Scientific Games reports Q3 results

3 Nov 2006

NEW YORK –- (PRESS RELEASE) -- Scientific Games Corporation (Nasdaq: SGMS) today reported third quarter 2006 revenues of $217.4 million, up 10 percent from $196.8 million in the third quarter of 2005.

Net income was $11.5 million or $0.12 per diluted share, net of $4.6 million of stock compensation expense and $10.2 million of pari-mutuel asset impairment charges, down from $19.2 million or $0.21 per diluted share in the third quarter of 2005. Non-GAAP adjusted net income before stock compensation expense and asset impairment charges for the third quarter of 2006 was $22.8 million or $0.24 per diluted share, compared to non-GAAP adjusted net income of $24.9 million or $0.27 per diluted share for the third quarter of 2005.

EBITDA (see the following EBITDA definition and reconciliation) for the third quarter of 2006 was $63.8 million, up 32 percent from $48.3 million in the third quarter of 2005. Excluding stock compensation expense and asset impairment charges, adjusted EBITDA increased 24 percent to $68.9 million for the third quarter ended September 30, 2006, compared to adjusted EBITDA of $55.5 million for the third quarter ended September 30, 2005.

For the nine months ended September 30, 2006, revenues increased 15 percent to $665.2 million compared to $578.8 million for the nine months ended September 30, 2005. Net income was $58.9 million or $0.62 per diluted share, net of $14.0 million of stock compensation expense and $12.2 million of reduction in force and asset impairment charges, compared to $65.0 million or $0.70 per diluted share in 2005. Non-GAAP adjusted net income before stock compensation expense, reduction in force and asset impairment charges was $77.6 million or $0.83 per non-GAAP diluted share for the nine months ended September 30, 2006, compared to non-GAAP adjusted net income of $70.3 million or $0.76 per diluted share for the nine months ended September 30, 2005.

EBITDA increased 22 percent to $191.2 million for the nine months ended September 30, 2006, compared to $156.8 million for the nine months ended September 30, 2005. Excluding stock compensation expense, reduction in force and asset impairment charges, adjusted EBITDA increased 26 percent to $207.4 million for the nine months ended September 30, 2006, compared to adjusted EBITDA of $164.1 million for the nine months ended September 30, 2005.

This is the third quarter in which Scientific Games has reported through its three new reporting segments: Printed Products, Lottery Systems and Diversified Gaming. The acquisition of EssNet AB, which closed in March of 2006, was consolidated into the Lottery Systems Group and accounted for approximately $5.8 million of revenue in the third quarter. The acquisition of The Global Draw Limited which closed in April of 2006, was consolidated into the Diversified Gaming Group, and accounted for approximately $21.2 million of revenue in the third quarter.

"Despite the expected summer season slow down, we continue to see strong demand for our instant lottery tickets and services. Printed Products service revenue grew 15 percent in the quarter," said Lorne Weil, Chairman and CEO of Scientific Games. "Excluding new contract revenue of approximately $1.8 million in the third quarter of 2006 and the Italian instant tickets credits of $1.4 million in the third quarter of 2005, 'same store' sales growth was approximately 11 percent."

Printed Products sales revenue in the third quarter was $10.6 million, a decrease of 37 percent from $16.9 million in the third quarter of 2005. This is primarily due to a decline in phone card sales reflecting a continuing market driven shift to lower priced products. Printed Products sales margins were down 58 percent, due to pricing pressure and decreased economies of scale.

"International instant ticket growth continues to be driven by Italy, where we are now experiencing record sales of approximately 90 million Euros per week. Additionally, it appears that the German lottery monopoly decision will be decided by year end, so 2007 should be an exciting year for instant tickets in Germany. We are also encouraged by the number of Deal Or No Deal(R) licensed games in the fourth quarter, and Major League Baseball(R) orders coming in for next year. We continue to believe that content is an important driver of our growth strategy and expect exciting new content opportunities to materialize in the coming months. Further, we see Asia as a more imminent source of greenfield growth in 2007."

"Lottery Systems Group service revenue grew at an impressive 20 percent during the third quarter," added Weil. "Excluding new contract and EssNet service revenues of approximately $6.2 million, 'same store sales' growth was approximately 6 percent. Profitability levels for EssNet, Colorado, Catalunya and Oklahoma continue to be a drag on margins. However, plans already in place for the coming quarters are expected to yield continuing margin expansion."

Lottery Systems sales revenue was $7.2 million, a decrease of 67 percent from $21.8 million in the third quarter of 2005. This is primarily due to the absence of a one-time sale of Instant Ticket Vending Machines (ITVMs) to Pennsylvania that accounted for $16.1 million of revenue in the third quarter of 2005.

"Diversified Gaming Group service revenue grew 65 percent, largely due to the addition of Global Draw. Although revenues and margins were virtually flat in our pari-mutuel business, we expect to see margin improvement due to cost reduction initiatives, the successful launches of both the East and West Coast Quantum Data Centers (QDCs), and a growing number of our customers migrating to the QDCs."

In the third quarter of 2006 we recorded asset impairment charges of approximately $10.2 million of pari-mutuel charges in the Diversified Gaming Group to write-off hardware and software which has been made obsolete by the roll-out of our new BetJet(R) terminals, the two new Quantum Data Centers, and hardware write-offs on certain under-performing contracts. These charges are expected to result in an annual reduction of depreciation and amortization of approximately $2.2 million going forward.

Business development was strong in the quarter, including a contract with Shell Oil in their "Million Gallon Giveaway" promotion and the contract for a new internet system to purchase lottery tickets for Lotterie-Treuhandgesellschaft mbH, the state lottery of Hessen in Germany. We also received instant ticket contract renewals from South Carolina and Massachusetts, two of our most important customers. In October, Global Draw received an important contract extension from its largest UK betting shop customer Coral, positioning the division for significant growth both in the UK and abroad.

Weil concluded, "Despite our business development success, we continue to be focused on improving the Company's operational performance. In October, we initiated a company wide personnel cost reduction initiative which we expect will cost approximately $11.0 million in termination pay, but which is expected to result in an ongoing annual benefit of approximately $18.0 million. These costs will be charged against earnings in the fourth quarter of 2006. We will discuss these items in further detail on our conference call tomorrow."

Stock Repurchase Program

In addition, on November 2, 2006, the Company's Board of Directors approved a stock repurchase program under which the Company is authorized to repurchase, from time to time in the open market through December 31, 2007, shares of its outstanding common stock in an aggregate amount up to $200 million. Purchases are expected to be funded by cash flows from operations, borrowings, or a combination thereof. The timing and amount of purchases will be determined by the Company's management based on its evaluation of market conditions, share price and other factors. The stock repurchase program may be suspended or discontinued at any time.

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	Scientific Games reports Q3 results 3 Nov 2006 NEW YORK –- (PRESS RELEASE) -- Scientific Games Corporation (Nasdaq: SGMS) today reported third quarter 2006 revenues of $217.4 million, up 10 percent from $196.8 million in the third quarter of 2005. Net income was $11.5 million or $0.12 per diluted share, net of $4.6 million of stock compensation expense and $10.2 million of pari-mutuel asset impairment charges, down from $19.2 million or $0.21 per diluted share in the third quarter of 2005. Non-GAAP adjusted net income before stock compensation expense and asset impairment charges for the third quarter of 2006 was $22.8 million or $0.24 per diluted share, compared to non-GAAP adjusted net income of $24.9 million or $0.27 per diluted share for the third quarter of 2005. EBITDA (see the following EBITDA definition and reconciliation) for the third quarter of 2006 was $63.8 million, up 32 percent from $48.3 million in the third quarter of 2005. Excluding stock compensation expense and asset impairment charges, adjusted EBITDA increased 24 percent to $68.9 million for the third quarter ended September 30, 2006, compared to adjusted EBITDA of $55.5 million for the third quarter ended September 30, 2005. For the nine months ended September 30, 2006, revenues increased 15 percent to $665.2 million compared to $578.8 million for the nine months ended September 30, 2005. Net income was $58.9 million or $0.62 per diluted share, net of $14.0 million of stock compensation expense and $12.2 million of reduction in force and asset impairment charges, compared to $65.0 million or $0.70 per diluted share in 2005. Non-GAAP adjusted net income before stock compensation expense, reduction in force and asset impairment charges was $77.6 million or $0.83 per non-GAAP diluted share for the nine months ended September 30, 2006, compared to non-GAAP adjusted net income of $70.3 million or $0.76 per diluted share for the nine months ended September 30, 2005. EBITDA increased 22 percent to $191.2 million for the nine months ended September 30, 2006, compared to $156.8 million for the nine months ended September 30, 2005. Excluding stock compensation expense, reduction in force and asset impairment charges, adjusted EBITDA increased 26 percent to $207.4 million for the nine months ended September 30, 2006, compared to adjusted EBITDA of $164.1 million for the nine months ended September 30, 2005. This is the third quarter in which Scientific Games has reported through its three new reporting segments: Printed Products, Lottery Systems and Diversified Gaming. The acquisition of EssNet AB, which closed in March of 2006, was consolidated into the Lottery Systems Group and accounted for approximately $5.8 million of revenue in the third quarter. The acquisition of The Global Draw Limited which closed in April of 2006, was consolidated into the Diversified Gaming Group, and accounted for approximately $21.2 million of revenue in the third quarter. "Despite the expected summer season slow down, we continue to see strong demand for our instant lottery tickets and services. Printed Products service revenue grew 15 percent in the quarter," said Lorne Weil, Chairman and CEO of Scientific Games. "Excluding new contract revenue of approximately $1.8 million in the third quarter of 2006 and the Italian instant tickets credits of $1.4 million in the third quarter of 2005, 'same store' sales growth was approximately 11 percent." Printed Products sales revenue in the third quarter was $10.6 million, a decrease of 37 percent from $16.9 million in the third quarter of 2005. This is primarily due to a decline in phone card sales reflecting a continuing market driven shift to lower priced products. Printed Products sales margins were down 58 percent, due to pricing pressure and decreased economies of scale. "International instant ticket growth continues to be driven by Italy, where we are now experiencing record sales of approximately 90 million Euros per week. Additionally, it appears that the German lottery monopoly decision will be decided by year end, so 2007 should be an exciting year for instant tickets in Germany. We are also encouraged by the number of Deal Or No Deal(R) licensed games in the fourth quarter, and Major League Baseball(R) orders coming in for next year. We continue to believe that content is an important driver of our growth strategy and expect exciting new content opportunities to materialize in the coming months. Further, we see Asia as a more imminent source of greenfield growth in 2007." "Lottery Systems Group service revenue grew at an impressive 20 percent during the third quarter," added Weil. "Excluding new contract and EssNet service revenues of approximately $6.2 million, 'same store sales' growth was approximately 6 percent. Profitability levels for EssNet, Colorado, Catalunya and Oklahoma continue to be a drag on margins. However, plans already in place for the coming quarters are expected to yield continuing margin expansion." Lottery Systems sales revenue was $7.2 million, a decrease of 67 percent from $21.8 million in the third quarter of 2005. This is primarily due to the absence of a one-time sale of Instant Ticket Vending Machines (ITVMs) to Pennsylvania that accounted for $16.1 million of revenue in the third quarter of 2005. "Diversified Gaming Group service revenue grew 65 percent, largely due to the addition of Global Draw. Although revenues and margins were virtually flat in our pari-mutuel business, we expect to see margin improvement due to cost reduction initiatives, the successful launches of both the East and West Coast Quantum Data Centers (QDCs), and a growing number of our customers migrating to the QDCs." In the third quarter of 2006 we recorded asset impairment charges of approximately $10.2 million of pari-mutuel charges in the Diversified Gaming Group to write-off hardware and software which has been made obsolete by the roll-out of our new BetJet(R) terminals, the two new Quantum Data Centers, and hardware write-offs on certain under-performing contracts. These charges are expected to result in an annual reduction of depreciation and amortization of approximately $2.2 million going forward. Business development was strong in the quarter, including a contract with Shell Oil in their "Million Gallon Giveaway" promotion and the contract for a new internet system to purchase lottery tickets for Lotterie-Treuhandgesellschaft mbH, the state lottery of Hessen in Germany. We also received instant ticket contract renewals from South Carolina and Massachusetts, two of our most important customers. In October, Global Draw received an important contract extension from its largest UK betting shop customer Coral, positioning the division for significant growth both in the UK and abroad. Weil concluded, "Despite our business development success, we continue to be focused on improving the Company's operational performance. In October, we initiated a company wide personnel cost reduction initiative which we expect will cost approximately $11.0 million in termination pay, but which is expected to result in an ongoing annual benefit of approximately $18.0 million. These costs will be charged against earnings in the fourth quarter of 2006. We will discuss these items in further detail on our conference call tomorrow." Stock Repurchase Program In addition, on November 2, 2006, the Company's Board of Directors approved a stock repurchase program under which the Company is authorized to repurchase, from time to time in the open market through December 31, 2007, shares of its outstanding common stock in an aggregate amount up to $200 million. Purchases are expected to be funded by cash flows from operations, borrowings, or a combination thereof. The timing and amount of purchases will be determined by the Company's management based on its evaluation of market conditions, share price and other factors. The stock repurchase program may be suspended or discontinued at any time.