Scientific Games reports Q1 2018

Scientific Games Corporation today reported results for the first quarter ended March 31, 2018.

First quarter revenue rose 12 percent to $811.8 million, up from $725.4 million in the 2017 period, reflecting the inclusion of $49.2 million in revenue from the NYX Gaming Group Limited acquisition completed on January 5, 2018, along with seven percent growth in lottery revenue and 21 percent growth in social revenue. Gaming revenue increased one percent from the prior year, reflecting a 30 percent increase in gaming machine replacement unit shipments offset by the impact from far fewer new casino openings globally.

Operating income in the first quarter was $49.4 million compared to $88.0 million in the prior year period, reflecting $52.2 million in restructuring and other charges that included an $18.0 million accrual for contingent consideration associated with higher-than-anticipated results from the 2017 acquisition of Spicerack, a $15.0 million charge related to certain litigation costs, and $13.5 million of acquisition and integration costs related to the NYX acquisition, as well as the unfavorable impact of higher depreciation and amortization expense, inclusive of a $19.0 million facilities impairment charge. These costs were partially offset by the benefit from higher revenue, the inclusion of NYX results and more efficient business processes. Net loss increased to $201.8 million from $100.8 million in the prior year, reflecting the impact of a $93.2 million loss incurred on debt financing transactions associated with our February 2018 refinancing and the change in operating income.

Attributable EBITDA, a non-GAAP financial measure defined below, increased 12 percent to $320.1 million from $286.6 million in the prior year period, primarily driven by higher revenue, the inclusion of NYX and more efficient business processes throughout the organization.

Netcash provided by operating activities decreased to $29.9 million from $111.0 million in the 2017 period. The change included the impact of $49.5 million associated with a change in accrued interest due to the timing of our February 2018 refinancing and $30.2 million related to the NYX acquisition, including transaction fees and net assumed liabilities.

In the 2018 first quarter, the Company completed refinancing transactions that resulted in an approximately $69 million reduction in annualized cash interest costs at then-prevailing interest rates and extended a portion of its debt maturities from 2022 to 2024, 2025 and 2026.

"Our first quarter results reflect our strength as a global diversified gaming technology provider," said Kevin Sheehan, CEO and President of Scientific Games. "Our results reflect the significant success our team achieved during the quarter such as the inclusion of NYX and our refinancing, as well as the underlying robust business fundamentals, such as the 30 percent increase in gaming machine replacement sales. With improving momentum across all our businesses, we are excited by the prospects and opportunities to smartly grow our revenue and AEBITDA during the remainder of 2018 and beyond."

Michael Quartieri, Chief Financial Officer of Scientific Games, said, "Our continued growth in revenue and AEBITDA, coupled with the lower interest costs resulting from our recent refinancing, establishes a solid platform for increased cash flows. We remain committed to our path of increasing cash flow, de-levering and strengthening our balance sheet."

Total gaming revenue increased $3.0 million in the first quarter of 2018 compared to the prior year, despite an approximately $33 million unfavorable impact of lower unit sales due to far fewer new casino openings and expansions globally in the first quarter 2018, as compared to the first quarter of 2017.

Operating income decreased $5.4 million to $72.1 million. The decrease compared to the prior year largely reflected higher depreciation, amortization and impairment expense, primarily due to a $19.0 million facilities impairment charge, which was partially offset by a more profitable business mix.

AEBITDA increased 4 percent, or $8.4 million, to $218.1 million, primarily reflecting a 150 basis point improvement in the AEBITDA margin to 49.2 percent, resulting from a more profitable business mix.

Gaming operations revenue declined $11.1 million in the first quarter 2018, inclusive of a $4.4 million negative impact from adopting the new revenue recognition guidance. The year-over-year decrease also reflected a 480 unit year-over-year decline in the installed base of Wide-Area Progressive ("WAP"), premium and daily-fee participation gaming machines and a $1.21 decline in average daily revenue per such unit. On a quarterly sequential basis, the installed base of WAP, premium and daily-fee participation units increased 21 units, reflecting the continued replacement of older cabinets with newer platforms such as the Gamescape®, TwinStar® V75 and TwinStar iReels™ cabinets, which are performing strongly, while the average daily revenue increased $0.72 per unit.

Gaming machine sales revenue decreased $11.4 million year over year, primarily due to a decline in new casino openings and expansions globally, offset by a 30 percent increase year over year of replacement units in the U.S. and Canada driven by ongoing demand for the TwinStar family of cabinets and success of the new content for the Pro Wave® cabinet. The average sales price increased 4 percent to $17,722, reflecting a more favorable mix of gaming machines. U.S. and Canadian shipments totaled 4,667 gaming machines, including 3,743 replacement units, 149 units for new casino openings and expansions and 775 VGTs for the Illinois market. In the prior-year period, U.S. and Canadian shipments totaled 5,862 units, which comprised 2,889 replacement units, 1,862 units for new casino openings and expansions, 861 VGTs for the Illinois market and 250 VLT units to Oregon. International shipments decreased 296 units to 2,201 gaming machines, including 261 units for new casino openings, compared with 2,497 units in the prior year, which included 424 units for new casino openings.

Gaming systems revenue increased $13.5 million, or 22 percent, to $75.0 million, from ongoing installations of a new system to casinos in the Canadian provinces of Alberta and Ontario, coupled with increased hardware sales, reflecting shipments of innovative new iVIEW®4 player-interface display units. The deployment of the new system to additional casinos across Alberta and Ontario is expected to continue throughout 2018, and beyond.

Table products revenue increased $12.0 million, or 24 percent, to $61.9 million, primarily reflecting increased revenue from a higher installed base of proprietary table games, shufflers and other utility products, table progressives and other side bets, along with strong sales to major customers of shufflers and other products, along with the inclusion of the Tech Art acquisition that closed in January 2018.

Total lottery revenue increased $12.6 million, or 7 percent, to $201.7 million from $189.1 million in the prior year, driven by increased instant products and services revenue.

Operating income increased $5.0 million from the prior year period to $61.1 million, related to higher revenue and a more profitable revenue mix, partially offset by increased selling, general and administrative and higher depreciation expenses.

AEBITDA increased 10 percent to $94.1 million, compared to $85.3 million in the prior year, with AEBITDA margin improving to 46.7 percent, primarily reflecting the revenue increase and a more profitable revenue mix partially offset by higher selling, general and administrative expense.

Instant products revenue increased $8.5 million, or 6 percent, reflecting increased shipments of new games, as well as an $8.1 million increase from adopting the new revenue recognition guidance. In the U.S., instant products revenue grew 8 percent, reflecting the success of our instant games in driving retail sales for our lottery customers, such as the successful WILLY WONKA Golden Ticket instant game.

Lottery systems revenue increased $4.1 million, or 9 percent, compared with the prior year. The increase was driven largely by higher services revenue from multi-state games in the U.S. and an increased number of international customer contracts for ongoing systems maintenance, partially offset by lower international product sales of hardware due to fewer new bid opportunities.

Social revenue grew 21 percent to $97.4 million, compared to the prior year period, primarily reflecting the contribution and growth of the Bingo Showdown™ app, along with the ongoing popularity of the Quick Hit Slots app and the growing success of the 88 Fortunes® app.

Reflecting the Social business' strategy to continually enhance the player experience, the Jackpot Party® Social Casino app was reintroduced on a new, improved technology platform, following a strategic pause to affect the transition. Following the mid-quarter relaunch of the app, revenue showed a significant improvement in the second half of the quarter, reflecting growth in the number of daily paying players.

Operating loss in the first quarter of 2018 reflected an $18.0 million accrual for contingent consideration resulting from better-than-anticipated results achieved by the Spicerack acquisition completed in April 2017.

AEBITDA rose 46 percent to $26.2 million and AEBITDA margin increased to 26.9 percent, primarily reflecting the continued rapid growth in revenue and improved operating leverage, partially offset by higher research and development expenses for game development.

An increase in average revenue per daily active user to $0.45 from $0.37 in the prior year period, reflects the growth in daily active paying users, on a year-over-year as well as on a quarterly sequential basis, and increased effectiveness in our user acquisition spending.

Subsequent to quarter end, a new MONOPOLY Slots themed social casino app, featuring new innovative play characteristics, was introduced in mid-April. This is our first third-party themed app, as well as the first to be launched simultaneously in North America and several other global markets.

The results of NYX have been combined with our B2B real-money online gaming business, previously included in our Interactive business segment, and are reported as the newly formed Digital business segment.

Total digital revenue increased to $69.7 million, primarily reflecting $49.2 million of revenue associated with the NYX acquisition and a 27 percent organic increase in revenue from our existing B2B online business.

Operating loss was $4.5 million, inclusive of $5.7 million in restructuring and other expense and a $14.6 million increase in depreciation and amortization expense resulting from the NYX acquisition. All other operating expenses also reflect year-over-year increases primarily due to the addition of NYX.

AEBITDA was $17.2 million and AEBITDA margin was 24.7 percent. The year-over-year increase in AEBITDA and the decrease in AEBITDA margin primarily reflects the inclusion of NYX.

During the first quarter of 2018, we successfully launched our gaming content across five new client sites and signed three new customers. Our development pipeline remains strong, as we held commitments with 48 customers that have not yet launched as of March 31, 2018.

Net cash provided by operating activities decreased $81.1 million to $29.9 million from a year ago, principally reflecting the changes in working capital from a $49.5 million impact associated with the change in accrued interest due to the timing of our February 2018 refinancing, $30.2 million related to the NYX acquisition, including transaction fees and net assumed liabilities, and $9.6 million of higher lottery contract assets net of inventory decrease, reflecting adoption of the new revenue recognition guidance, which were partially offset by strong gaming business segment receivables collections and other working capital changes.

Capital expenditures totaled $88.0 million in the first quarter 2018, compared with $61.3 million in the prior-year period. The increase from the prior year was related primarily to the ongoing acceleration of our installed base of participation games, lottery systems installations in Maryland and Kansas and the inclusion of NYX. For 2018, the Company continues to expect capital expenditures will be within a range of $320-$350 million, based on existing contractual obligations and planned investments.

We paid $665.8 million in cash to acquire NYX, including fees and expenses, and to redeem NYX's outstanding debt, of which $550.7 million was paid in the first quarter of 2018.

On February 14, 2018, we successfully completed a series of financing transactions, including a private offering of an additional $900.0 million principal amount of our 5.000% senior secured notes due 2025, €325.0 million of 3.375% new senior secured notes due 2026 and €250.0 million of 5.500% new senior unsecured notes due 2026, and an amendment to our credit agreement to refinance our existing term loan B-4 facility and increase the term loans outstanding by $900.0 million under a new term loan B-5 facility (collectively referred to as the "February 2018 refinancing"). We used net proceeds of the February 2018 refinancing to redeem $2,100.0 million of our outstanding 7.000% senior secured notes due 2022, prepay $230.0 million of our revolver borrowings under our credit agreement and pay accrued and unpaid interest thereon plus related premiums, fees and expenses. In connection with the amendment to our credit agreement, the interest rate on our term loans was decreased from LIBOR plus 3.25% to LIBOR plus 2.75%. We also increased the amount of the revolving credit agreement by $24.0 million to $620.2 million through October 18, 2018, with a step-down in availability at that time to $445.7 million until the extended maturity on October 18, 2020.

Including the effect of cross-currency interest rate swap arrangements, the net impact of these financing transactions was to lower the Company's annual cash interest cost by approximately $69 million at then-prevailing interest rates, while extending maturities of $2.1 billion of its debt from 2022 out to 2024, 2025 and 2026. The Company also entered into new floating-to-fixed interest rate swaps on a portion of our term loans, which resulted in fixing the interest rate on a total of 62 percent of the Company's total debt.