Scientific Games (SGMS) Q3 Loss Narrower than Expected
Scientific Games Corp SGMS recently reported third-quarter 2015 adjusted loss of 85 cents in the quarter, which compared favorably with the Zacks Consensus Estimate of a loss of $1.17. However, the loss per share was greater than the loss of 50 cents reported in the year-ago quarter.
Scientific Games Corporation (SGMS) - Earnings Surprise | FindTheCompany
On a GAAP basis, the company reported a loss of $7.88 per share, which compared unfavorably with a loss of 82 cents reported in the prior-year quarter.
In the quarter, the company had to bear a $103.6 million non-cash impairment charge owing to the write down of some intangible assets in the gaming business.
Quarterly Details
The company’s revenues of $671.6 million lagged the Zacks Consensus Estimate of $709.4 million. In the prior year quarter, the company had recorded revenues of $415.6 million.
Gaming Segment – Revenues soared 161% year over year to $429.1 million due to a significant revenue contribution by Bally Technologies ($286.7 million), which completely offset the decline of $22 million in legacy gaming. Revenues from services jumped 154.2% year over year to $244.3 million, while product sales revenues increased 170.6% from the year-ago quarter to $184.8 million.
Lottery Systems Group – Revenues declined 10.1% year over year to $191.3 million. Instant games revenues improved 5.2% year over year while there was a decline in revenues from both product sales (74.2%) and services (6.6%).
Interactive Group – Revenues increased 33% year over year to $51.2 million. This was primarily due to Bally Technologies (contributed $8.6 million to segment revenues) and increase in revenues from the legacy interactive business ($4.1 million).
The company has achieved $194 million in cost savings related to the Bally acquisition till Sep 30, 2015 out of the $200 million savings expected in the year. In addition the company implementedover 85% of the expected second-year WMS-related synergies of $30 million. The company expects approximately $10 million of incremental costs savings in the fourth quarter.
In the reported quarter, the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) were $264.2 million. EBITDA from gaming segment came in at $205 million. The same for Lottery Systems was $76.8 million while that for the Interactive segment was $12.5 million.
Balance Sheet & Cash Flow
Scientific Games exited the quarter with $102.1 million in cash and cash equivalents compared with $171.8 million as on Dec 31, 2014. The company’s long-term debt stood at $8.36 billion compared with $8.47 billion as of Dec 31, 2014.
Cash flow from operations was $141.1 million in the quarter compared with $126.3 million in the prior-year quarter. Free cash flow was $50.3 million in the reported quarter compared with $64.7million in the previous quarter.
Our Take
Scientific Games holds a premium position in the gaming equipment space. Furthermore, the company has been witnessing improvement in its organic business and strength in the replacement market. This when combined with a robust product line and a recovering financial position are significant positives. Also, we are optimistic about the company’s ongoing cost cutting initiatives.
In the reported quarter, the company consolidated the gaming machine productions at its Las Vegas manufacturing facility, which will further result in cost savings going ahead and will also lead to working capital improvements.
Bally Technologies and WMS Industries acquisitions are positives for the company as they diversify its product portfolio and expand its global footprint. The acquisition of Bally Technologies eliminates one of the nearest competitors and will thereby help it to expand market share.
However, the acquisitions put Scientific Games’ balance sheet under pressure as the company opted for debt financing for the buyout. Nonetheless, with the integration nearing completion, the company is already seeing improvement in cash flow, which will likely continue in the near term.
In addition, the company has been impacted by loss/termination of contracts in the quarter including the Colorado Lottery Systems contract and a China-based contract.
Further, Scientific Games’ legacy business continues to disappoint amid significant competition from the likes of Computer Sciences Corp. CSC and others.
Currently, Scientific Games sports a Zacks Rank #1 (Strong Buy). A couple of similarly-ranked stocks in the same space are NCI, Inc. NCIT and LogMeIn, Inc. LOGM.
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