Scientific Games Reports Third Quarter 2017 Results

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Scientific Games Reports Third Quarter 2017 Results

Growth Achieved across Gaming, Lottery and Interactive Businesses

 

NEWS PROVIDED BY

Scientific Games Corporation 

Nov 01, 2017, 16:05 ET

 

LAS VEGASNov. 1, 2017 /PRNewswire/ -- Scientific Games Corporation (NASDAQ: SGMS) ("Scientific Games" or the "Company"), today reported results for the third quarter ended September 30, 2017.

  • Third quarter revenue rose 7 percent to $768.9 million, up from $720.0 million a year ago. The growth was driven by revenue increases in each of the Gaming, Lottery and Interactive segments. Foreign exchange had a $2.1 millionfavorable impact on revenue.
  • Operating income in the third quarter increased 170 percent to $90.6 million from $33.5 million a year ago, reflecting revenue growth, a more profitable revenue mix, more effective business processes and lower depreciation and amortization. Net loss declined to $59.3 million from $98.9 million in the prior-year period, reflecting the improvement in operating income and a $16.5 million decrease in interest expense, partially offset by an $8.4 million loss from financing transactions and a $15.5 million decrease in income tax benefit.
  • Attributable EBITDA ("AEBITDA"), a non-GAAP financial measure defined below, increased 10 percent to $299.0 million from $271.6 million a year ago, primarily driven by higher revenue, a more profitable revenue mix and more effective business processes. AEBITDA margin, a non- GAAP financial measure defined below, improved to 38.9 percent from 37.7 percent a year ago.
  • Net cash provided by operating activities decreased $41.4 million to $109.5 million from a year ago. The primary driver was an unfavorable change in working capital accounts of $107.1 million, partially offset by a $64.5 millionincrease in incremental net earnings adjusted for non-cash adjustments and other items.
  • The Company completed a refinancing of its $3.283 billion of existing term loans that lowered the applicable interest rate by 75 basis points and extended maturity to 2024.
  • The Company entered into a definitive agreement to acquire NYX Gaming Group Limited ("NYX") at a total enterprise value of approximately $631 million; subject to closing, the transaction is expected to ideally position Scientific Games to capitalize on the growing global online gaming and sports betting markets. Subsequent to third quarter end, the Company issued $350.0 million aggregate principal amount of 5.000% senior secured notes due 2025 to partially fund this acquisition.

"This quarter each business segment achieved revenue and AEBITDA growth, we showcased industry-altering innovation at NASPL and G2E, we were named 'Industry Land-Based Supplier of the Year' and announced our intent to acquire NYX, the industry leader in digital real-money gaming and sports betting. We are excited by the acquisition of NYX and the opportunities to grow our digital business," said Kevin Sheehan, Chief Executive Officer of Scientific Games. "We are growing our businesses, expanding our product portfolio, improving our processes, enhancing our operating margin, paying down debt, and delivering positive results."

Michael Quartieri, Chief Financial Officer of Scientific Games, said, "Our improved performance is enabling us to strengthen our balance sheet and lower our cost of capital. During the third quarter, we successfully extended our term loan maturity until August 2024 and reduced the term loan interest rate by 75 basis points. Additionally, we established a new benchmark with the issuance of our 5.000% senior secured notes due in 2025. At quarter-end, our net debt leverage ratio decreased to 6.7 times trailing twelve-month AEBITDA, down from 7.4 times a year ago. We remain committed to our path of deleveraging, while capitalizing on meaningful opportunities to grow our business."

                                                                               

SUMMARY CONSOLIDATED RESULTS

 

($ in millions)    

Three Months Ended September 30,

 

2017

 

2016

Revenue

$                  768.9

 

$                  720.0

Operating income

90.6

 

33.5

Net loss before income taxes

(63.5)

 

(118.6)

Net loss(1)

(59.3)

 

(98.9)

Net cash provided by operating activities

109.5

 

150.9

Capital expenditures

73.9

 

81.8

       

Non-GAAP Financial Measures:(2)

     

AEBITDA

$                 299.0

 

$                  271.6

AEBITDA margin

38.9%

 

37.7%

Free cash flow

$                   27.6

 

$                    61.1

       
 

As of Sept. 30,

 

As of Dec. 31,

Balance Sheet Measures:

2017

 

2016

Cash and cash equivalents

$                 196.4

 

$                  115.1

Principal face value of debt outstanding(3)

8,178.4

 

8,235.3

Available liquidity

726.8

 

631.6

(1)     The 2017 third quarter includes a $15.5 million decrease in income tax benefit and an $8.4 million loss related to financing transactions. Cash income taxes paid in the period were $9.1 million compared with $3.2 million in the prior-year period.

(2)     The financial measures "AEBITDA", "AEBITDA margin", "free cash flow", and "EBITDA from equity investments" (disclosed in a table below) are non-GAAP financial measures defined below under "Non-GAAP Financial Measures" and reconciled to the most directly comparable GAAP measures in the accompanying supplemental tables at the end of this release.

(3)     For the nine months ended September 30, 2017, in addition to a $138.2 million reduction in net debt, cash flows include the impact of $57.7 million for business acquisitions, net of cash acquired, and $52.3 million for cash costs related to financing transactions.


 

GAMING SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017

         

GAMING SEGMENT

Three Months Ended

   

($ in millions)

September 30,

 

Increase/(Decrease)

 

2017

2016

 

Amount  

%

Revenue(1)

         

Gaming operations                       

$     176.0

$    182.4

 

$          (6.4)

(3.5)%

Gaming machine sales                

163.1

159.8

 

3.3

2.1 %

Gaming systems                           

62.0

57.6

 

4.4

7.6 %

Table products                              

53.5

48.4

 

5.1

10.5 %

 

$     454.6

$    448.2

 

$            6.4

1.4 %

           

Operating income 

$       85.2

$      51.5

 

$          33.7

65.4 %

AEBITDA(2)     

$     221.2

$    209.9

 

$          11.3

5.4 %

AEBITDA margin   

48.7%

46.8%

     

(1)     Gaming operations revenue is included in services revenue, gaming machine sales revenue is included in product sales revenue, and portions of gaming systems and table products revenue are included in both services revenue and product sales revenue.

(2)     AEBITDA in the 2017 and 2016 third quarter periods included $2.2 million and $2.6 million, respectively, of EBITDA from equity investments in International Terminal Leasing ("ITL") and Roberts Communications Network, LLC ("RCN").

  • Total gaming revenue increased $6.4 million, or 1 percent, compared to the strong results of the year-ago period, inclusive of a $2.2 million favorable foreign exchange impact.
  • Operating income improved $33.7 million to $85.2 million. The increase primarily reflected the benefit of the higher revenue and lower depreciation and amortization compared to the 2016 third quarter.
  • AEBITDA increased to $221.2 million with an AEBITDA margin of 48.7 percent, reflecting the higher revenue and improved business processes compared to the prior year.
  • Gaming operations revenue declined $6.4 million, or 4 percent, largely reflecting a year-over- year decrease in the installed base of WAP, premium, and daily-fee participation gaming machines. On a quarterly sequential basis, gaming operations revenue declined $2.4 million, primarily related to a decrease in average revenue per day. A 105-unit increase in the WAP, premium and daily-fee participation units installed base at quarter-end - the first quarterly sequential increase since 2014 - was offset by a $0.71 per day seasonal sequential decline in average daily revenue. The installed base of other leased and participation gaming machines was essentially flat on a quarterly sequential basis, as the placement of additional VLTs at New York gaming facilities and the ongoing roll-out of VLTs in Greece was offset by a convert-to-sale of participation units in certain  Maryland casinos. The $0.30 decrease in the average daily revenue per unit of other leased and participation units included the impact from the lower-yielding Greek VLTs.
  • Gaming machine sales revenue increased $3.3 million year over year, largely due to a 30-percent increase in shipments of U.S. and Canadian replacement gaming machines that reflects the strong performance of the TwinStar® J43 gaming machine. The increase in replacement units more than offset the impact from lower global sales related to fewer new casino openings and expansions. The average sales price increased to $17,643 from $16,824 in the prior year, reflecting a more favorable mix of gaming machines. U.S. and Canadian shipments totaled 4,662 gaming machines, including 3,932 replacement units, 251 units for new casino openings and expansions and 479 VGTs for the Illinois market. In the prior-year period, U.S. and Canadian shipments totaled 4,022 units, which comprised 3,033 replacement units, 744 units for new casino openings and expansions and 245 VGTs for the Illinoismarket. International shipments decreased 998 units, or 25 percent, to 2,940 units, primarily reflecting 915 fewer new units sold for new casino openings, compared with 3,938 units in the prior year, which had included 945 units for new casino openings.
  • Gaming systems revenue increased 8 percent to $62.0 million, primarily reflecting an increase in hardware sales, including shipment of innovative new iVIEW4 player-interface display units.
  • Table products revenue increased 11 percent to $53.5 million, including growth in the installed base of shufflers, proprietary table games and progressives, and a benefit from the acquisition of DEQ Systems Corp. completed in January 2017.

 

LOTTERY SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017

         

LOTTERY SEGMENT

Three Months Ended

   

($ in millions)

September 30,

 

Increase/(Decrease)

 

2017

2016

 

Amount

%

Revenue

         

Instant games                

$    141.6

$    137.7

 

$           3.9

2.8%

Services                              

44.3

38.3

 

6.0

15.7%

Product sales                           

17.0

10.6

 

6.4

60.4%

 

$    202.9

$    186.6

 

$         16.3

8.7%

           

Operating income    

$      62.4

$      43.2

 

$         19.2

44.4%

AEBITDA(1)   

$      89.2

$      77.3

 

$         11.9

15.4%

AEBITDA margin     

44.0%

41.4%

     

(1)     AEBITDA in the 2017 and 2016 third quarter periods included $15.7 million and $17.3 million, respectively, of EBITDA from equity investments in Lotterie Nazionali S.r.l. ("LNS"), Northstar New Jersey Lottery Group, LLC, Beijing Guard Libang Technology Co., Ltd., Beijing CITIC Scientific Games Technology Co. Ltd. ("CSG"), Hellenic Lotteries S.A. ("Hellenic Lotteries") and Northstar Lottery Group, LLC ("Northstar Illinois").

  • Total lottery revenue increased $16.3 million, or 9 percent, inclusive of a $0.1 million unfavorable foreign exchange impact compared to the year-ago period.
  • Operating income increased $19.2 million, primarily reflecting the benefit from higher revenue and a more profitable revenue mix, coupled with lower selling, general and administrative expense and lower depreciation and amortization.
  • AEBITDA increased 15 percent to $89.2 million compared to $77.3 million in the prior year, with AEBITDA margin improving to 44.0 percent, primarily reflecting the revenue increase, a more profitable revenue mix and lower selling, general and administrative expense.
  • Instant games revenue increased $3.9 million, or 3 percent, as an $8.3 million increase in U.S. revenue was partially offset by a $4.4 million decline in international revenue that largely reflected unfavorable timing of instant game launches in markets with price-per-unit contracts. During the third quarter, the Company won: a six-year contract with two two-year extension options to continue as the primary provider of instant games and associated services to the Colorado Lottery, a 2-year contract extension with the Ohio Lottery to continue as the primary provider of instant games and associated services, and a contract extension with the Oregon Lottery to continue as a provider of instant games and associated services through June 2018.
  • Services revenue increased $6.0 million, primarily reflecting higher U.S. retail sales of multi-state games compared to the prior year and higher international revenue. During the quarter, the Company signed a new 10-year contract with a five-year extension option to provide technologies, systems and services to the Kansas Lottery, displacing a competitor.
  • Product sales revenue increased $6.4 million, primarily reflecting higher international software and hardware sales due to increased lottery bid activity compared with the prior year.

 

INTERACTIVE SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017

         

INTERACTIVE SEGMENT

Three Months Ended

   

(in millions)

September 30,

 

Increase/(Decrease)

 

2017

2016

 

  Amount 

%

Revenue

         

Social gaming - B2C         

$       95.1

$       70.3

 

$            24.8

35.3%

Other interactive - B2B       

16.3

14.9

 

1.4

9.4%

 

$     111.4

$       85.2

 

$            26.2

30.8%

           

Operating income 

$       12.9

$         9.6

 

$              3.3

34.4%

AEBITDA   

$       23.2

$       13.6

 

$              9.6

70.6%

AEBITDA margin

20.8%

16.0%

     

 

  • Total interactive revenue grew 31 percent to $111.4 million, primarily reflecting a 35 percent increase in social gaming B2C revenue due to the ongoing popularity and growth of the Jackpot Party® Social Casino and Quick Hit® Slots apps, coupled with the success of more recent apps, such as the 88 Fortunes™ app launched in the first quarter of 2017, and the contribution of the Bingo Showdown™ app, acquired with the April 2017 acquisition of Spicerack Media, Inc.
  • Operating income increased 34 percent to $12.9 million, primarily reflecting the higher revenue. Selling, general and administrative expense increased primarily due to higher marketing expenses to support ongoing growth and pre-launch game development for apps not yet launched.
  • AEBITDA rose 71 percent to $23.2 million and AEBITDA margin increased to 20.8 percent, primarily reflecting higher revenue and improved operating leverage, partially offset by increased marketing costs and ongoing development initiatives underlying the rapid growth.
  • In the third quarter, the Company completed the acquisition of Red7Mobile Ltd., a privately held U.K.-based mobile and interactive casino content developer.

 

LIQUIDITY

     
       
 

Three Months Ended

 

Increase/ 

Cash flows from operating activities

September 30,

 

(Decrease)

($ in millions)   

2017

 

2016

 

2017 vs. 2016

Net loss

$                (59.3)

 

$                (98.9)

 

$                     39.6

Non-cash adjustments included in net loss

181.6

 

195.4

 

(13.8)

Non-cash interest expense

4.1

 

10.1

 

(6.0)

Changes in deferred income taxes and other

0.1

 

(44.6)

 

44.7

Distributed earnings from equity investments

1.6

 

0.4

 

1.2

Changes in working capital accounts

(18.6)

 

88.5

 

(107.1)

Net cash provided by operating activities

$                109.5

 

$                150.9

 

$                    (41.4)

 

  • Net cash provided by operating activities decreased $41.4 million to $109.5 million, primarily reflecting a $107.1 million unfavorable change in various working capital accounts, partially offset by a $64.5 million increase in incremental net earnings adjusted for non-cash adjustments and other items.
  • The most significant changes in working capital accounts were a $37 million increase in receivables reflecting the timing of collections, $30 million from the timing of interest payments due to the refinancing of our term loans and $30 million related to timing of vendor payments, partially offset by a $19 million decrease in inventory.
  • The change in deferred income taxes and other is a result of the valuation allowance on our deferred taxes.
  • Capital expenditures totaled $73.9 million for the quarter. For 2017, the Company continues to expect capital expenditures will be within a range of $280-$310 million, based on existing contractual obligations and planned investments.
  • During the quarter, the Company modified its credit agreement, which lowered the term loan interest rate by 75 basis points and extended the term loan maturity to August 2024.

Earnings Conference Call

Scientific Games executive leadership will host a conference call on Thursday, November 2, 2017, at 11:00 a.m. EST to review the Company's third quarter results. To access the call live via a listen-only webcast and presentation, please visit http://www.scientificgames.com/investors/events-presentations/ and click on the webcast link under the Investor Information section. To access the call by telephone, please dial: 1 (412) 317-5420 (U.S. and International) and ask to join the Scientific Games Corporation call. A replay of the webcast will be archived in the Investors section on ScientificGames.com, which is updated regularly with financial and other information about the Company.

About Scientific Games

Scientific Games Corporation (NASDAQ: SGMS) is the global leader in technology-based gaming systems, table games, table products and instant ticket games and a leader in products, services and content for gaming, lottery and interactive markets. Scientific Games delivers what customers and players value most: trusted security, creative content, operating efficiencies and innovative technology. Today, we offer customers a fully integrated portfolio of technology platforms, robust systems, engaging content and unrivaled professional services. For more information, please visit www.scientificgames.com, which is updated regularly with financial and other information about the Company.

COMPANY CONTACTS

Investor Relations 
Scientific Games:  Michael Quartieri +1 702-532-7658
Executive Vice President and Chief Financial Officer

Media Relations 
Susan Cartwright +1 702-532-7981
Vice President, Corporate Communications This email address is being protected from spambots. You need JavaScript enabled to view it.

All ® notices signify marks registered in the United States. © 2017 Scientific Games Corporation. All Rights Reserved.

Forward-Looking Statements

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