Thursday brought good news and bad news to shareholders of lottery facilitator GTECH Holdings (NYSE:GTK).
Good news first: GTECH's contract to run the national lottery in Brazil has been extended for another year.
And the bad news? That that's probably the end of it. One year and out.
Apparently, the folks at GTECH partner and Brazilian lottery operator Caixa Economica Federal have finally decided to try their hands at overseeing the national lottery themselves. In the future, they'll be parceling out just four pieces of the contract for bidding by outside operators. According to media reports, however, GTECH is not interested in trading in its former job of running the whole ball of wax, accepting just a few drippings instead. The result: It will not bid on any of the work still available.
This has two implications for shareholders, one short-term and one long-term. In the short term, GTECH has reliable Brazilian revenues on track throughout fiscal 2006 and into early fiscal 2007, totaling $105 million to $120 million. Those numbers include funds already owed to GTECH by Brazil in payment for services rendered in fiscal 2005. The Brazilian government withheld $29 million of GTECH's revenue, pending resolution of bribery charges leveled against GTECH last year. Now that the bribery case appears to have been resolved in GTECH's favor, the remainder of those funds should be released.
Excluding those payments, revenues just from GTECH's work operating the lottery this year will come in at between $80 million to $85 million, or about 12% lower than last year. True, GTECH's fee reduction only amounts to about 1% of its worldwide revenues, and it shouldn't harm its overall results unduly in the coming year.
But the reduction also demonstrates a loss of pricing power in the lottery giant, arising in large part from the fact that by the time fiscal Q2 2007 rolls around, GTECH may very well be out of the Brazilian lottery game. While GTECH's CEO characterized this development as "an agreement" to "support" and "assist" Caixa toward a "seamless transition" resulting in a "gradual exit by GTECH" -- it's the words transition and exit that deserve the most attention by investors.
For unless Caixa completely muffs the job of running its country's lottery solo, chances are that come June 2006, GTECH will lose one of its biggest clients, the source of 10% of its worldwide revenues.
It's been one year to the day since we first started following GTECH's Brazilian saga. Read all about it from start to finish in:
- GTECH's Dicey Situation
- Gambling on GTech
- Can GTECH's Stock Survive SEC Probe?
- GTECH Thrives but Holds Wild Card
- GTECH Wins Big
Fool contributor Rich Smith has no position in GTECH.
