Scientific Games loses $24.7m in Q4, clears WMS acquisition hurdle

scientific-games-lossesLottery tech supplier Scientific Games Corporation (SGMS) reported a net loss of $24.7m in Q4 2012, a significant increase on the $8.5m loss in Q4 2011. Disappointed investors sent the stock tumbling nearly 7% on Tuesday. The company blamed the downturn on $24m of accelerated depreciation on gaming terminals and software and $5.8m in asset impairment charges on lottery systems contracts. Despite six consecutive quarters of revenue growth, SGMS has found profits elusive due to writedowns and restructuring costs. For the year as a whole, SGMS reported a net loss of $62.6m, despite revenue rising 7% to $940.6m.

SGMS’ Q4 revenue rose 4% to $249.2m and earnings rose 13% to $90.6m, but the operating loss of $6.3m was a dramatic reversal from the operating income of $19.2m in Q4 2011. Overall lottery systems revenue rose 16% to $80.7m and printed products increased 3.6% to $129.6m. Instant ticket sales rose 3.9% in Italy and 5.1% in the US, although Chinese lottery sales remained weak despite the country’s overall lottery sector growing 18% in 2012. In a post-earnings call with analysts, SGMS CEO Lorne Weil said the Chinese decline in instant ticket retail sales had continued in 2013 but noted that the most recent two weeks of sales in China had been the best to date. The company also has high hopes for its new Greek lottery operations.

SG Gaming, SGMS’ gaming division that includes the Global Draw and Barcrest machine operations, saw revenue fall 12.3% to $38.9m due to the loss of its contract with UK bookie William Hill and the decision to exit the Australian over-the-counter business. But SG Gaming’s machines in Hills’ rival Ladbrokes produced 10% gains in gross win per machine per week and 11.5% gains in gross win per shop per week in 2012, which Weil believes bodes well for SG Gaming’s future earnings.

In more positive news, SGMS announced it had received permission from the Federal Trade Commission (FTC) to terminate the waiting period imposed on SGMS’ acquisition of gaming device maker/online gambling hopeful WMS Industries. In January, SGMS announced its intention to acquire WMS for $1.5b and with the waiting period precondition having been satisfied, the deal is now expected to close before the end of the year. However, transaction costs associated with the WMS takeover will likely subtract $46m from SGMS’ Q1 2013 results, with additional costs expected to have a “large impact” on results through 2013.