SGMS Reports Improving 2Q Results

Lottery operator and supplier Scientific Games SGMS reported improved second-quarter results due to increased lottery and retail gaming sales in the U.S. and UK. Compared to the year-ago quarter, consolidated revenue rose 4% to $233 million, due mainly to increasing instant ticket sales and higher hardware and software sales. Revenue also increased in the firm's printed products division due to new contracts in Arkansas and Puerto Rico and an increase in instant ticket revenue due to higher volumes. In the U.S., instant ticker retail sales turned positive, increasing roughly 2%. In the lottery systems business, revenue was up as well due to higher system sales. Operating expenses increased slightly due to higher compensation expense and professional fees, keeping operating margins steady year-over-year at 11%. Despite the improved performance, we continue to believe 2010 will be a difficult year for the firm, as it faces lower levels of discretionary spending by consumers. That said, we still think that the firm has the tools to benefit from increasing state budget deficits, as well as from the possible legalization of Internet gambling, which could be future growth drivers over time. We are leaving our fair value estimate unchanged.