Scientific Games reports Q3 results

2 Nov 2007

NEW YORK -- (PRESS RELEASE) -- Scientific Games Corporation (Nasdaq: SGMS) today reported third quarter 2007 revenues of $266.9 million, up 23 percent from $217.4 million in the third quarter of 2006. Net loss was $2.9 million or $(0.03) per diluted share, down from net income of $11.5 million or $0.12 per diluted share in the third quarter of 2006. Non-GAAP adjusted net income, excluding asset impairment charges, a net loss from the start-up in Mexico and stock compensation expense, was $22.3 million or $0.24 per nonGAAP diluted share, compared to non-GAAP adjusted net income of $22.8 million or $0.24 per non-GAAP diluted share in the third quarter of 2006.

EBITDA for the third quarter of 2007 was $73.7 million, up 16 percent from $63.8 million in the third quarter of 2006. Adjusted EBITDA increased 19 percent to $81.1 million for the third quarter of 2007, compared to adjusted EBITDA of $68.3 million for the third quarter of 2006.

During the quarter ended September 30, 2007 the Company incurred printed products asset impairment charges of $26.1 million related to the rationalization of its global Printed Products Group operations in Germany and Peru. The Company reported a net loss of $2.0 million for the start-up of its Mexican operation and $6.3 million in charges for stock compensation costs in the quarter.

For the nine months ended September 30, 2007, revenues were $778.7 million, compared to $665.2 million for the nine months ended September 30, 2006, an increase of 17 percent. Net income was $49.0 million or $0.51 per diluted share, compared to $58.9 million or $0.62 per diluted share in 2006. EBITDA increased to $233.8 million, compared to $191.2 million in 2006. Adjusted EBITDA increased 24 percent to $256.1 million, compared to $206.9 million in 2006.

"The revenue trend in the quarter was strong and essentially in line with the Company's expectations," said Lorne Weil, Chairman and CEO of Scientific Games. "Nevertheless, overall profit margins, and therefore, profit growth, were below the Company's expectations. We believe that the third quarter results reflect events that were predominantly unusual and infrequent in nature, rather than any deterioration in the inherent profitability of the business." The results are discussed in more detail below.

Printed Products

Printed Products Group service revenue for the quarter ended September 30, 2007 was $139.1 million, 53 percent ahead of the third quarter of 2006 and 24 percent ahead excluding the impact of revenues of Oberthur Gaming Technologies (OGT). 'Same store' sales growth excluding OGT was approximately 22 percent in the quarter. The strong revenue growth was led by record licensed products revenue including the launch of Deal or No Deal(TM) in 32 states and year-over-year growth in Italy.

Printed Products Group service margins went from 48.5 percent in the third quarter of 2006 to 40.8 percent in the third quarter of 2007 due to several factors. While OGT margins improved from the second quarter of 2007, they still lagged those of the legacy Scientific Games instant ticket business, thereby dragging down the average. Scientific Games margins were also considerably lower than normal due to the start-up of the new "P6" printing line in the Company's Alpharetta, Georgia manufacturing facility. There were substantial direct and indirect costs associated with the start-up, with no associated revenues in the quarter, as the Company continued to operate the "P1" printing line in parallel.

Early in the fourth quarter, all P1 production had been shifted to P6, resulting in a considerably improved cost situation. And most importantly, in the first quarter of 2008 all production currently taking place in San Antonio, Texas, about 4.5 billion tickets annually, will be relocated to Alpharetta, which is expected to result in significantly lower costs and higher margins.

Lorne Weil noted, "After multiple acquisitions on four continents and several years of significant capacity and revenue growth, our Printed Products Group has recognized that a rationalization of its operational infrastructure will yield significant improvements in productivity, efficiency, competitiveness and profitability. While a few details of the plan remain to be worked out, this rationalization occasioned a non-cash asset impairment charge in the third quarter of $26.1 million together with approximately $5 million of cash charges projected for the fourth quarter 2007. We believe this overall plan, including the previously announced closure of the San Antonio production facility, will yield approximately $20 million in annualized cost savings starting in 2008."

Printed Products Group sales revenue for the quarter ended September 30, 2007 was $9.4 million compared to $10.6 million for the quarter ended September 30, 2006. This decrease was primarily attributable to a continuing decline in phone card prices and volumes reflecting the market driven shift to lower priced products. Printed Products Group sales margins went from 18.5 percent in the third quarter of 2006 to 16.8 percent in the third quarter of 2007 due to pricing pressure and decreased economies of scale.

Lottery Systems Group

Lottery Systems Group service revenue increased 7 percent during the third quarter from $50.9 million in third quarter 2006 to $54.6 million. Excluding new contract revenues, 'same store' sales increased 7 percent largely due to an increase in Powerball jackpots. The launch of the Televisa Mexican lottery contract continues to be a significant drag on earnings. The third quarter impact on the Company was approximately ($0.02) in earnings per share. Despite this, the Lottery Systems Group service margins improved to 47.1 percent from 45.1 percent in the third quarter 2006.

Mr. Weil noted, "The two keys to the success of the Televisa Mexican lottery are the expansion of the size and quality of the distribution network to levels anticipated at the time the Company entered into the contract, and perhaps more importantly the introduction of instant tickets. The Company is working together with Televisa to move forward with the changes we believe are necessary and we continue to be optimistic that success can be achieved in the early part of next year."

Lottery Systems Group sales revenue was $8.4 million, an increase of 17 percent from $7.2 million in the third quarter of 2006. Lottery Systems Group sales margins also increased to 54.8 percent from 46.6 percent in the third quarter 2006. The Company is optimistic that add-on sales of terminals and other equipment to Germany should continue to improve if the German Lotto Bloc's contract is extended by year end.

Diversified Gaming

Diversified Gaming Group service revenue decreased from $56.9 million in the third quarter of 2006 to $50.8 million in 2007. During July and August, the winding down of Global Draw's Betfred business, the beginning of contract renewals at lower prices, and the initial impact of the United Kingdom (U.K.) smoking ban that came into effect in July had not yet been offset by increases in machine density that had largely moved from 3 machines per shop to 4. But by September, the new U.K. regulations combined with the increased density produced average win per shop across the entire U.K. installed base that was 20% ahead of September 2006, and for the month of October, average win per shop ran approximately 31% ahead of October 2006.

During the quarter, Global Draw successfully converted its full estate of approximately 9,500 gaming terminals to meet the requirements of the new U.K. gambling bill ahead of the September 1, 2007 effective date, and was the only supplier in the U.K. to do so. This new legislation allows the betting shops to offer B3 Jackpot content as well as B2 fixed odds betting terminal (FOBT) content on each of their allocated four machines. Global Draw replaced all of its original terminals with state of the art dual screen 'Nevada' terminals, which are specifically designed to allow both B2 and B3 games to be offered on all terminals.

Mr. Weil noted, "While shipments of Games Media analog machines declined sharply between the second and third quarters of 2007, we are very excited by the prospects of our pub-based digital business. As evidenced by the recent announcement of our trial agreements with four major pub retailers, the launch of the digital business is well underway, and thus far the results of the trials have been extremely encouraging. We believe it will take a few quarters to build digital revenues back to prior analog levels, but the changeover is expected to have significant benefits. As compared to the one-time sale nature of the analog business, the digital business will produce a 'participation based' recurring service revenue stream that is expected to be inherently far more profitable and faster growing than the analog business, all the more so because it will utilize the Global Draw operating infrastructure."

Business Development

Third quarter business development included instant ticket contract awards in Connecticut, Ohio, Idaho, Iowa, Rhode Island and the U.K., instant ticket Cooperative Services contracts with Rheinland Pfalz in Germany and MSL in the Ukraine, and new pari-mutuel systems contracts with Great Canadian Gaming and the California Horse Racing Industry.

Subsequent to the end of the quarter, the Company inaugurated the new "P6" high-speed printing press in Alpharetta, Games Media was awarded trial agreements with four pub retailers in the U.K. for its new integrated digital solution, and Global Draw was awarded a five-year contract to supply up to 1,500 of its multi-game server based gaming terminals to Corporacion Interamericana de Entretenimiento ("CIE") in Mexico. The latter is extremely significant and casts important light on Global Draw's growth strategy.

Language: Any Language Location: Currency: > edit my preferences Home Online Slots Live Dealer Games Online Casinos Online Poker Online Bingo Games Lotteries Sports & Racebooks Fantasy Sports Forex Betting Exchanges Spread Betting Binary Options Exclusive Bonuses Weekly Newsletter Online Gaming News Payment Methods Gaming Software Gaming Site Owners Gaming Jurisdictions		Bonuses! New games! Gossip! And all the player news you can handle. Sign up NOW! View the current issue
	Scientific Games reports Q3 results 2 Nov 2007 NEW YORK -- (PRESS RELEASE) -- Scientific Games Corporation (Nasdaq: SGMS) today reported third quarter 2007 revenues of $266.9 million, up 23 percent from $217.4 million in the third quarter of 2006. Net loss was $2.9 million or $(0.03) per diluted share, down from net income of $11.5 million or $0.12 per diluted share in the third quarter of 2006. Non-GAAP adjusted net income, excluding asset impairment charges, a net loss from the start-up in Mexico and stock compensation expense, was $22.3 million or $0.24 per nonGAAP diluted share, compared to non-GAAP adjusted net income of $22.8 million or $0.24 per non-GAAP diluted share in the third quarter of 2006. EBITDA for the third quarter of 2007 was $73.7 million, up 16 percent from $63.8 million in the third quarter of 2006. Adjusted EBITDA increased 19 percent to $81.1 million for the third quarter of 2007, compared to adjusted EBITDA of $68.3 million for the third quarter of 2006. During the quarter ended September 30, 2007 the Company incurred printed products asset impairment charges of $26.1 million related to the rationalization of its global Printed Products Group operations in Germany and Peru. The Company reported a net loss of $2.0 million for the start-up of its Mexican operation and $6.3 million in charges for stock compensation costs in the quarter. For the nine months ended September 30, 2007, revenues were $778.7 million, compared to $665.2 million for the nine months ended September 30, 2006, an increase of 17 percent. Net income was $49.0 million or $0.51 per diluted share, compared to $58.9 million or $0.62 per diluted share in 2006. EBITDA increased to $233.8 million, compared to $191.2 million in 2006. Adjusted EBITDA increased 24 percent to $256.1 million, compared to $206.9 million in 2006. "The revenue trend in the quarter was strong and essentially in line with the Company's expectations," said Lorne Weil, Chairman and CEO of Scientific Games. "Nevertheless, overall profit margins, and therefore, profit growth, were below the Company's expectations. We believe that the third quarter results reflect events that were predominantly unusual and infrequent in nature, rather than any deterioration in the inherent profitability of the business." The results are discussed in more detail below. Printed Products Printed Products Group service revenue for the quarter ended September 30, 2007 was $139.1 million, 53 percent ahead of the third quarter of 2006 and 24 percent ahead excluding the impact of revenues of Oberthur Gaming Technologies (OGT). 'Same store' sales growth excluding OGT was approximately 22 percent in the quarter. The strong revenue growth was led by record licensed products revenue including the launch of Deal or No Deal(TM) in 32 states and year-over-year growth in Italy. Printed Products Group service margins went from 48.5 percent in the third quarter of 2006 to 40.8 percent in the third quarter of 2007 due to several factors. While OGT margins improved from the second quarter of 2007, they still lagged those of the legacy Scientific Games instant ticket business, thereby dragging down the average. Scientific Games margins were also considerably lower than normal due to the start-up of the new "P6" printing line in the Company's Alpharetta, Georgia manufacturing facility. There were substantial direct and indirect costs associated with the start-up, with no associated revenues in the quarter, as the Company continued to operate the "P1" printing line in parallel. Early in the fourth quarter, all P1 production had been shifted to P6, resulting in a considerably improved cost situation. And most importantly, in the first quarter of 2008 all production currently taking place in San Antonio, Texas, about 4.5 billion tickets annually, will be relocated to Alpharetta, which is expected to result in significantly lower costs and higher margins. Lorne Weil noted, "After multiple acquisitions on four continents and several years of significant capacity and revenue growth, our Printed Products Group has recognized that a rationalization of its operational infrastructure will yield significant improvements in productivity, efficiency, competitiveness and profitability. While a few details of the plan remain to be worked out, this rationalization occasioned a non-cash asset impairment charge in the third quarter of $26.1 million together with approximately $5 million of cash charges projected for the fourth quarter 2007. We believe this overall plan, including the previously announced closure of the San Antonio production facility, will yield approximately $20 million in annualized cost savings starting in 2008." Printed Products Group sales revenue for the quarter ended September 30, 2007 was $9.4 million compared to $10.6 million for the quarter ended September 30, 2006. This decrease was primarily attributable to a continuing decline in phone card prices and volumes reflecting the market driven shift to lower priced products. Printed Products Group sales margins went from 18.5 percent in the third quarter of 2006 to 16.8 percent in the third quarter of 2007 due to pricing pressure and decreased economies of scale. Lottery Systems Group Lottery Systems Group service revenue increased 7 percent during the third quarter from $50.9 million in third quarter 2006 to $54.6 million. Excluding new contract revenues, 'same store' sales increased 7 percent largely due to an increase in Powerball jackpots. The launch of the Televisa Mexican lottery contract continues to be a significant drag on earnings. The third quarter impact on the Company was approximately ($0.02) in earnings per share. Despite this, the Lottery Systems Group service margins improved to 47.1 percent from 45.1 percent in the third quarter 2006. Mr. Weil noted, "The two keys to the success of the Televisa Mexican lottery are the expansion of the size and quality of the distribution network to levels anticipated at the time the Company entered into the contract, and perhaps more importantly the introduction of instant tickets. The Company is working together with Televisa to move forward with the changes we believe are necessary and we continue to be optimistic that success can be achieved in the early part of next year." Lottery Systems Group sales revenue was $8.4 million, an increase of 17 percent from $7.2 million in the third quarter of 2006. Lottery Systems Group sales margins also increased to 54.8 percent from 46.6 percent in the third quarter 2006. The Company is optimistic that add-on sales of terminals and other equipment to Germany should continue to improve if the German Lotto Bloc's contract is extended by year end. Diversified Gaming Diversified Gaming Group service revenue decreased from $56.9 million in the third quarter of 2006 to $50.8 million in 2007. During July and August, the winding down of Global Draw's Betfred business, the beginning of contract renewals at lower prices, and the initial impact of the United Kingdom (U.K.) smoking ban that came into effect in July had not yet been offset by increases in machine density that had largely moved from 3 machines per shop to 4. But by September, the new U.K. regulations combined with the increased density produced average win per shop across the entire U.K. installed base that was 20% ahead of September 2006, and for the month of October, average win per shop ran approximately 31% ahead of October 2006. During the quarter, Global Draw successfully converted its full estate of approximately 9,500 gaming terminals to meet the requirements of the new U.K. gambling bill ahead of the September 1, 2007 effective date, and was the only supplier in the U.K. to do so. This new legislation allows the betting shops to offer B3 Jackpot content as well as B2 fixed odds betting terminal (FOBT) content on each of their allocated four machines. Global Draw replaced all of its original terminals with state of the art dual screen 'Nevada' terminals, which are specifically designed to allow both B2 and B3 games to be offered on all terminals. Mr. Weil noted, "While shipments of Games Media analog machines declined sharply between the second and third quarters of 2007, we are very excited by the prospects of our pub-based digital business. As evidenced by the recent announcement of our trial agreements with four major pub retailers, the launch of the digital business is well underway, and thus far the results of the trials have been extremely encouraging. We believe it will take a few quarters to build digital revenues back to prior analog levels, but the changeover is expected to have significant benefits. As compared to the one-time sale nature of the analog business, the digital business will produce a 'participation based' recurring service revenue stream that is expected to be inherently far more profitable and faster growing than the analog business, all the more so because it will utilize the Global Draw operating infrastructure." Business Development Third quarter business development included instant ticket contract awards in Connecticut, Ohio, Idaho, Iowa, Rhode Island and the U.K., instant ticket Cooperative Services contracts with Rheinland Pfalz in Germany and MSL in the Ukraine, and new pari-mutuel systems contracts with Great Canadian Gaming and the California Horse Racing Industry. Subsequent to the end of the quarter, the Company inaugurated the new "P6" high-speed printing press in Alpharetta, Games Media was awarded trial agreements with four pub retailers in the U.K. for its new integrated digital solution, and Global Draw was awarded a five-year contract to supply up to 1,500 of its multi-game server based gaming terminals to Corporacion Interamericana de Entretenimiento ("CIE") in Mexico. The latter is extremely significant and casts important light on Global Draw's growth strategy.