Scientific Games sees losses grow in 2018

21 February 2019

Strong growth in revenue failed to offset the impact of growing costs for Scientific Games in 2018, with the gaming solutions provider’s loss for the period growing to $352.4m (£269.3m/€310.1m).

Revenue for the 12 months ended December 31, 2018 was up 9.1% year-on-year, with a marginal decline in gaming revenue - down 0.7% to $1.8bn - offset by strong growth in the social and digital divisions.

Social gaming revenue grew 14.9% to $415.9m, with digital revenue more than trebling to $269.6m, boosted by the acquisition of NYX Gaming Group, which was completed in January 2018. Lottery posted more modest growth, with revenue up 4.3% from 2017 to $846.3m.

This growth in revenue was almost matched by significant growth in operating costs. Cost of services, which rose 21.2% to $505.6m, and restructuring-related costs of $253.4m - up from $45.9m in the prior year - saw particularly significant increases. The restructuring-related costs also included $151.5m, which was paid to Shuffle Tech to settle a long-running antitrust lawsuit in December 2018, and $27.5m in earn-out payments after Spicerack Media, acquired in 2017, performed better than expected over the year. This contributed to total operating costs for the year rising 15.1% to $3.1bn. Consolidated adjusted earnings before interest, tax, depreciation and amortisation increased 9% to $1.3bn.

However operating profit for the year declined 32.4% to $265.6m. Once finance related costs, including interest expenses of $597.2m (down marginally year-on-year) and a $93.2m loss on debt financing transactions were factored in, Scientific Games posted a pre-tax loss of $339.3m. The company’s net loss for the year grew 45.4% to $352.4m.

For for fourth quarter of 2018, Scientific Games posted revenue of $885.7m, up 7.6% year-on-year. The business was boosted by a $51.7m contribution from NYX in the period, which drove digital revenue from $17.8m in Q4 2017 to $71.5m, including $33.3m from sports betting and platform supply deals. The social division also enjoyed a strong quarter, with revenue rising 19.1% to $113.7m. Lottery revenue was also up in Q4 2018, at $230.7m.

The core gaming division saw revenue decline, falling 4.7% to $469.8m. This, Scientific Games said, was due in part to new revenue recognition accounting implemented in 2018, which led to a $6.8m decline in gaming operations revenue. Machine sales, on the other hand, suffered in comparison to Q4 2017. The prior year included sales of 884 units for new opening and expansions, plus an additional 700 video lottery terminals being deployed in Canada. In Q4 2018, however, just 286 units were sold for new openings and expansions.

Operating costs for the quarter fell, down 22.2% to $564.5m. This was largely due to a $183.1m reversal of the original penalty imposed on Scientific Games by an Illinois court in the Shuffle Tech case. Ultimately the settlement saw the company pay 45% of the court-imposed penalty. 
Quarterly EBITDA was up 6% at $343.5m, driven by higher revenue and continuing operational efficiencies.

Operating profit for Q4 grew from $321.2m, with the company posting a net profit of $206.8m for the period, up from a loss of $43.1m in 2017.

Scientific Games chief executive Barry Cottle said it was a “very exciting time” for the business.

"We’re focused on developing the best games and the most innovative platforms to deliver outstanding gaming experiences wherever and whenever players choose to play,” he explained. “We are building momentum and continuing to grow our business while at the same time operating more efficiently.

“The entire organisation is enthused about 2019 and focused on helping our customers win, which will drive our free cash flow and create meaningful value for our shareholders.”

The supplier’s finance chief Michael Quartieri added that the executive team saw opportunities to further drive top- and bottom-line growth in the year ahead, as it was committed to maximising are cash flow and drive down debt. This will be achieved in part through an initial public offering for a minority stake in its social gaming division, which filed an amended draft registration statement with the Securities and Exchange Commission on February 14.