Scientific Games reports results
EBITDA for the fourth quarter of 2007 was $73.7 million, up 53 percent from $48.3 million in the fourth quarter of 2006. Adjusted EBITDA increased 29 percent to $84.6 million for the fourth quarter of 2007, compared to adjusted EBITDA of $65.7 million for the fourth quarter of 2006.
During the quarter ended December 31, 2007, the Company reported a net loss of $2.8 million from its Mexican operations, a benefit of $3.9 million from the reversal of purchase accounting reserves and $6.9 million in charges for stock compensation costs. In addition, following the rationalization of its global Printed Products Group operations in Germany and Peru in the third quarter 2007, the Company reported additional disposal costs and asset impairment charges of $3.0 million in the fourth quarter, and employee termination costs of $3.6 million.
For the full year ended December 31, 2007, revenues were $1,046.7 million, compared to $897.2 million for the full year ended December 31, 2006, an increase of 17 percent. Net income was $65.4 million or $0.68 per diluted share, compared to $66.8 million or $0.70 per diluted share in 2006. Non-GAAP adjusted net income, excluding a net loss from the Company's Mexican operations, Peru lottery disposal costs, employee termination costs, the reversal of purchase accounting reserves, asset impairment charges and stock compensation expense, was $111.0 million or $1.17 per non-GAAP diluted share, compared to non-GAAP adjusted net income of $98.8 million or $1.05 per non-GAAP diluted share for the full year ended December 31, 2006.
For the full year ended December 31, 2007, EBITDA increased 28 percent to $307.5 million, compared to $239.5 million in 2006. Adjusted EBITDA increased 25 percent to $340.6 million, compared to $273.0 million in 2006.
Printed Products
Printed Products Group revenue increased by 17 percent overall to $137.7 million in the fourth quarter of 2007. Printed Product service revenue for the quarter of 2007 was $127.5 million, 23 percent ahead of the fourth quarter of 2006. Excluding the impact of licensed products, the re-pricing of the Pennsylvania cooperative services program contract and revenues from Oberthur Gaming Technologies (OGT) of $24.6 million, "same store" sales growth in the quarter was just under 8%. International instant ticket sales, especially in the United Kingdom (U.K.) and Italy, were particularly strong. Licensed product sales, which tend to exhibit far more quarter-to-quarter volatility than core instant tickets sales, declined by $5.6 million in the fourth quarter of 2007 due primarily to the seasonality of some brands in the fourth quarter 2006. Conversely, the Company believes that 2008 promises to be a very strong year for licensed products in general with nearly a 50 percent increase in the total number of licensed games, including Major League Baseball(R), Deal or No Deal(TM) and the World Poker Tour(R) games in particular.
Overall margins in the Printed Products Group declined from 45 percent in the fourth quarter of 2006 to 39 percent in the fourth quarter of 2007. However, if the impact of both OGT and phone cards is eliminated from revenue and gross margin, then the resulting overall gross margin for the quarter was 45 percent. As of the end of the fourth quarter of 2007, OGT's annualized San Antonio production of 4.5 billion tickets had been relocated to Alpharetta, Georgia, a consolidation that is expected to yield improved margins throughout 2008.
Rationalization of Printed Products operations in Germany and Peru, which was initiated in the third quarter of 2007, is expected to further improve margins in 2008. In the third quarter the Company recorded a depreciation and amortization charge of $26.1 million related to asset write-downs in these operations and in the fourth quarter the Company recorded an additional charge of $6.6 million for associated shutdown and employee termination expenses. Overall, the rationalization of the German and Peru operations negatively impacted 2007 earnings per share by approximately $0.25, most of which was non-cash.
After the close of the fourth quarter, the Company announced two important agreements involving the China Sports Lottery. Scientific Games will design, install and operate a national instant ticket network comprising a central monitoring and control system, a national call center, and 90,000 validation terminals, for which it will be paid on the basis of a percentage of retail sales. Sales are expected to begin during the first quarter of 2008 in four of the wealthiest provinces in China. In one of these provinces, Shandong, the Company will be providing traditional "cooperative services" support through a joint-venture partnership. The Company also is working with China Sports Lottery Printing, Ltd. to establish a state-of-the-art instant ticket production facility in China that is expected to supply tickets to all 30 Sports Lottery operations in China.
Additionally, in connection with the Company's activities in China, the Company has broadened its relationship with REXCAPITAL Financial Holdings Limited, its partner in the Guard Libang joint venture that services the China Welfare Lottery, to include a strategic alliance to pursue other gaming and lottery related opportunities in China.
Management intends to discuss the range of activities in China in considerable detail during tomorrow's conference call.
Lottery Systems Group
Lottery Systems revenue and gross margins for the fourth quarter increased by 21 percent and 31 percent, respectively, year over year, with the largest increase coming in the international market. Lottery Systems international revenue increased by 41 percent to $30.5 million in the fourth quarter of 2007. A sale of terminals to Golden Casket in Australia was an important contributor to international revenue growth. Overall Lottery Systems margins improved from 43 percent in 2006 to 47 percent in 2007.
Notwithstanding these improvements, the Televisa Mexican lottery contract continued to be a significant drag on earnings in 2007. The fourth quarter and full year impacts on the Company were approximately $0.03 and $0.10, respectively, in earnings per share, including an allocation of interest expense. As the Company has previously indicated, it believes that the launch of instant tickets is the key to the eventual turnaround of this venture. At the present time, the Company has begun to see meaningful progress in this regard and is cautiously optimistic that there will be a launch of instant tickets in the second half of 2008.
Diversified Gaming
As we previously disclosed at the end of the third quarter, the change in gaming regulations that were introduced in Great Britain in September 2007 continued to have a very positive impact on Global Draw in the fourth quarter, and this has carried over into the first quarter of 2008. Global Draw's "same store" sales were up 17% in the fourth quarter of 2007 versus 2006; in January of this year, Global Draw's average gross win per shop and per terminal were up 40 percent and 20 percent respectively over January 2007. On the strength of this performance, Global Draw was awarded a contract by William Hill PLC (LSE: WMH) to supply a minimum of 548 betting shops with approximately 2,100 new state-of-the-art dual screen Nevada(TM) terminals, which are specifically designed to allow both the legacy B2 and newly introduced B3 games on all terminals. The terminals are being installed during the first quarter of 2008 and should be 100% operational by the beginning of the second quarter. Also during the fourth quarter, Global Draw expanded importantly outside of the U.K. by signing a contract to supply 1,500 multi-game server-based gaming terminals to Corporacion Interamericana de Entretenimiento (BMV: CIE B) in Mexico. Given the very high fixed cost nature of this business, the Company expects that these additional 3,600 terminals will have very high levels of marginal profitability.
Games Media has announced agreements to supply an integrated digital gaming and entertainment solution for commercial distribution with six of the largest public house retailers in the U.K. -- Enterprise Inns, Spirit Group, Orchid Group, Admiral Taverns, Greene King and Marston's -- which together control approximately 16,000 venues representing approximately 30 percent of the total U.K. pub market. Installations took place during October and November 2007 in a total of 63 pub retail outlets, incorporating 275 machines, including gaming and entertainment terminals and digital juke boxes. Performance from all products was in line with management's expectations and ahead of comparable competitive offers, and the Company is confident that as it continues to hit target performance levels, the base of machines will continue to expand.
Racing-related revenues and gross margin declined slightly in the fourth quarter, reflecting the continued secular decline in racetrack-based attendance and wagering handle. Several important developmental opportunities were completed during the fourth quarter, suggesting that expansion via non-traditional products, markets and distribution channels has the potential to reverse the recent revenue trend. During the fourth quarter the Company was awarded a racebook contract by the Oneida Bingo & Casino in Wisconsin, a contract to provide an internet wagering platform and an interactive voice response telephone wagering system for New Jersey Account Wagering LLC and a tote/keno agreement with Loteria Electronica Internacional Dominicana, S.A. throughout the Dominican Republic. In addition, the Company was awarded its first contract in Brazil by Comtech Telecommunications Corp. calling initially for three upscale off-track wagering facilities growing potentially to 30 sites by 2009, and potentially to include sports betting as well.
Information about the use of non-GAAP financial information is provided under the section "Non-GAAP Disclosure" below. The non-GAAP measures (adjusted net income, diluted adjusted net income per share, EBITDA and adjusted EBITDA) are reconciled to the corresponding GAAP measures in the financial schedules accompanying this release.
Convertible Debentures
A market price event did not occur for the quarter ended December 31, 2007 and, accordingly, the Convertible Debentures are not convertible during the current quarter ending March 31, 2008. During the fourth quarter of 2007, the average price of the Company's common stock exceeded the specified conversion price of $29.10 of the Convertible Debentures. Because of this, 1,506,960 shares of common stock underlying the Convertible Debentures have been included in the weighted average number of diluted shares for the fourth quarter of 2007. For the full year 2007, the Company has included 1,357,207 shares of common stock in its weighted average number of diluted shares. Although the Company purchased a hedge in December 2004 to mitigate the potential dilution from the conversion of the Convertible Debenture, the Company is precluded from reflecting this hedge in the GAAP weighted average number of diluted shares because the effect would be anti-dilutive. However, to the extent the Convertible Debentures are converted during the term of the hedge, the diluted share amount will decrease because the hedge will offset the dilution from conversion of the Convertible Debentures.