What a difference a year makes. Last June, news of GTECH Holdings' (NYSE:GTK) Brazilian troubles had just surfaced, and the lottery systems provider's prospects didn't look good. Suffice to say that harsh terms such as "bribery," "indictment," "subpoena," and "SEC investigation" were being thrown around. That the company's legal woes stemmed from charges related to contracts with Brazil's Caixa Economica Federal -- GTECH's single largest customer -- only compounded matters.
While GTECH claimed that the bribery charges levied against it were meritless, the dispute seemed to have one inevitable conclusion -- the loss of Brazil's business, which accounted for roughly 10% of the firm's total revenues. In the meantime, Brazilian prosecutors were pushing for the repayment of $650 million GTECH had already received, and they were also demanding that 30% of future payments be withheld and placed under court control. In the fallout from the scandal, rival Scientific Games (NASDAQ:SGMS) landed a large contract with Puerto Rico.
One year ago today, I commented that investors willing to stand behind GTECH might be rewarded if the allegations against it proved baseless. That now appears to be the case; the Brazilian public ministry has decided against prosecuting either the company or its employees. As for shareholders, their faith has yielded a market-topping 17% return over the past 12 months. The company has even secured a new contract in Brazil, although future ones are unlikely.
Now that this story is one step closer to playing out, investors can turn their focus back to the company's first-quarter numbers -- which weren't bad. Backing out a one-time gain from last year, earnings jumped 23% to $0.43, on revenues that climbed 16.5% to $326.4 million. The company also generated a healthy $121.6 million in cash from operation -- 26% more than the $96.4 million churned out a year ago -- and signed a number of new deals, including lottery contract extensions in Barbados, vending machine orders in Indiana, and monitoring and control agreements relating to gaming in Pennsylvania and Louisiana.
Any lingering PR concerns are unlikely to make much of an impact going forward. Less than 10% of the firm's contracts are up for renewal in the next two years -- plenty of time for things to settle down. In the meantime, long-term deals signed with 70% of the world's lottery markets should continue to provide a steady stream of recurring service revenues -- at gross margins north of 40%. And while new lottery markets are dwindling, other business ventures, such as a recently announced partnership with Harrah's Entertainment (NYSE:HET), should help spur growth.
It may not offer the thrill of hitting a multimillion-dollar Powerball jackpot, but the odds are good that GTECH will be a winning ticket for shareholders.
Philip Durell recommends GTECH in his Motley Fool Inside Value newsletter, which seeks out companies trading at a discount to fair value. Want to know what else Philip has recommended? Take a trial of the newsletter today. It comes with a money-back guarantee.
Fool contributor Nathan Slaughter once won $1 on a scratch-off lottery ticket. He owns none of the companies mentioned.
