Reduced lawsuit settlement helps Scientific Games reverse fourth quarter loss; revenue tops forecast

February 21, 2019 8:11 PM
  • Matthew Crowley, CDC Gaming Reports
February 21, 2019 8:11 PM
  • Matthew Crowley, CDC Gaming Reports

A federal lawsuit settlement and an operating income boost helped Scientific Games post a fourth-quarter net income Thursday, reversing a year-earlier loss. The company’s revenue also topped Wall Street forecasts.

Story continues below

In a statement, the Las Vegas-based gaming equipment manufacturer said its net income was $206.8 million, or $2.21 per diluted share, in the three months ended Dec. 31, reversing a year-earlier net loss of $43.1 million, or 48 cents per diluted share.

The news sent Scientific Games’ stock surging nearly 12 percent on the Nasdaq. The shares closed at $28.74, up $2.54 or 9.69 percent.

Consolidated adjusted earnings before interest, taxes, depreciation and amortization, a cash flow measure excluding nonrecurring costs, rose 5.9 percent to $343.5 million from $324.5 million, buoyed by higher revenue and operational efficiencies. Operating income more than tripled to $312.2 million from $97.2 million.

Revenue was $885.7 million, topping the $873.8 million analysts polled by Zacks Investment Research had forecast. That total is up 7.6 percent from $823 million a year earlier.

“We are building momentum and continuing to grow our business while… operating more efficiently,” Scientific Games CEO Barry Cottle said in a statement accompanying the earnings. “The entire organization 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 company said the December settlement, which resolved a 2014 patent-infringement lawsuit brought by Chicago-based Shuffle Tech, helped reverse the quarterly loss.

The lawsuit stemmed from a 2012 patent-infringement lawsuit filed in Nevada by SHFL Entertainment, now part of Scientific Games, against DigiDeal Corp., Aces Up Gaming Inc. and Poydras-Talrick Holdings LLC, all of which Shuffle Tech worked with in launching its first automatic card-shuffler that year.

A Chicago jury ruled in August that Scientific Games had initiated sham litigation to keep the rival shuffler out of the market. The jury awarded $105 million: $45 million to Shuffle Tech, $25 million to Poydras, $15 million to Aces Up and $20 million to DigiDeal, which assigned its rights in the lawsuit to Shuffle Tech. Ultimately, after a federal judge tripled the award and all attorney’s fees and costs were added, Scientific Games wound up owing $335 million.

But in December, Scientific Games agreed to pay $151.5 million to settle the case. The company said in a statement that it disagreed with the initial verdict but was glad to resolve the matter.

“While the in-line results were above our Street low forecast, the trajectory of the premium installed base will be the determinant of the stock for the time being,” Jefferies gaming analyst David Katz wrote in an investor’s note. “The prospects for growth remain robust, (but) the immediate pathway is less clear, driving our ‘hold’ rating on the shares. We expect a neutral reaction to the shares.”

Scientific Games’ fourth-quarter gaming equipment sales revenue fell 13.9 percent to $166.7 million, missing Jefferies’ $186.7 million forecast. The company sold 9,023 units in the quarter.

Fourth-quarter gaming operations revenue was $151.4 million, in line with Jefferies’ forecasts.

On Dec. 17, Scientific Games’ social gaming business submitted a draft registration statement to the Securities and Exchange Commission for a possible initial public offering of a minority interest. Proceeds from the offering, if it happened, would help pay down debt. The company said it had amended the form on Feb. 14 but didn’t specify how.

For the 12 months ended Dec. 31, Scientific Games had a net loss of $352.4 million, or $3.87 per diluted share, compared with a net loss of $242.3 million, or $2.52 per diluted share, a year earlier. The company said a $253.4 million restructuring and several other charges, including the Shuffle Tech case settlement, helped widen the year-to-year loss.

Full-year revenue rose 10 percent to $3.4 billion from $3.1 billion.

Follow Matthew Crowley on Twitter @copyjockey.