Scientific Games Reports Improved First-Quarter Results

Lottery operator and supplier Scientific Games SGMS reported improved first-quarter results despite the recent sale of its racing division. Consolidated revenue declined 9% to $197 million, largely due to the firm's divestiture of its racing division, however on an apples-to-apples basis, revenue increased roughly 2.5% from the prior-year's adjusted revenue of $192 million. This quarter's results had several highlights, including the announcement of new state contracts with New York, Missouri, Colorado, and Iowa, coupled with strong instant ticket sales in China and Italy. Based on third-party data, domestic instant ticket and lottery system sales increased 4% and 6%, respectively. Instant ticket sales in China and Italy increased a healthy 38% and 10%, respectively. Operating costs came in slightly higher than we anticipated due to higher compensation related costs. Higher operating costs and lower revenues due to the racing divestiture forced operating margins lower by 250 basis points to 7% on a GAAP basis. Although this quarter's results were encouraging, we believe Scientific still has a ways to go in its turnaround efforts before we would contemplate a moat or fair value change.