Scientific Games reported a forecast-topping narrowing of its third-quarter loss and said it will consider selling a minority stake in its social games business to boost the gaming company’s revenue potential.
In a statement Thursday, the Las Vegas-based Scientific Games – which provides equipment and systems for the lottery and casino industries – said its net loss, excluding restructuring costs, was 14 cents per share in the three months ended Sept. 30, topping the 16-cents-per-share average loss analysts polled by Zacks Investment Research had forecast.
Zacks said it was the first time in four quarters that Scientific Games had topped earnings-per-share forecasts.
Scientific Games’ shares surged on the quarterly report, rising more than 22 percent Thursday on the Nasdaq.
Scientific Games’ unadjusted third-quarter loss was $351.6 million, or $3.85 per share. The company was hurt by $338.7 million in restructuring and other costs. Scientific Games said a $315 million verdict returned against the company weighed heavily in the restructuring.
In August, a federal jury ruled that Scientific Games, apparently aiming to control the automatic-card shufflers market for casinos, had initiated sham litigation to assert invalid patents and keep a rival shuffler out of the market. U.S. District Judge Matthew Kennelly tripled the jury’s original $105 million award after announcing the verdict.
On Thursday, Scientific Games said the verdict is subject to post-trial motions and appeals and hasn’t caused any cash outflow.
Scientific Games’ third-quarter adjusted earnings before interest, taxes, depreciation and amortization, a cash flow measure excluding nonrecurring costs, rose 5 percent, to $232.5 million from $221.2 million.
Revenue fell 6.8 percent to $821 million from $768.9 million, missing Zacks’ $824.8 million forecast.
Social games revenue in the quarter grew 11 percent from a year earlier to $105.1 million. Scientific Games said the increase was partly driven by the growth of core apps, including Jackpot Party Social Casino, and new apps including Monopoly, which is themed on the popular board game.
In a statement, Scientific Games suggested the company would gain flexibility by offering a social-games business stake.
“For our rapidly growing social business, an IPO would give us greater flexibility to pursue growth for the business and drive value for stakeholders,” CEO Barry Cottle said.
The quarterly results left Jefferies gaming analyst David Katz, which rates Scientific Games “buy,” enthusiastic. Scientific Games’ gaming equipment sales revenue, which rose 3 percent to $167.2 million from $163.1 million, topped a $146.6 million forecast, Katz said. Also, 7,663 in units sold during the quarter topped his forecast of 7,059 units sold.
“The solid quarterly results, at quick first blush, suggest that all facets of the business remain more stable than the shares reflect,” Katz said in an investors note. “As well, the indication of value unlocking strategies could be prudent and is consistent with our view that all of the technology businesses within (Scientific Games) are overlooked and undervalued. We expect a positive reaction in the shares to the report.”
During the quarter, Scientific Games bolstered its sports betting portfolio, by closing its deal for Las Vegas-based Don Best Sports Corp. and Vancouver, British Columbia-based DBS Canada Corp. for an undisclosed price.
Also in the quarter, Scientific Games signed a three-year deal to provide scratch-off games to Hard Rock International and extended its instant games contract with the Washington Lottery by four years.
Nevertheless, Zacks, which rates Scientific Games’ stock “hold,” expressed caution in a September investors’ note. Zacks said many core-market competitors hampers Scientific Games’ ability to demand higher renewal rates and imperils its profitability.
“The loss of a single contract, either to a competitor, or for any other reason, will have a significant impact on revenues,” Zacks wrote. “Nevertheless, the innovative product portfolio along with international expansion is expected to (help) Scientific Games improve its financial performance going ahead.”
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