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Scientific Games (SGMS) Posts Narrower-than-Expected Q2 Loss

Scientific Games Corp. SGMS reported second-quarter 2017 loss of 43 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 52 cents.

Revenues increased 5.1% from the year-ago quarter to $766.3 million, which was better than the Zacks Consensus Estimate of $739.3 million. The growth was driven by increases in the gaming and interactive segment revenues. However, unfavorable foreign currency exchange hurt revenues by $8 million.

We note that Scientific Games has massively outperformed the industry on a year-to-date basis. While the stock returned 143.9%, the industry gained 13.9%.

Higher Replacements, Interactive Drove Revenues

Gaming Segment (59.7% of total revenue) revenues increased 3.5% year over year to $457.2 million. The increase can primarily be attributed to growth in Gaming Machine sales, Gaming Systems and Table Products by 5.8%, 12.8% and 15.2%, respectively. This was partly offset by lower revenues in gaming operations that decreased 4.1%. Unfavorable foreign currency exchange also impacted revenues by $4.9 million.

During the quarter, the company shipped 4,367 gaming machines to the U.S. and Canada. Replacement shipment increased 24% on a year-over-year basis to 3,773 units. International shipments increased 14% to 3,411 units including 54 units for new casino openings. Average Selling Price (ASP) increased from $16,859 to $17,550 in the reported quarter, reflecting favorable mix.

The year-over-year growth in Gaming Systems revenues was driven by an increase in software and hardware sales, including shipment of new iVIEW4 player-interface display units. Moreover, Table Products benefited from growth in leased shufflers, proprietary table games, and progressives.

Gaming Operations revenues fell due to decline in installed base of WAP, premium, and daily-fee participation gaming machines.

Lottery Segment (26.4% of total revenue) revenues were down 0.8% year over year to $202.3 million. Instant Games and Services revenues declined 1% and 6.6% from the year-ago quarter, respectively. This was partially mitigated by 31.5% surge in Product Sales, which reflected higher U.S. and international hardware sales. Unfavorable foreign currency exchange impacted revenues by $2.2 million.

Lower international revenues and unfavorable foreign currency exchange ($1.8 million) hurt Instant Games revenue growth in the reported quarter. Further, the decline in Services reflected lower year-over-year retail sales of multi-state games as well declining international revenues primarily attributable to an unfavorable foreign exchange impact of $0.4 million.

Interactive Group (13.9% of total revenue) revenues surged 28.1% year over year to $106.8 million, on the back of robust performance from Social Gaming–B2C and Other Interactive–B2B, which grew 31.8% and 9.8%, respectively.

Social gaming B2C revenue growth exhibited robust performance from Jackpot Party Social Casino, as well as the success of more recent apps like the 88 Fortunes app (introdcuced in first-quarter 2017). The acquisition of Spicerack Media (completed in Apr 7) the provider of the Bingo Showdown app also contributed handsomely.

Most recently, the company acquired Red7Mobile, a U.K.-based firm that expands talent base and technology for real-money gaming portion of the company’s Interactive business.

Scientific Games Corp Price, Consensus and EPS Surprise


Scientific Games Corp Price, Consensus and EPS Surprise | Scientific Games Corp Quote

Operational Details

Attributable earnings before interest, taxes, depreciation and amortization (AEBITDA) increased 12.5% to $314.8 million driven by higher revenues and increasing operating efficiency. AEBITDA margin expanded 270 basis points (bps) to 41.1%.

Gaming AEBITDA increased 12.7% to $226.9 million. Gaming AEBITDA margin expanded 400 bps to 49.6%, reflecting favorable business mix of high-margin products.

Lottery AEBITDA was almost flat reflecting profitable business mix and lower selling, general and administrative (SG&A) expense. Lottery AEBITDA margin expanded 60 bps due to the same reasons.

Interactive AEBITDA surged 35.2% to $24.6 million and margin expanded 120 bps owing to higher revenues and improved operating leverage.

SG&A increased a modest 0.7% year-over-year to $145.9 million in the reported quarter. However, research & development (R&D) expense declined almost 7% to $48.1 million.

As a result, reported operating income surged 98.5% to $117.3 million.

Interest expense declined 8.5% year over year to $151.2 million in the reported quarter.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with $198.2 million compared with $131.9 million in the previous quarter. The company’s long-term debt was $8.06 billion as compared with $8.07 billion at the end of previous quarter.

Cash flow from operations was $168.5 million compared with $110 million in the previous quarter.

Zacks Rank & Stocks to Consider

Currently, Scientific Games carries a Zacks Rank #2 (Buy). Better-ranked stocks include ARI Network Services, Inc. ARIS, Lam Research Corp. LRCX and IPG Photonics Corp. IPGP in the broader sector. All these three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank Stocks here.

In the trailing four quarters, ARI Network Services, Lam Research and IPG Photonics have yielded positive average earnings surprises of 33.34%, 6.14% and 6.12%, respectively.

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