Scientific Games' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Scientific Games (SGMS)

Scientific Games Corporation (NASDAQ:SGMS)

Q2 2013 Earnings Conference Call

August 8, 2013 8:00 am ET


Cindi Buckwalter - VP

Lorne Weil - Chairman & CEO

Jeff Lipkin - SVP &CFO


Barry Jonas – Wells Fargo Securities

Todd Eilers – Eilers Research

Kelly Knybel – Deutsche Bank

Ross Licero – Craig-Hallum Capital Group

Steven Wieczynski – Stifel


Good morning, ladies and gentlemen, and welcome to Scientific Games Second Quarter 2013 Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce Cindi Buckwalter, Vice President for Scientific Games. Ms. Buckwalter, you may begin.

Cindi Buckwalter

Welcome and thank you all for joining us this morning. During this call, we will discuss our second quarter results followed by a Q&A period. Please refer to our earnings press release for further detail.

As a reminder, this call is being simultaneously webcast and is accompanied by a slide presentation, which are both available along with our press release in the investor information section of our website at A replay of the call and a slide presentation will be archived in the investor information section of our website.

This conference call will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially. For certain information regarding these risks and uncertainties please refer to our earnings press release and materials relating to the call posted on our website and our filings with the SEC, in our most recent annual report on Form 10-K and our subsequent reports filed with the SEC.

During this conference call, we will discuss certain non-GAAP financial measures. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release.

Now I’ll turn the call over to Lorne Weil, Chairman and CEO.

Lorne Weil

Thanks Cindi. Good evening everyone. And thank you for joining our second quarter 2013 earnings call. Joining me this morning along with Cindi is Jeff Lipkin, our CFO.

We are pleased with our results for the quarter, both or revenue and attributable EBITDA year-over-year and met the expectations that we had set for ourselves. Our core lottery business with a solid quarter was accelerating instant ticket and lottery system retail sales. Our U.S. customer’s retail sales of instant tickets increased 5% in the quarter and their sales of draw games grew nearly 11%, compared to the second quarter last year.

In addition, we recently secured a number of new contracts which represent incremental business for us, including an instant ticket cooperative services contract with a private lottery operator LEIDSA in the Dominican Republic, new lottery systems, internal contracts with the Hungarian State Lottery, the Norwegian lottery, Norsk Trippin, and the Swisse Lottery Romande.

Our joint venture in New Jersey executed a long-term contract to provide marking and sale services for the New Jersey Lottery. And lastly, and very importantly, our consortium executed a 12-year concession agreement for the exclusive rights to produce and manage instant ticket lotteries in Greece. This brings us a step closer to relaunching instant tickets in Greece after a hiatus of approximately 1,000 years. We believe this is a very significant opportunity given that Greece, notwithstanding the recent economic conditions there, remains the third largest lottery in the world based on per capita sales, and this obviously does not even yet include instant tickets since they haven't been available, as I said a moment ago, since the early 2000.

These incremental contract wins are in addition to the contract wins from our existing customers in South Carolina and Rhode Island, and internationally with the Hungarian lottery and the Israeli Sports Betting Board. We've also received extensions from the Ohio, Oregon, and West Virginia lotteries in the U.S., and Tattersalls lotteries in Australia. We're also continuing to execute on the growth initiatives we laid out at the beginning of the year.

So, overall, our core business is very strong. We're steadily adding new contracts and new business to our portfolio and we continue to have a tremendously high record of renewing and extending an existing business which is a question that we often get asked.

Well, our UK gaming business continues to be quite strong from a profitability standpoint. Economic conditions in the UK have finally begun to affect player activity in gross wins and, therefore, growth across all betting shops. We had been able to grow this business throughout 2012 despite the considerable economic weakness in the UK but our gross win per terminal per day has been down modestly in each of the first two quarters of 2013.

On the other hand, we are quite encouraged that our two primary competitors Ladbrokes and Coral have nicely outperformed the customers of our principal competitors. Here, we've been helped by the role of our new affinity to the cabinet in the UK. And looking ahead we expect to be helped even more by the introduction into the UK network of our WYMS content. Bear in mind that all of this business in the UK is participation based, and so any improvement in the cash box and we certainly anticipate significant improvement in the WYMS content is introduced will essentially fall straight to the bottom-line.

Instant tickets in Italy were down modestly in the second quarter but the year-over-year percentage decrease was relatively comparable to what we had seen in the first quarter. While instant tickets appear to have been impacted and part by ongoing challenging economic conditions in Italy, we believe we were seeing some signs of stabilization.

Although Chinese ticket retail sales declined somewhat in the quarter, we continue to believe that key to improving performance there is better games and increased retailer marketing and promotions. We are implementing more tailored marketing and promotions as well as a much more robust game line up than we had last year.

We're working closely with the number of the top selling provinces and customized game design and retailer and senders. But what we're most excited about is our newest NBA game which we expect to launch in the September-October timeframe and will be the first holographic paper game in China and the first caricature art design which is unique to the Chinese sports lotteries.

The tickets will include both team based tickets as well as individual player theme tickets. We actually just saw the first print samples of these games. The 30 player tickets are absolutely phenomenal. Not only have we -- I've never seen anything like this in China. We've actually never seen anything even remotely comparable to this in the States, and we do think this game is going to be a huge success. The tickets themselves, as I said, are unlike anything in the marketplace has seen and we're planning consumer awareness campaign unlike anything we've ever done before in China.

Firstly, we're integrating the instant tickets with social gaming to further engage players. We teamed up with the NBA to use the official NBA microblogging account. The NBA flag ship store on Tmall which is China's BDC online retail store, and the NBA official site star teasers going into the launch. Post launch microblog users can upload a picture of themselves holding an NBA team instant ticket, and blog to a number of friends to take part in the luck draw to win excellent gifts. This viral dissemination hasn't been done before and we think it is very interesting potential in China.

Secondly, we're promoting the tickets as collectibles, and again when hopefully some of you have an opportunity to see these tickets you'll understand why. Certain tickets will have a collect ticket for gifts mark and if the player collects five of these marked tickets they will win an NBA theme prize. Ticket collection stimulates the continual purchase of tickets and prolongs the game's life cycle. We also believe it enhances the game's competitiveness as real fans may forego the purchase of other instant tickets in order to collect the entire set. We believe the unique promotions will differentiate the NBA games and give them a significant advantage in the latter part of 2013.

While China is not yet where we want it to be from a growth standpoint, it continues to be very possible and positive cash flow business. More importantly, our infrastructure in China and elsewhere in the Asia Pacific region including Australia where we have been extremely active for many-many years in the lottery world give us a strong platform to help develop the Asia Pacific gaming for WMS post closing.

In the gaming context in China, we've been working on an electronic instant ticket or EIT project very similar to video lottery terminals. We're very pleased with the progress we're making and we hope to be able to report more concerning this strategic project quite soon. Although the content provided by Scientific Games for these machines in this network is quite strong, here again we're extremely confident that when we're able to integrate WMS content and implement bonusing and new math models, the players will find the games very entertaining and this will become a very, very -important platform for growth for us in China.

On a more macro level, the success in gaming of Macao and Singapore has resulted in governments across Asia showing heightened interest in gaming as the way to help attract more tourist dollars. I'm sure many of you have been reading or hearing about the developments that are currently taking place in Japan, for example. We have invested a great deal in Asia-Pacific over the years and we have extensive local knowledge, relationships, resources, and infrastructure. And with our reputation, our network and presence we believe we're very well positioned here again to help grow the WMS Asia-Pacific gaming business post acquisition.

Speaking of WMS, I'd like to briefly talk about the WMS integration planning and the recent response to WMS new games. As we have reported we have satisfied many of the key closing conditions and we've made good progress in the gaming regulatory approval process with a number of approvals already received. We continue to believe we on track for a fall 2013 closing.

When we first announced the WMS acquisition back in January, there were two major questions that seemed to be in the minds of our investors and those that follow us. These were, number one, how real were the cost energy numbers that we estimated at the time and, two, how would WMS next generation products be received by the marketplace, given the WMS have not introduced a new family of gaming machines in quite some time.

In a moment, Jeff will discuss the integration economics and why our confidence is extremely high about achieving the synergy estimates we provided.

On the produce side, we are very pleased to say that our expectations for WMS's next-generation new products have been met in them some so far. As those of you who are in contact with casino operators will know the player field and customer satisfaction with WMS's latest product is very strong.

Indus Resources have estimated that reason ship share metrics for WMS are very encouraging, likely boosted by the new (inaudible) cabinet. They had also indicated a positive response to new leased products so called gaming operations or participation products, as well as a new premium platform game field xD. Going forward, Willy Wonka which is a game on the game field platform seems to be highly anticipated premium lease title.

In totality, the products appear to be extremely well received. The most important driver was and always will be of course the performance of the game in order to drive customer demand.

At Scientific Games, we understand that at the end of the day it is the products, content and solutions that drive the business along with relationships with customers. Most importantly, we believe that innovation is crucial to this model. WMS has long used innovation to drive product differentiation, player appeal to enhance end game casino performance for their customers. The favorable casino operator feedback, particularly of WMS's latest new products supports that investment. And we are of course intent on keeping this focus.

Because of the way the cost synergies are coming together, as Jeff will discuss in some detail in a moment, area such as G&A, procurement, technology, supply chain, engineering and so forth, we firmly believe that we will actually be in a position to positively increase our investment in R&D and in the innovation in creativity of our business so that one of the may be most important aspects of the synergy of the two companies is that this commitment to innovation, R&D and product development will actually accelerate.

Before I finish up I wanted to touch on our interactive business subject and we can discuss this more during Q&A if anyone is interested. During the quarter, we successfully launched the Properties Plus Program for Maryland. I think this Jeff is a six. There are seven states where we are now doing our Lottery Loyalty program and we are very encouraged about the possibility extending this concept to the casino world, an innovation GML 5 mobile app for the Missouri Lottery's Properties Plus Program, which is accessible from desktop, tablet or mobile devices. Other initiatives are in the works, which we hope to share with you in the future.

In our last conference call, we talked about the importance of what we are able to do in Delaware by combining the interactive resources or scientific games in WMS. Each company has a passion for engaging players and delivering results. And by coming together, we will be either better equipped to provide world-class innovative content enabled by advanced technology across all distribution channels.

In conclusion, we are pleased with the performance of our core businesses. And obviously, we are very, very excited about the expected benefits of the merger with WMS because of the time that will have lapsed between when we announced the deal in January and when we hope to close after having obtained all the necessary regulatory approvals, we will have had a period of six or seven or eight months to really plan for the integration of the two companies. And I think I would not be understating the case to say that the further we go into this and the better we understand how the two companies will fit, the more encouraged and the more excited. We are about the possibilities, both from the point of view of scale and their core profitability as we have discussed a number of times.

And as importantly, the scope as the fitting together of the two companies creates all kinds of revenue opportunities that would not have been available to either company. And again, we are happy to talk about that more in the Q&A. So, I think we are on the cuss now of something really phenomenal and looking forward to this unfolding later on the following.

With that I will turn it over to Jeff to talk more about the finance.

Jeff Lipkin

Thanks Lorne. Hello everybody and thanks for joining us this morning. Beginning of the year we communicated our thoughts regarding fiscal 2013 and our expectation have based on the timing of the growth initiatives we were pursuing, our results would build over the course of the year. In line with these plans, we recently signed a number of new contracts that represent incremental revenue, enter in to several contract expansions and further several important lottery development initiatives. We are pleased with our progress on our growth initiatives in the first half of 2013.

Now let's turn to our Q2 reported results. For the most part retail sales KPIs reflect continued improvement from what we saw in Q1. Total revenue for the quarter was $235 million as compared to $226 million in the prior year period led by growth in our core lottery businesses partially offset by a decrease in gaming.

Operating income for the quarter was $12.5 million as compared to $11.4 million in the prior year period. However Q2 013 was negatively impacted by $6.2 million of incremental depreciation expense. Also SG&A was burdened by $2.4 million of WMS acquisition related cost this quarter.

Looking at our segments, Printed Products revenue grew $7.4 million or 6% driven primarily by an increase in revenue from both price per thousand and percentage of sales customers. Printed Products operating income was $35.3 million compared to $23.1 million last year. The increase was primarily due to employee termination and restructuring costs incurred in the prior year period and higher D&A expenses in that period related to the closing of a printing facility and accelerated depreciation related to certain development costs.

The growth in operating income also reflected a higher and more profitable revenue mix this year. Lottery Systems revenue increased $4.3 million or nearly 7%. The sales revenue growth was principally due to higher international hardware and software sales, while the increase in service revenue was driven by a record $591 million Powerball Jackpot during the quarter.

Lottery Systems operating income decreased primarily due to higher depreciation and amortization resulting, but related to new hardware deployed in the U.S. and China along with less profitable service revenue mix.

Gaming revenue decreased by $2.6 million reflecting lower revenue from customers outside the UK, the negative impact of Fx, the loss of the William Hill contract in 2012 and lower sales from gaming terminals. This was partially offset by higher revenue from core UK LBO customers, growth of the interactive business and the 2012 acquisition of ADS.

Gaming operating loss was approximately $8.4 million in compare to a loss of $800,000 last year primarily due to a lower and less profitable revenue mix and $8.4 million increase in D&A. The D&A increase reflected a write-down of used gaming terminals and accelerated appreciation related to change in the estimated useful life of the terminals. The less profitable revenue mix was principally due to loss of revenue from William Hill and the interruption of $1.4 million of revenue from customers in Puerto Rico and Italy. These factors were partially offset by lower SG&A primarily due to reduction in account receivable reserves and the absence of restructuring costs that occurred in Q2 last year.

Moving down to P&L, interest expense increased by $1 million year-over-year reflecting the issuance of senior subordinated notes in Q3 last year. Our earnings from equity investments decreased by $3.4 million year-over-year primarily due to lower results from ITL and Northstar Illinois. The decrease from earnings in ITL was due to an increase in D&A to reflect the change I mentioned earlier in the estimated life of our gaming terminals.

With respect to Northstar Illinois, we understand that the lottery completed its financial statements for 2012 and has compiled preliminary information for its fiscal year ended June 2013. Although there are a number of matters that are now formally resolved given where things stand, Northstar has estimated potential shortfall payment obligations to stay at approximately $42 million and as recorded the liability in its books with this amount and a corresponding non-current asset, which will be amortized over the life of the PMA.

For the three and six month ended June 2013, our earnings from our equity investments in Northstar Illinois were reduced by an amount equal to our 20% of amortization both by Northstar for the contract to date. This amount was not material to our results of operations for the three and six months ended June 2013.

We realized the $1.4 million increase in year-over-year in other income primarily due to a decrease in foreign exchange transaction expenses this year. These factors resulted in a reported loss for the second quarter of $12.4 million or $0.14 per share.

Turning to attributable EBITDA. EBITDA from equity investments declined year-over-year by $1.1 million to $20.2 million primarily reflecting lower results from Italy. Attributable EBITDA increased by $3.4 million year-over-year to $86.5 million as a result of the factors I have mentioned.

Moving on to the balance sheet. Our debt less cash at quarter end was approximately $1.4 billion. Our liquidity stood at approximately $292 million and approximately $214 million of availability under our revolver and cash of $78 million.

Our free cash flow was $2.6 million for the quarter compared to $32.9 million in Q2 last year primarily due to increased CapEx related to the timing of purchases of gaming terminals in the UK and our printing press upgrade initiative. We are also experienced lower cash flows from operating activities during the quarter primarily related to the timing of working capital needs. During the quarter we received distributions from our equity investment totaling $42 million and made an investment in Northstar New Jersey of $21.4 million.

As Lorne mentioned we are pleased with our progress towards completing the WMS acquisition. Key executives of both of the companies are leading the detailed integration planning efforts, which are focused on realizing the expected synergy opportunities. We remain very enthusiastic about our potential for cost savings from this combination. I say combination because the reductions will be coming from both companies and we see many opportunities to optimize the combined business.

Just to recap, when we announced the deal back in January, we had identified approximately $90 million in cost synergies. As we spent more time working with WMS, we identified an additional $10 million of synergies for a total of $100 million in expected cost synergies, which are laid out in detail in the PowerPoint presentation we filed in mid-May.

Importantly, as we progress further through our integration planning over the last several months, we have built out details integration plans and in doing so, our confidence level on executing these synergies remain high.

After WMS received shareholder approval for the transaction in May, we successfully syndicated our $2.3 billion debt covenant. We would drawdown on our new credit facility at closing to pay the merger consideration and refinance existing indebtedness. We look forward to continuing to update you on our progress as we move forward to our closing.

With that, I will turn the call back to Lorne to wrap up.

Lorne Weil

Thanks Jeff. I really don’t have much to wrap up in the way of prepared comments, other than to again reiterate the enthusiasm and excitement we feel right now in terms of where we are overall as a company. The core business is performing extremely well. Many of the business development activities that we have been engaged with for the last couple of years in different parts of the world are really now beginning to take hold.

Seeing this in American and Europe, hopefully on the gaming side of our business in Asia and at the same time, the performance of WMS on the standalone basis in terms of what has been made publicly available is very, very encouraging. And as Jeff just talked about from both the profitability and from maybe more importantly long run from the growth point of view, the integration planning between the two companies is producing really fabulous result.

So, I will leave it at that. And we are happy to open the call up for questions.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Barry Jonas with Wells Fargo Securities. Please proceed.

Barry Jonas – Wells Fargo Securities

Just Lorne, can you talk a little bit more about some areas, where you see the potential for revenue synergies with WMS?

Lorne Weil

Yeah, sure. Well, I think the most immediate and obvious one which I alluded to a couple of times in the call just now was where we can begin to apply or introduce WMS content into gaming networks in different parts of the world, where our revenue was driven by the gross we enter with the cashbox performance. So, as soon as we start putting these games on these platforms, we will start to see that revenue growth. The UK is the most obvious and immediate one for that.

As I think you know, we have a number of selling networks that are not quite as big in Latin American places like Mexico and Puerto Rico. We are deeply involved in project in China that will I’m quite confident result in similar participation based networks that will make great utilization of the WMS content. So that would be the first.

The second is I think if you study WMS carefully, you will see that although the market share on an average basis worldwide is quite strong. I should really say our position in the North American market is extremely strong and market share in some of the foreign geographies, the Asia-Pacific region some of the parts in Latin American, some parts of Europe are not quite as strong.

And these are areas where again as I think you know, we have many, many years of experience. We have tremendous infrastructure. Many of these customers that are actually lottery jurisdictions in places, where lotteries have jurisdiction over gaming machines and so we think we can create some tremendous synergy combining the WMS product with the depth and breadth of the market position we have outside of the United States.

And I would say the third area or a third area is I think of the complementary strengths that we have as a company is our depth of systems expertise. Again as you know really if we go back to how Scientific Games as we know it today was created, it really grew out of systems culture and systems expertise and systems is becoming increasingly important in the gaming side of the house both in the North America, but again very much so outside the U.S.

So I think there are many, many customers, where the addition of our systems expertise to the capability, the WMS has in device engineering, device design and most importantly content development will create a revenue opportunity that would have been not available to either company. So, for openers those would be the three things that come immediately to mind for me.

Barry Jonas – Wells Fargo Securities

Great and then just one more question. Jeff free cash flow generation seems to have been impacted by timing on CapEx this quarter. Do you think we'll see a ramp up in the second half of the year?

Jeff Lipkin

Yeah, so we at the outset of the year had articulated that our growth initiatives were laying out in a way, where they were heavily weighted towards signing up and launching in the first half of the year and that they would be ramping up in the back half of the year. That's largely true today. A couple of initiatives have been executed, but perhaps slightly slower than we had hoped, but are executed importantly.

And so what you are seeing is an increase in capital related to the development of these new revenue opportunities In particular the biggest area that we spend capital on the first half was for new terminals for the Coral Estate and that was heavily, heavily weighted towards the second quarter, predominance of that cost, plus we are increasing, we've an initiative to improve our printing facility capacity and that impact hit us in the, this doesn’t have any direct revenue associated to it, but it will improve profitability in the future for us. But it had an impact in terms of the CapEx in the second quarter.

In total its probably around $25 million of more CapEx or so that hit us in the second quarter that impacted free cash flow and then separately cash flow from operations was impacted by a couple of timing issues related to a couple of receivables that just came in July. So it's just a flip. Had they come in June the picture there probably would have been roughly $15 million or so better from a cash flow from operations perspective. So, it’s just the way things landed and ended up coming in early July.


Your next question comes from the line of Todd Eilers with Eilers Research. Please proceed.

Todd Eilers – Eilers Research

Yes, thanks for taking my questions. I wanted to ask a couple of questions on the Lottery Systems segment. For the quarter it looks like your lottery system sales were very strong. Can you talk a little bit about what drove that and then secondly along the same lines you mentioned several international lottery system contracts with Hungary, Norway, Switzerland and also include terminals.

Can you also maybe talk a little bit about what sort of impact those types of contracts have on that business segment. I'm assuming that most likely those are sales type contracts. But be helpful to kind of understand how should we look at those and also I guess the timing on some of those as well.

Jeff Lipkin

I'll start and then Lorne you can add in. The product sale that you saw in the second quarter for lottery systems were largely international product sales that we've done. And so as you know our business outside the U.S. is mostly for sales business for lottery equipment and there were several customer. We're seeing an increase in activity in that segment of the business and it sort of relates the second part of your question for the new contracts that we announced.

I'm sure you haven’t seen it, but we actually could try to make things more transparent. We in our PowerPoint that Todd put a page in there that actually has quite a bit of detail on these new contracts in terms of when they start and what the term is and then come information that hopefully allows you to quantify a little bit about what the contracts are that we signed. And so, I don't know if that might be help it’s on slide 5.

Todd Eilers – Eilers Research

Got it, I just saw it. Thank you.

Jeff Lipkin

Okay. So, we deliberately tried to do that because we figured that people would want to understand. You'll see the Norsk Tipping transaction really will commence next year. These are generally speaking sales of both system and terminals. And so you know they're different revenue recognition for each element of that transaction. The delivery of the terminals is one piece of it and then system is recognized under different accounting rules.

So, the system will be largely spread out over a period of time with significant component upfront and then a maintenance element that recurs and then the terminal piece will be based on when customer acceptance happens. But this will largely be these contracts that we're signing now would be for delivery early next year.

Todd Eilers – Eilers Research

Okay, great. That's helpful. Second question I have was related to Greece. Obviously that opportunity now moving forward, but there was some press reports or some indication that I guess the new owner of OPAP was interested in and taking a look at some of the contracts that were signed related to the new lottery tender there. Can you may be update us on that. Where there any changes made that were material at all?

Lorne Weil

I don’t believe Todd comment and I just want to point on the brief conservation you guess Jeff had about the European Systems business. But coming back to Greece I think I’m correct in saying that there were no modifications whatsoever to those agreements prior to the signing of the supply agreement.

Jeff Lipkin

That change to be economic in any material way for sure.

Lorne Weil

Yeah there was no material change there. On the European Lottery Systems business Jeff is exactly right that the business is primarily driven by product sales rather than facilities management way the business is in the states. But this is actually would makes it that European business such as terrific business I think from the point of view of return on capital employed is probably the most profitable business in all Scientific Games and we will probably still be the most profitable business, when we combine with WMS.

And although in the first instance all of the business is primarily all of the business is driven by product sales. You are actually take the P&L from one year to the next apart about half of the revenue attributable to EBITDA actually come from follow on software sales, game sales, maintenance and so forth.

So, effectively what happen is over time as we have build up the installed base of customers with these upfront sales were also building in parallel the backlog of recurring revenue that goes with it. So, when we look at the new contracts like Hungary, Norway and Switzerland and at least the first two of these three are very big contracts by the standards of this business, big in the tens of millions of dollars.

It’s not just the benefit of the sale itself, which is Jeff will we expect to realize in 2014. But it’s the addition of the recurring revenue stream from those upfront sales that will accrue to the years that follow. But it is because we are getting hallow what in the American business model would have been the CapEx out upfront in the form of the sale of the system or the sale of the terminals plus profit. This is why this business is so profitable from a return on capital point of view.

Eilers Research – Todd Eilers

Okay, great. And then just a one final question on China you guys mentioned that you are seeing to be kind of moving forward with respect to some sort of VLT type opportunity. I was wondering if you could maybe elaborate a little bit more on that. I guess with kind of in two areas. Number one will that fall under your existing into take a contract with Sports Lottery or with the fees something different.

And then secondly obviously with seem like it could be a very big opportunity, but if you could maybe help us kind of understand what the opportunity is there that will be help as well. Thank you.

Lorne Weil

I think really all were we would be comfortable saying rate this second because there has been not any disclosure at least in any detail about this in China. Although there has been a tremendous amount of activity and I think the activity itself is reasonably well known. I think I can only say that it is an activity that will begin in one province and then if it’s successful it would have the potential to be rolled out to a greater number of provinces. It’s affiliated with an organization in China that we are quite familiar with and have had a lot of experience with.

If you look for example in terms of try and get a sense of the scale Todd, the China Welfare Lottery has under its jurisdiction of VLT network whose scale right now is around equivalent of about $4 billion a year. So, it’s larger than just to put that in perspective. The instant ticket business is with the China’s Sports Lottery obviously the two don’t have anything directly to do we cover, but it would give you some sense of the appetite for this kind of product in China.

And again our thinking as we look at the nature of the opportunity that the potential impact on this of WMS content capability should be huge. I really do apologize for being somewhat cryptic, but it just we actually had hope by the time of this call we could have more say about this. But unfortunately we don’t, but I’m pretty confident that over the course of the next quarter certainly we should be able to say something more about this Todd.

Jeff Lipkin

But I would tell also Todd it is not under the instant ticker contract. It’s a similar customer and the activity is part of our strategy in China, which is diversify into all lottery products that we offer globally. Today we are primarily in the instant ticket business there, but try to leverage the infrastructure there to grow the other elements of the lottery business in China. So, this is an example of that strategy.

Eilers Research – Todd Eilers

Okay, perfect. Thanks guys.


Your next question comes from the line of Kelly Knybel with Deutsche Bank.

Kelly Knybel – Deutsche Bank

Hey, guys. I was just wondering if you could kind of quantify what the impact of the Powerball was on the lottery system segment in the quarter.

Jeff Lipkin

It’s interesting. It wasn’t as significant as one would expect. One of the things that we look at in the way we make money obviously Kelly is based on the duration of the run. So, obviously we get compensated as a percentage of the revenue and so it’s not necessarily just the size of the jackpot, but it is also equally important how many roles there are if you will.

And one of the things that happened in this instance was that it was heavily weighted by the introduction of Powerball in California. The jackpot are big quicker than it typically had in the past and so I think there was maybe like relative to the last part of the similar size there was substantially less roles. I think it was something like 15 versus 25 or something like that. So, that’s why it wasn’t as impactful. It was a big jackpot, but wasn’t there for as many weeks as we had with the last big jackpot. So, I would say in revenues the impact was maybe between $1 million and $2 million.

Kelly Knybel – Deutsche Bank

Okay, great. Thank guys. And just with the Printed Product segment you mentioned Provoloto being rolled in for this quarter. Can you kind of quantify what kind of impact that had on your product sales side there in that segment?

Jeff Lipkin

Yeah, it's de minimis.

Kelly Knybel – Deutsche Bank

Okay, great. Thanks a lot.

Jeff Lipkin

I mean very de minimis at this point. The development activity we try to grow that market, which has great upside in opportunity, but in this current state it's not producing much contribution.


Ladies and gentlemen, we have time for one more question and it comes from the line of Mike Malouf with Craig-Hallum Capital Group. Please proceed sir.

Ross Licero Craig-Hallum Capital Group

Yes, this is Ross Licero on for Mike. I just had one quick question about the diversified gaming business. You said the cash box was a little lower than it had been in the past in the UK Can you comment on the trend, has it stabilized, gotten worse as the quarter went on?

Jeff Lipkin

Yeah, so the economy in the UK has been bad. We've been commenting on that on prior quarters for now probably the better part of two years what's been actually very interesting is that our cash box despite the economy has held up pretty well. What we're seeing is that after several quarters of that economy that it started to creep its way into our segments of the business. And so what we're seeing is that you saw the first half of 2013 was weak and those trends are basically continuing today. We haven’t seen yet an uptick or optimistic that it will turn, but we haven’t seen any indications that there's a change. It's still a very difficult economic situation in the UK

From an overall revenue perspective the actual LBO revenues are growing, but that's also because we've been able to increase density number of machines for location in early 2013 with a change in the tax law relating to those machines. So, the overall revenues up on a per machine basis we're seeing some impact that we believe is a little bit due to the increase in terminals and it also due to the economy.

We are obviously as Lorne mentioned in his comments, we are optimistic that the introduction of the WMS content will allow us on a relative basis to continue to outperform other players in that market. We had seen the data from the other LBO providers on in a relative basis. Our customers are outperforming and we believe with the introduction of WMS content then that trend will accelerate.


We do have one additional question and it comes from the line of Steven Wieczynski with Stifel. Please proceed.

Steven Wieczynski – Stifel

Hey, Good morning guys. Just one question and you talked about I guess Lorne or Jeff either one. With Global Draw you talked about the pressures you are starting to see with kind of more economic issues coming out of the UK. How should we think about and how are you think about that market going forward. This is the market that we’re going to see a little bit of more pressure over the next six months to twelve months, maybe seen a type of rebound there, I guess what I'm trying to get at.

Lorne Weil

Well, I think Jeff mostly answered that a minute ago. I don't think we see any reason to see any further worsening from where we are. As I said as we've been rolling out this new infinity cabinet. We've actually seen some upward pressure on the cash box from that. So clearly that's for the next little while a counter way to the, what's going on in the economy.

I think people think generally that the UK economy has stabilized and although it's not necessarily about to take off upward like a rocket. Hopefully having been in this condition for the best part of a couple of years, they've seen the worst of it. So, I think our feeling now is absent any other factors. We sort of see this as you know moving sideways, but if we factor in the impact of the new cabinet that we've introduced. And I think very importantly and this is an area of the integration of WMS and Scientific Games that is, let just say very well advanced in terms of planning and implementation.

We're certainly encouraged by what we think the impact of the addition of that content to the network in the UK can happen and I know you know this, but in case other people don't. In the U.S. similar situation, the rolling out of that new content is a fairly lengthy and laborious and complicated process because it either requires shipping new machines into the market and bringing old machines back or it means going out into the field in retrofitting machines with new chips and glass and so forth and again that's a pretty lengthy and laborious practice in the UK.

Our network is completely server based. And so, once this, the WMS game content has been as they say ported on to the Global Draw platform, these games can be instantaneously made available through network of 30,000 machines. And this of course is the exact environment, where the notion, the concept of server base gamming has the greatest impact, because otherwise go around and retrofit content on machines right across a retail network of 10,000 locations.

As obviously a lot more complicated than changing some machines in a casino in Nevada that has 5,000 machines all under one roof. So, I think the way we are thinking about is we take all these factors into account. We feel the balance of this year, we should be kind of in a treading water state and then as we move forward in to 2014 we would begin to see reacceleration of growth for all the recent payment.

Steven Wieczynski – Stifel

Great, thanks for the color. Appreciate it.

Lorne Weil

Okay, everyone. Well, look thanks for joining this early in the morning. I won’t bother to reiterate yet again our thoughts on where we are in our evolution. But again, just to summarize we are as ebullient as we could possibly be. And I think if we get a few breaks by the time we have our next conference call, we will have a lot of, to put it mildly, very interesting things to talk about. And thanks for bearing with us in the meantime.


Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may not disconnect. Have a great day.

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