Forecasts continue to be mixed for lottery operator GTECH (NYSE:GTK). Sunny skies have prevailed as second-quarter earnings released this morning climbed 9.5% to $53.1 million on a 17% jump in revenues to $323.5 million. However, an ongoing Securities and Exchange Commission investigation into alleged bribery charges is a dark and ominous storm cloud on the horizon that threatens to dampen GTECH's future.
To quickly recap the last few months: Allegations of bribery first surfaced back in March, when Brazil's public ministry outlined concerns over the methodology used to award GTECH a lucrative contract extension. GTECH quickly countered, insisting that the contract was awarded fairly. A Brazilian judge has since sided with GTECH, refusing to indict several key executives, but the SEC has subpoenaed documents and is only now beginning to dig deeper.
Brazil's ministry has also filed a civil suit, seeking to recover the $650 million that the company has received since 1997. Until the matter is resolved, 30% of payments due from Caixa Economica Federal, which runs the nation's lottery, are to be withheld and placed under court control. GTECH claims that "the services were provided under valid and enforceable contracts, and as such does not anticipate material liabilities to result."
Unfortunately, in the wake of negative publicity, one contract -- a $66.7 million deal with Puerto Rico -- has already been handed to GTECH's chief rival, Scientific Games (NASDAQ:SGMS). More importantly, the potential loss of Brazil's business, which accounts for 10.2% of GTECH's total revenues, is a troubling prospect.
While these legal problems are a complete wild card, GTECH's operations remain solid. The company is the world's largest lottery systems operator, providing equipment or services to 70% of lottery jurisdictions worldwide. Year-to-date net income of $106.7 million is 19.2% ahead of last year's pace, and in the recently completed second quarter, key contracts with Italy, Jamaica, Mexico, and Spain were secured. These international contracts, together with domestic deals signed with Oregon, Maine, and Minnesota, will deliver $220 million to $240 million in future revenues.
Looking forward, the company is projecting product sales exceeding $200 million, and service revenues (which represent more than three-fourths of GTECH's top line) to grow 5% to 7%. Earnings are expected to rise from $1.39 to a range of $1.43 to $1.48.
While new lottery markets and potential acquisitions are getting increasingly harder to find, GTECH is relying on new ventures for growth. The company has, for example, launched bill payment and credit/debit card processing services, where it will compete with the likes of First Data (NYSE:FDC). With these new sources of income complementing an already stable base of recurring revenues from core services, the company looks interesting at only 15 times trailing earnings, particularly if the problems in Brazil can be carefully sidestepped.
Fool contributor Nathan Slaughter knows a guy who knows a guy who once hit five of six lottery numbers correctly. He owns none of the companies mentioned.
