Scientific Games (SGMS) recently signed a new contract with Szerencsejatek Zrt, the Hungarian State Lottery, after winning a competitive procurement process. Szerencsejatek Zrt is the only lottery provider in Hungary, operating more than 4,800 terminals. The company generated sales of approximately $900.0 million in 2012.
Under the terms of the contract ending 2020, Scientific Games will implement and manage its AEGIS NGS video central communication system for Szerencsejatek and install and manage additional Wave terminals.
We believe that the new contract will expand Scientific Games’ footprint in the Central and Eastern European lottery market. This will help Scientific Games to somewhat offset weak performance in the domestic market as well as in United Kingdom, Italy and China.
International expansions provide significant growth opportunities for Scientific Games. Most recently, Scientific Games won contracts in Dominica and Panama. Currently, Scientific Games has lottery systems operating in Argentina, Canada, China, Israel, Australia, France, Hungary, Iceland, Latvia, Mexico, Norway, the Philippines, Spain and Switzerland.
Scientific Games continues to seek to expand its server-based gaming machine business outside the U.K., with current deployments in the Caribbean, Czech Republic, Mexico and Puerto Rico. As of Dec 31, 2012, Scientific Games had an installed base of approximately 5,100 gaming machines outside U.K.
Scientific Games already generates more than 50% of revenues from international operations and we see further opportunities in untapped markets of India, Russia and Greece going forward.
Moreover, the domestic lottery industry is undergoing a transition, which involves increasing involvement of private vendors in state lottery management, higher prize payouts and introduction of tiered pricing for national jackpot games to add impetus to the sagging lottery industry in the U.S.
We believe that Scientific Games is well positioned to benefit from this transition going forward. Apart from price increases, Scientific Games sees an opportunity for providing central monitoring and control systems for video gaming networks in the future, which will be an attractive growth avenue.
However, increasing investment for product development is expected to hurt profitability in the near term. Additionally, a significant increase in regulatory, professional fees and other expenses related to the WMS Industries (WMS) acquisition will hurt margins in the near term.
Further, stiff competition from the likes of International Game Technology (IGT) and Bally Technologies Inc. (BYI) is expected to hurt profitability, going forward.
Currently, Scientific Games carries a Zacks Rank #4 (Sell).
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