Net income per diluted share of $0.27; Non-GAAP net income per diluted share of $0.33 excluding stock compensation expense
NEW YORK, Oct. 30 /PRNewswire-FirstCall/ -- Scientific Games Corporation (Nasdaq: SGMS) today reported third quarter 2008 revenues of $291.9 million, up 9% from $266.9 million in the third quarter of 2007. Net income was $25.4 million or $0.27 per diluted share, up from a net loss of $2.9 million or $0.03 per diluted share in the third quarter of 2007. Excluding stock compensation expense, earnings were $31.3 million or $0.33 per non-GAAP diluted share, compared to non-GAAP adjusted net income, excluding $26.1 million of asset impairment charges and $6.3 million of stock compensation expense, of $20.9 million or $0.22 per non-GAAP diluted share in the third quarter of 2007.
EBITDA for the third quarter of 2008 was $88.6 million, up from $73.7 million in the third quarter of 2007. Adjusted EBITDA increased 21% to $96.8 million for the third quarter of 2008, compared to adjusted EBITDA of $80.0 million for the third quarter of 2007.
For the nine months ended September 30, 2008, revenues were $854.9 million, compared to $778.7 million for the nine months ended September 30, 2007, an increase of 10%. Net income was $74.3 million or $0.79 per diluted share, compared to $49.0 million or $0.51 per diluted share in 2007. EBITDA increased to $258.5 million from $233.8 million in 2007. Adjusted EBITDA increased 15% to $290.7 million.
Printed Products Group
Printed Products Group service revenue increased by about 6% in the third quarter of 2008 to $147.1 million. While licensed product revenues showed solid sequential growth from the second to third quarter of 2008, year-to-year licensed product revenue declined sharply due primarily to the unusually high revenues associated with the launch of Deal or No Deal(TM) in 2007. Excluding licensed product revenues, which in the past has tended to fluctuate far more significantly from quarter to quarter than the underlying core instant ticket business, overall printed product service revenues grew by more than 12% in the third quarter of 2008 as compared to the corresponding 2007 quarter. Further, excluding from total service revenue sales to China and other year to year anomalies, same store sales growth was about 4.5%. This amount represents somewhat of a deceleration from historic growth rates, but is consistent with the Company's expectations given the current economic environment.
Instant tickets sales to China increased slightly from the second to the third quarter in 2008, but by less than anticipated. Largely because of the national preoccupation with the Olympics in August, there was a significant delay in the introduction of new games, the optimization of inventory levels throughout the country, the expansion of the retailer base and the movement to a higher average price point. In the last few weeks there has been excellent progress in each of these areas and as a result there have been strong week-to-week increases in retail sales.
The Company's production plan for China anticipates two presses being operational by the middle of 2009. Each press will have the capacity to produce about 4 billion tickets per year. The first press is scheduled to become operational before the end of 2008 and be at full capacity by the end of the first quarter of 2009; the second press is scheduled to be delivered towards the end of the first quarter and be capable of operating at full capacity by the end of the second quarter. As we have discussed previously, the shift of production from Alpharetta to China will have an extremely positive impact on margins due to the cost of airfreight that the Company is currently experiencing. In the third quarter of 2008 the latter accounted for at least 2 points of overall margin in the printed product service business and is the primary reason Printed Products Group gross margins declined from 39% in the third quarter of 2007 to 38% this year.
Lottery Systems Group
Lottery Systems Group service revenues grew by 14% in the third quarter of 2008 to $62.4 million from $54.6 million last year and at the same time service gross margins improved from 47% to 48%. Essentially all of the revenue and margin improvement was driven by the national contract for ticket activation, validation and tracking services with the China Sports Lottery. Excluding China revenue as well as revenue from expired contracts, "same store" sales growth in lottery services was about 5% with virtually all of the growth coming in Europe and Latin America. The progress being made in Puerto Rico is particularly pleasing where revenues have increased by 33% year over year. The Televisa Mexican lottery contract negatively impacted earnings by $2.9 million or nearly $0.02 per share in the third quarter of 2008; during the third quarter the Company began exploring various new strategies for alleviating this loss and is actively working to determine the best course of action.
Diversified Gaming Group
Diversified Gaming Group revenues increased by 8% overall in the third quarter of 2008 to $59.9 million from $55.4 million, with a 38% increase in Global Draw revenues offset by a decline in revenues from Games Media and the racing related businesses. As explained previously, Games Media is in the deliberate process of transitioning from a one-time product sale business model to a model driven by participation-based recurring revenues and, while the transition is tracking well according to plan, the Company expects that it will take a few more quarters for revenue to return to previous levels. More importantly however, Games Media gross margins increased from about 10% in the third quarter of 2007 to 49% in the same quarter of 2008, a clear indication that the fundamental strategy is working. Overall margins in the Diversified Gaming Group increased from 37% in 2007 to 42% in 2008, driven by margin increases in both Global Draw and Games Media.
New Contract Activity
During the third quarter of 2008, Scientific Games was awarded the primary instant ticket contract with New South Wales (NSW) Lotteries Corporation and the Montana Lottery as well as a secondary instant ticket contract with the Kansas Lottery. In addition, the Company signed instant ticket contract extensions with Washington, Colorado and Delaware and online extensions with Delaware (including video lottery) and Iowa. The Company also signed an extension with Puerto Rico for online field marketing services.
Non-GAAP Financial Measures
Information about the use of non-GAAP financial information is provided under the section "Non-GAAP Disclosure" below. The non-GAAP measures (adjusted net income, diluted adjusted net income per share, EBITDA and adjusted EBITDA) are reconciled to the corresponding GAAP measures in the financial schedules accompanying this release.
Convertible Debentures
A market price event did not occur for the quarter ended September 30, 2008 and, accordingly, the Convertible Debentures are not convertible during the current quarter ending December 31, 2008. During the third quarter of 2008, the average price of the Company's common stock was lower than the conversion price of the Convertible Debentures. Therefore, no shares related to the Convertible Debentures were included in our weighted-average diluted common shares outstanding for the three months ended September 30, 2008. For the nine months ended September 30, 2008, the Company has included approximately six shares related to the Convertible Debentures in our weighted-average diluted common shares outstanding. Although the Company purchased a hedge in December 2004 to mitigate the potential dilution from the conversion of the Convertible Debenture, the Company is precluded from reflecting this hedge in the GAAP weighted average number of diluted shares because the effect would be anti-dilutive. However, to the extent the Convertible Debentures are converted during the term of the hedge, the diluted share amount will decrease because the hedge will offset the dilution from conversion of the Convertible Debentures.
Conference Call Details
We invite you to join our conference call tomorrow at 8:30 a.m. Eastern. To access the call live via webcast please visit www.scientificgames.com and click on the webcast link under the Investors tab. To access the call by telephone, please dial (866) 203-3436 (US & Canada) or (617) 213-8849 (International) fifteen minutes before the start of the call. The Conference ID# is 33038474. The call will be archived for replay on the Company's website for 30 days.
About Scientific Games
Scientific Games Corporation is the leading integrated supplier of instant tickets, systems and services to lotteries worldwide, a leading supplier of server-based gaming machines and systems, Amusement and Skill with Prize betting terminals, interactive sports betting terminals and systems, and wagering systems and services to pari-mutuel operators. It is also a licensed pari-mutuel gaming operator in Connecticut, Maine and the Netherlands and is a leading supplier of prepaid phone cards to telephone companies. Scientific Games' customers are in the United States and more than 60 other countries. For more information about Scientific Games, please visit our web site at www.scientificgames.com.
Company Contact:
Investor Relations
Scientific Games
212-754-2233
Forward-Looking Statements
In this press release the Company makes "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward- looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may"," "will," "estimate," "intend," "continue," "believe," "expect," "anticipate," "could," "potential," "opportunity," or similar terminology. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of future results or performance. Actual results may differ materially from those projected in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; material adverse changes in economic and industry conditions in the Company's markets; technological change; retention and renewal of existing contracts and entry into new contracts; availability and adequacy of cash flow to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; seasonality; dependence on suppliers and manufacturers; factors associated with foreign operations; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; and stock price volatility. Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made, and except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
Non-GAAP Disclosure
EBITDA, as included herein, represents net income plus income tax expense, interest expense, and depreciation and amortization expenses, net of other income. EBITDA is included in this document as it is a basis upon which the Company assesses its financial performance, and it provides useful information regarding the Company's ability to service its debt. In addition, EBITDA is useful to investors in evaluating the Company's financial performance because it is a commonly used financial analysis tool for measuring and comparing gaming companies in several areas of liquidity, operating performance and leverage. EBITDA should not be considered in isolation or as an alternative to net income, cash flows from operations, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles (GAAP) as measures of the Company's profitability or liquidity. EBITDA as defined in this press release may differ from similarly titled measures presented by other companies.
EBITDA, adjusted EBITDA, non-GAAP adjusted net income and diluted non-GAAP adjusted net income per share are non-GAAP financial measures that are presented as supplemental disclosures and are reconciled to GAAP net income and GAAP net income per diluted share in financial schedules accompanying this release. In calculating the adjusted financial measures, the Company excludes certain items in order to better facilitate an understanding of the Company's operating performance.
The Company's management uses these adjusted financial measures in conjunction with GAAP financial measures to monitor and evaluate the performance of the Company's business operations; facilitate management's internal comparisons of the Company's historical operating performance of its business operations; facilitate management's external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels; review and assess the operating performance of the Company's management team and as a measure in evaluating employee compensation and bonuses; analyze and evaluate financial and strategic planning decisions regarding future operating investments; and plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
The Company's management believes that these adjusted financial measures are useful to investors to provide them with disclosures of the Company's operating results on the same basis as that used by the Company's management. The Company's management also believes that because it has historically provided such adjusted non-GAAP financial measures in its earnings releases, continuing to do so provides consistency in its financial reporting and continuity to investors for comparability purposes. Accordingly, the Company's management believes that the presentation of the adjusted non-GAAP financial measures, when used in conjunction with GAAP financial measures, provides both management and investors with financial information that can be useful in assessing the Company's financial condition and operating performance.
The adjusted financial measures should not be considered in isolation or as a substitute for net income or net income per diluted share prepared in accordance with GAAP. The adjusted financial measures as defined in this press release may differ from similarly titled measures presented by other companies. The adjusted financial measures, as well as other information in this press release should be read in conjunction with the Company's financial statements filed with the Securities and Exchange Commission.
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2007 and 2008
(Unaudited, in thousands, except per share amounts)
Three Months Ended
September 30,
2007 2008
Operating revenues:
Services $ 244,526 265,430
Sales 22,374 26,505
266,900 291,935
Operating expenses :
Cost of services (exclusive of depreciation
and amortization) 141,935 157,480
Cost of sales (exclusive of depreciation and
amortization) 15,874 17,257
Selling, general and administrative expenses 43,738 41,937
Depreciation and amortization 61,266 36,487
Operating income 4,087 38,774
Other (income) deductions:
Interest expense 15,975 17,659
Equity in earnings of joint ventures (8,344) (13,356)
Other (income) expense (123) (818)
7,508 3,485
Income (loss) before income tax expense (3,421) 35,289
Income tax expense (543) 9,879
Net income (loss) $ (2,878) 25,410
Basic and diluted net income per share:
Basic net income (loss) $ (0.03) 0.27
Diluted net income (loss) $ (0.03) 0.27
Weighted average number of shares
used in per share calculations:
Basic shares 92,737 92,841
Diluted shares 96,527 94,626
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2007 and 2008
(Unaudited, in thousands, except per share amounts)
Nine Months Ended
September 30,
2007 2008
Operating revenues:
Services $ 690,180 764,044
Sales 88,563 90,867
778,743 854,911
Operating expenses :
Cost of services (exclusive of depreciation
and amortization) 388,380 440,394
Cost of sales (exclusive of depreciation and
amortization) 64,815 63,808
Selling, general and administrative expenses 123,378 140,775
Depreciation and amortization 122,600 106,099
Operating income 79,570 103,835
Other (income) deductions:
Interest expense 43,141 45,962
Equity in earnings of joint ventures (31,623) (48,612)
Early extinguishment of debt - 2,960
Other income (166) (1,513)
11,352 (1,203)
Income before income tax expense 68,218 105,038
Income tax expense 19,230 30,725
Net income $ 48,988 74,313
Basic and diluted net income per share:
Basic net income $ 0.53 0.80
Diluted net income $ 0.51 0.79
Weighted average number of shares
used in per share calculations:
Basic shares 92,440 92,933
Diluted shares 95,894 94,588
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED BALANCE SHEET DATA
December 31, 2007 and September 30, 2008
(Unaudited, in thousands)
December September
31, 30,
2007 2008
Assets:
Cash and cash equivalents $ 29,403 161,770
Other current assets 368,474 420,943
Property and equipment, net 561,624 629,970
Long-term assets 1,140,538 1,144,258
Total assets $ 2,100,039 2,356,941
Liabilities and Stockholders' Equity:
Current portion of long-term debt $ 4,942 53,488
Other current liabilities 212,572 219,370
Long-term debt, excluding current portion 1,072,625 1,217,594
Other long-term liabilities 148,685 141,952
Stockholders' equity 661,215 724,537
Total liabilities and stockholders' equity: $ 2,100,039 2,356,941
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED SEGMENT OPERATING DATA
Three Months Ended September 30, 2007 and 2008
(Unaudited, in thousands)
Three Months Ended September 30, 2007
Printed Lottery Diversified
Products Systems Group
Group Group Gaming Totals
Service revenues $ 139,132 54,583 50,811 244,526
Sales revenues 9,378 8,429 4,567 22,374
Total revenues 148,510 63,012 55,378 266,900
Cost of services (1) 82,399 28,867 30,669 141,935
Cost of sales (1) 7,805 3,809 4,260 15,874
Selling, general and
administrative
expenses 16,541 8,606 4,846 29,993
Depreciation and
amortization (2) 37,013 16,130 7,893 61,036
Segment operating
income $ 4,752 5,600 7,710 18,062
Unallocated
corporate expense 13,975
Consolidated
operating income $ 4,087
Three Months Ended September 30, 2008
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $ 147,142 62,354 55,934 265,430
Sales revenues 7,431 15,072 4,002 26,505
Total revenues 154,573 77,426 59,936 291,935
Cost of services (1) 91,459 32,597 33,424 157,480
Cost of sales (1) 4,423 11,581 1,253 17,257
Selling, general and
administrative
expenses 14,330 6,860 5,449 26,639
Depreciation and
amortization (2) 9,276 15,409 11,519 36,204
Segment operating
income $ 35,085 10,979 8,291 54,355
Unallocated
corporate expense 15,581
Consolidated
operating income $ 38,774
(1) Exclusive of depreciation and amortization
(2) Includes amortization of service contract software
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED SEGMENT OPERATING DATA
Nine Months Ended September 30, 2007 and 2008
(Unaudited, in thousands)
Nine Months Ended September 30, 2007
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $ 370,714 161,726 157,740 690,180
Sales revenues 28,734 29,944 29,885 88,563
Total revenues 399,448 191,670 187,625 778,743
Cost of services (1) 208,929 86,335 93,116 388,380
Cost of sales (1) 23,809 15,935 25,071 64,815
Selling, general and
administrative
expenses 43,746 23,941 15,408 83,095
Depreciation and
amortization (2) 55,536 45,486 20,894 121,916
Segment operating
income $ 67,428 19,973 33,136 120,537
Unallocated corporate
expense 40,967
Consolidated
operating income $ 79,570
Nine Months Ended September 30, 2008
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $ 421,153 178,332 164,559 764,044
Sales revenues 24,648 47,335 18,884 90,867
Total revenues 445,801 225,667 183,443 854,911
Cost of services (1) 249,650 92,429 98,315 440,394
Cost of sales (1) 16,309 38,352 9,147 63,808
Selling, general and
administrative expenses 47,860 25,742 19,493 93,095
Depreciation and
amortization (2) 28,728 45,765 30,774 105,267
Segment operating income $ 103,254 23,379 25,714 152,347
Unallocated
corporate expense 48,512
Consolidated
operating income $ 103,835
(1) Exclusive of depreciation and amortization
(2) Includes amortization of service contract software
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CALCULATION OF NON-GAAP ADJUSTED NET INCOME
(Unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2008 2007 2008
Income (loss) before
income tax expense $ (3,421) 35,289 68,218 105,038
Add: Stock
compensation charges 6,313 8,220 18,408 24,348
Add: Printed Products
restructuring - - - 2,772
Add: Printed Products
asset impairment
charges 26,097 - 26,097 -
Add: Global Draw
earn-out - - - 3,446
Add: Division
President retirement - - - 930
Add: California Horse
Race Board resolution - - - 700
Add: Early
extinguishment of debt - - - 2,960
Non-GAAP net income
before income tax
expense 28,989 43,509 112,723 140,194
Non-GAAP income tax
expense 8,117 12,183 31,562 41,077
Non-GAAP adjusted net
income 20,872 31,326 81,161 99,117
Diluted non-GAAP net
income per share $ 0.22 0.33 0.86 1.05
Diluted GAAP net
income (loss) per share $ (0.03) 0.27 0.51 0.79
Weighted average number
of shares used in per
share calculations 96,527 94,626 95,894 94,588
Less: Diluted shares
included in weighted
average number of shares
related to potential
conversion of convertible
debt 6,669 - 1,307 6
Non-GAAP weighted average
number of shares used in
per share calculations 94,858 94,626 94,587 94,582
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(Unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2008 2007 2008
Net income (loss) $ (2,878) 25,410 48,988 74,313
Add: Income tax expense (543) 9,879 19,230 30,725
Add: Depreciation and
amortization expense 61,266 36,487 122,600 106,099
Add: Interest expense, net
of other income or loss 15,852 16,841 42,975 47,409
EBITDA $ 73,697 88,617 233,793 258,546
Add: Printed Products
restructuring - - - 2,772
Add: Division President
retirement - - - 930
Add: California Horse Race
Board resolution - - - 700
Add: Global Draw earn-out - - - 3,446
Add: Stock compensation
charges 6,313 8,220 18,408 24,348
Adjusted EBITDA $ 80,010 96,837 252,201 290,742
