company made an equity investment of $17.7 million in ITL related to UK Gaming's roll-out of terminals for Ladbrokes and received a $22.4 million return of capital payment from LNS and $44.9 million of cash proceeds from the sale of its equity interest in Sportech PLC, of which $14.5 million represented a gain on sale
As previously announced, the Company repurchased 2.0 million shares of its common stock for approximately $29.5 million in the 2014 first quarter; as of May 8, 2014, the Company has approximately $75.0 million available for share repurchases under its existing stock repurchase program

About Scientific Games

Scientific Games Corporation is a leading developer of technology-based products and services and associated content for worldwide gaming and lottery markets. The Company's portfolio includes instant and draw-based lottery games; electronic gaming machines and game content; server-based lottery and gaming systems; sports betting technology; loyalty and rewards programs; and social, mobile and interactive content and services.


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