Scientific Games (SGMS) Misses On Q3 Earnings, Revenues Top

Scientific Games Corporation (NASDAQ:SGMS) reported third-quarter 2017 loss of 66 cents per share, which was wider than the Zacks Consensus Estimate of a loss of 44 cents but narrower than the year-ago quarter’s loss of $1.13.

Revenues increased 6.8% from the year-ago quarter to $768.9 million. Revenues came in better than the Zacks Consensus Estimate of $753.6 million. The growth was driven by increases in Gaming, Lottery and Interactive segment revenues. However, unfavorable foreign currency exchange hurt revenues by $2.1 million.

Scientific Games’ shares have gained 241.1% year to date, substantially outperforming the industry’s 22.6% rally.

Quarter Details

Gaming Segment (59.1% of total revenues) revenues increased 1.4% year over year to $454.6 million in the third quarter. The increase can primarily be attributed to growth in Gaming Machine sales, Gaming Systems and Table Products of 2.1%, 7.6% and 10.5%, respectively. This was partly offset by lower revenues in gaming operations that decreased 3.5%. Unfavorable foreign currency exchange also impacted revenues by $2.2 million.

During the quarter, the company shipped 4,662 gaming machines to the United States and Canada. Replacement shipment increased 29.6% on a year-over-year basis to 3,932 units driven by high adoption of the TwinStar J43cabinets. International shipments declined 25% to 2,940 units. Average Selling Price (ASP) increased nearly 4.9% year over year to $17,643 in the reported quarter, reflecting favorable mix.

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

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

Lottery Segment (26.4% of total revenues) revenues were up 8.7% year over year to $202.9 million. Revenues from Instant Games, Services and Product sales increased 2.8%, 15.7% and 60.4% from the year-ago quarter, respectively. The surge in Product revenues was driven by increase in hardware and software sales in international markets. The company continued to win significant contracts this quarter. However, unfavorable foreign currency exchange impacted revenues by $0.1 million.

Interactive Segment (14.5% of total revenue) revenues surged 30.8% year over year to $111.4 million on the back of robust performance from Social Gaming–B2C and Other Interactive–B2B, which grew 35.3% and 9.4%, respectively.

Social gaming B2C revenue growth reflected robust performance from apps like Jackpot Party Social Casino, Quick Hit Slots, 88 Fortunes and Bingo Showdown, which contributed significantly. Moreover, 73% of the revenues were contributed by the mobile platform compared with 69% in the year-ago period.

The company also acquired Red7Mobile, a U.K.-based firm that will expand the talent base and technology of real-money gaming part of the company’s Interactive business, in the quarter.

The company also entered into a contract to acquire Canada-based NYX Gaming Group Ltd. ("NYX") for about $631 million, which it expects to complete by the first quarter of 2018.

Operational Details

Attributable earnings before interest, taxes, depreciation and amortization (AEBITDA) increased 10% from the year-ago period to $299 million driven by higher revenues, profitable revenue mix and increasing operating efficiency. AEBITDA margin expanded 120 basis points (bps) to 38.9%.

Gaming AEBITDA increased 5.4% year over year to $221.2 million. Gaming AEBITDA margin expanded 190 bps to 48.7%.

Lottery AEBITDA increased 15.4% year over year to $89.2 million. Lottery AEBITDA margin expanded 260 bps. This segment incurred lower selling, general and administrative (SG&A) expenses.

Interactive AEBITDA surged 70.6% to $23.2 million and margin expanded 480 bps.

SG&A increased 3.9% year over year to $158.8 million in the reported quarter. However, research & development (R&D) expense declined almost 11.3% to $47.8 million.

As a result, reported operating income surged 170.4% to $90.6 million.

Interest expense declined almost 10% year over year to $148.9 million in the reported quarter.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with cash and cash equivalents of $196.4 million compared with $198.2 million in the previous quarter. The company’s long-term debt was $8.05 billion compared with $8.06 billion at the end of previous quarter.

Cash flow from operations was $109.5 million, compared with $168.5 million in the previous quarter.

Zacks Rank & Stocks to Consider

Scientific Games carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector are NVIDIA Corporation (NASDAQ:NVDA) , Lam Research Corporation (NASDAQ:LRCX) and Micron Technology Inc. (NASDAQ:MU) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for NVIDIA, Lam Research and Micron is projected to be 11.2%, 14.9% and 10%, respectively.

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