Scientific Games’ revenues on the rise

The company incurred a net loss of USD72.4 million, or USD 0.86 per share, inclusive of a USD 0.31 per share loss on the early extinguishment of debt, USD 0.09 per share related to the Company's share of an estimated net shortfall accrual recorded by its Northstar Illinois joint venture, and USD 0.06 per share in employee termination and restructuring expense.  

This compares to a net loss from continuing operations of USD12.4 million, or USD0.14 per share, in the prior-year quarter, which included USD0.03 per share related to acquisition-related and transition costs and an USD0.08 per share impact related to a write-down and accelerated depreciation resulting from a change to reduce the depreciable life of our U.K. gaming terminals.  

"Our second quarter revenue of USD416.9 million reflected contributions from the WMS acquisition, which substantially expanded our gaming business, and a 7% year-over-year increase in lottery revenue," said Gavin Isaacs, President and Chief Executive Officer. 

"Although our second quarter results continued to reflect challenging gaming industry conditions, we saw sequential quarterly revenue growth across our businesses and benefits from our ongoing integration initiatives, which contributed to a USD9.3 million sequential quarterly increase in attributable EBITDA. While we have made significant progress across our worldwide organization with our integration efforts, we believe there are additional opportunities to grow our business and further strengthen performance.”  

"Our pending acquisition of Bally Technologies, which we announced last week, presents a unique opportunity to combine two exceptional companies with long track records of delivering leading-edge games, gaming technology products and systems to their customers," Isaacs continued. 

"The transaction would significantly expand Scientific Games' portfolio to include leading casino management systems and table products, including automatic shufflers, proprietary table games and electronic table systems, and should drive further expansion of Scientific Games' social and real-money interactive businesses.  We believe the combination will provide opportunities to cross-utilize the companies' content and technology across lottery, gaming and interactive distribution channels and platforms, further diversify our revenue streams, and increase our cash flows allowing us to meaningfully reduce our leverage.  I look forward to meeting with our gaming and lottery customers and sharing our vision for how the combined company expects to provide new value for them through our creation of innovative games and value-added services that can help them engage their players and grow their revenues."  

WMS Merger Integration Update 

Since the completion of the WMS acquisition on October 18, 2013, Scientific Games has been implementing its detailed integration plans aimed at improving operational efficiencies and reducing the company's cost structure.  Based on the progress of its integration-related actions through June 30, 2014 and plans for further integration efforts during the remainder of the year, the Company is raising its estimate of cost synergies to be realized in 2014 from USD60 million to at least USD70 million. The company continues to expect to achieve a total of USD100 million in cost savings on an annualized run-rate basis by the end of 2015. Included in the expectations for annualized cost synergies is at least USD65 million of annualized cost synergies from actions already initiated or completed.

"The success being achieved in our integration initiatives is the result of our team's commitment and collaboration in implementing our comprehensive plans across our operations to achieve planned cost reductions," said Scott D. Schweinfurth, Executive Vice President and Chief Financial Officer. "Even as we continue our integration initiatives, we are focused on identifying additional process improvements to eliminate redundancies and unneeded costs that should further improve our operating margins and increase free cash flow.  Significantly, we believe Scientific Games' acquisition of Bally would provide an important opportunity to realize an incremental USD220 million in cost savings."

2014 Second Quarter Business Update 

Gaming Segment

Financial results and revenue metrics presented below include the results of operations for WMS in the 2014 second quarter but not in the 2013 second quarter. All WMS results are included in the Company's Gaming segment. In addition, the results of the Company's video gaming systems operations, previously included in the LotterySystems segment, are now included in the Gaming segment for all periods presented herein.

Gaming Segment Second Quarter Financial Highlights

• Revenue increased USD168.5 million principally due to USD169.6 million of revenue from WMS 

• Services revenue increased USD92.8 million, reflecting USD93.0 million of revenue from WMS and a benefit of USD2.9 million from favorable foreign currency translation in our U.K. gaming business ("UK Gaming"), partially offset by a decline in UK Gaming services revenues related to the loss of the Betfred contract in December 2013 

o The installed base of WAP and premium participation units at June 30, 2014 of 8,732 units was comprised of 3,707 WAP and 5,025 premium participation units compared to 9,810 units comprised of 3,493 WAP and 6,317 premium participation units for WMS at June 30, 2013.  The average installed base of 8,973 WAP and premium participation units generated average daily revenue of USD70.73 per unit, a 5% increase over the amount reported by WMS in the prior-year period due to the strong performance of new games and the shift in the installed footprint to more WAP units 

o Services revenue from WAP and premium participation gaming machines of USD57.8 million was essentially flat on a sequential quarterly basis with USD57.7 million in the 2014 first quarter, primarily reflecting an increase in the average daily revenue offset by the decline in the average installed base 

o Our average installed base of other leased and participation units rose to 27,228 units, reflecting the addition of 2,462 other leased units within the WMS footprint, partially offset by a decline in the UK Gaming installed base that largely results from the previously announced loss of the Betfred contract.  The average daily revenue from other leased and participation units increased to USD12.36 from USD12.19 per unit on a year-over-year basis reflecting a modest improvement in the UK Gaming yield and the addition of higher-yielding WMS leased units  

• Interactive services revenue was USD32.3 million reflecting the acquisition of WMS 

o The growth in revenue from the social gaming business largely reflected the growth in the average DAU for the Company's social casinos in the 2014 second quarter to approximately 1.4 million compared to the approximately 0.6 million average DAU reported by WMS in the prior-year period, partially offset by a decline in ARPDAU to USD0.22 reflecting the impact of a significantly larger player base and growth in players utilizing mobile platforms 

• Product sales revenue increased USD75.7 million, including USD76.6 million in revenue from WMS. New gaming machine sales reflected shipments of 2,553 new WMS gaming machines to U.S. and Canadian customers, comprised of 2,019 replacement units for casino operators, 225 Illinois video gaming terminals ("VGTs") and 309 units for new casino openings and expansions. The 1,550 new unit shipments to international customers included 1,222 WMS units and 328 UK Gaming terminals. Other product sales revenue increased by USD18.5 million principally due to USD18.4 million from WMS, which included game content subscription revenue and sales of conversion kits, used gaming machines and parts 

o New unit shipments for WMS declined to 3,775 units from 6,795 units in the prior-year period; shipments for WMS in the prior-year quarter included a quarterly record 4,142 replacement units for U.S. and Canadian casino operators, 234 Canadian VLTs, 250 Illinois VGTs, 114 units for new casino openings and expansions in the U.S. and Canada, and 2,055 units shipped to international customers 

o Unit shipment declines reflected continued challenging gaming industry conditions that included increased competition and lower casino revenue in many U.S. gaming jurisdictions, which we believe has resulted in constrained capital spending by casino operators; in addition, we believe our ship share declined from the level achieved by WMS in the prior-year quarter, but improved relative to the first quarter of 2014; the decline in international new unit shipments was due in part to continued import limitations in Argentina and a decline in shipments to Mexican customers reflecting fewer casino operators and other industry challenges 

o The average selling price for WMS gaming machines was essentially flat compared to the prior-year period, as slightly lower average prices on international Bluebird®2 lite units were offset by a more favorable shift in the mix of product sales that included fewer lower-priced VGTs and a benefit from the launch of the new premium-priced mechanical-reel BladeTMStepper gaming machine 

• New unit shipments included 2,365 Blade gaming machines, which represented 63% of total WMS global new unit shipments, including 617 mechanical reel BladeStepper units  

• Operating loss improved by USD6.6 million to a loss of USD1.8 million, reflecting the acquisition of WMS, associated integration-related savings and an improved UK Gaming cost structure, including lower depreciation and amortization expense 

o Selling, general and administrative expense increased USD37.9 million primarily from WMS 

o Research and development expense increased USD23.7 million primarily from WMS 

o Employee termination and restructuring costs reflected USD2.2 million of charges associated with integration-related cost savings initiatives 

o Depreciation and amortization increased USD45.4 million, of which USD53.2 million was from WMS, including incremental depreciation and amortization related to purchase accounting associated with the WMS acquisition, partially offset by lower depreciation and amortization in UK Gaming   

Gaming Segment Business Development Highlights 

• With 48 Blade video game themes available, including four games developed specifically for Asian markets, and six Blade mechanical reel games approved, the Blade gaming machines continue to perform strongly, with the original six video game themes continuing to outperform casino house average more than 16 months after launch and the new mechanical reel games, such as the Aftershock theme, showing strong initial performance   

• The Gold Fish Social Slots game app, a second social gaming site that was launched in March 2014 and became available on mobile devices in the second quarter, was expanded to multiple mobile platforms and supported by increased marketing spend to increase player awareness  

• Entered into five new game content agreements with online operators, and went live on several sites, including bwin.party sites in Europe and online casino sites in New Jersey.