Scientific Games Prepares for the Long Run

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While its competitor International Game Technology (NYSE: IGT  ) saw income from continuing operations almost triple year over year in the latest quarter, Scientific Games (Nasdaq: SGMS  ) reported a net loss for its first quarter.

The maker of technology-based products for lotteries and gaming witnessed a decline in its revenues from the same quarter last year, too -- an event which was mostly triggered by the sale of its racing business. However, I think it's creating a stronger business than was in place before.

Performance sans racing business
Scientific Games reported a loss of $6.9 million, as compared to a profit of $4.9 million in the first quarter of last year. During the same period, operating income dropped to $14.4 million from $21.5 million. Revenue was off nearly $20 million, due largely to the sale of the racing business, which generated $24.5 million in sales.

But those who follow the company know that earnings from the racing division had been relatively lackluster for a long time, and attempts to breathe life into this low-potential segment by consolidating operations in North America and Germany had proved futile. Plus, with the exception of IGT, the industry itself isn't exactly growing at gangbuster rates. Bally Technologies (NYSE: BYI  ) , for example, has seen declines across the top-line and anemic profit growth in recent quarters. These types of economic headwinds have been pretty normal as of late.

It was about time management made a decision to improve the overall long-term prospects of Scientific Games, and I believe the divestiture of this segment was one big step towards it.

Gearing up
As a testament to the company's renewed interest in long-term success, we've recently learned that Scientific games is acquiring Barcrest Group from IGT. It's a supplier of gaming content and machines in Europe. This acquisition should put a lot of cash in Scientific's kitty by considerably boosting its core gaming business.

The company will gain access to U.K. server-based gaming platforms and new video lottery customers in Italy and the Czech Republic. More importantly, Barcrest's library of sought-after games will expand its gaming portfolio on various digital platforms, including Internet and mobile. In a prior article, I discussed Scientific Games winning a Colorado Lottery deal to become the primary vendor for instant ticket games. All of this activity paints a picture of a company that is restructuring for long-term success.

The Foolish bottom line
In spite of this quarterly loss, I believe divestiture of the racing segment was a sensible decision and has enabled Scientific Games to focus on its core operations. Recent transitions have made the company look all the more promising in the long run. Despite this, I would recommend that Fools wait for a while before spending money on it. There's more clarity to be gained.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of International Game Technology and Bally Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/21/2016 4:00 PM
SGMS $13.05 Up +0.15 +1.16%
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