Scientific Games Corporation 2019

Introduction to Scientific Games Corporation 2019

Scientific Games Corporation (SGC) is a world-leading slot machine manufacturer. As a U.S.-based company, it files annual financial reports with the U.S. Securities Exchange Commission (SEC) (https://www.sec.gov/) under stock ticker symbol SGMS.

With fascinating insights, SGC’s filed reports to the SEC are a treasure trove for slots players. I review these filed reports, required by federal law to be easy to read, each year for you. Together, we’ll learn about the current state of the world’s gaming industry.

This article has the following sections:

Introduction to Reviewing Scientific Games Corporation 2019
2019 Overall Risk Factors for SGC
Overview of Slots Manufacturer SGC
Gaming Business Segment
Lottery Business Segment
Social Business Segment
Digital Business Segment
Summary of Reviewing Scientific Games Corporation 2019

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2019 Calendar [Reviewing Scientific Games Corporation 2019]

2019 Overall Risk Factors for SGC

This year, SGC filed its Form 10-K annual financial report on February 28, 2019. Its contents cover the company’s fiscal year which, for SGC, is the 2018 calendar year. It’s 286 pages long, but the treasure we are looking for is not too hard to find.

You can find SGC’s annual financial report Form 10-K at two locations online:

Search SEC using their Fast Search tool using SGC’s stock ticker SGMS
Visit SGC’s Investors under the SEC Filings Tab

Federal law requires company officers to offer risk factors and forward-looking statements about their business. These are the best thoughts of gaming experts, freely available to all, regarding their overall corporate position within their gaming industry markets of interest.

Here we will learn the current state of the gaming industry wherever SGC does business. Since they’re a world leader in the gaming industry, this means the risk factors and forward-looking statements they describe are quite comprehensive.

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Forward-Looking Statements are how SGC lays out its expectations, plans, and strategies for the future. Their company plans are dependent upon risks and uncertainties in the world’s gaming industry. This is the logic behind their needing to be so clear regarding potential risk factors.

Most people who read these reports are financial investors, not necessarily slots players looking for advantage plays. Go figure. If you plan to invest in SGC, naturally you’ll want to perform your review of their annual report.

With that understanding in mind, let’s consider SGC’s thoughts for the future of their company along with the risks involved. I’ve consolidated risk factors into general topics, where each has lengthy descriptions provided in the financial report.

Risk topics include:

SGC operates in highly competitive industries in 4 business segments
Unfavorable U.S. and international economic conditions
Changes in the replacement cycle of gaming machines
Ownership changes and consolidation in the gaming industry
Gaming opponents attempting to curtail legalized gaming
Failure to succeed in ongoing research and development activities
Responsiveness to customer demand for creating appealing products
The adverse impact of strict government regulations (long section)
Legislative interpretation of sports wagering activities
Failing to maintain intellectual property protection efforts
Lack of a shift toward regulated online gaming despite expectations
Lack of capitalizing on a change toward regulated online gaming
Maintaining business relationships with key suppliers
Obtaining and renewing lottery contracts
Securing intellectual property and proprietary information
Security and integrity of SGC systems, products, and data privacy
Maintaining SGC’s new global enterprise resource planning system
Failure to maintain internal control of financial reporting systems
Disruptive natural events in locations where SGC operates
Inability to complete mergers and acquisitions
A proposed initial public offering of minor interest in Social gaming business
Restructuring costs for prior mergers and acquisitions
Complex revenue recognition standards for products and services
Periodic operating results due to seasonality
Business performance of suppliers and contract manufacturers
Compliance risks due to foreign operations
The uncertainty of Brexit
Substantive changes in the U.S. and international tax laws
Dependence on key employees
Potential violations of environmental laws
Litigation costs
Failing to meet contractual obligations
Liability for product defects or other product claims
Labor disputes
Level of company indebtedness
Maintaining company cash flow for operating activities
Decision-making influence of individual common stockholders

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For you and I as slots enthusiasts, what does all this mean? It means that being a slot machine manufacturer is a risky business. And, while SGC is working hard to keep us entertained, they may not succeed.

These risk factors may turn into reality at a gaming jurisdiction where you play slots. If so, you may be disappointed. But, perhaps you won’t be as disappointed if you know that these risks exist.

Further, some of these risk factors apply to the entire gaming industry. If they occur, they’ll most likely affect all slot machine manufacturers. In turn, such risks to these companies are also risks to our being as entertained as we’d like. I suggest we wish them well.

When compared to 2018’s financial report, there are several additional risks as well as one risk which is now missing. The missing risk is relevant to us slots players because it is about changing technology and the evolution of industry standards.

What does it mean that new technology and industry standards are no longer a risk? As these topics relate to slots, there have been a lot of changes since around 2012. These changes have centered around the emergence of relatively new casinos with central computer servers remotely controlling slot machines on the casino floor.

My best interpretation of this no longer reported risk being as a concern is that it’s over. Meaning, implementation of the new technology was successful. Further, also updated were the corresponding gaming industry standards. Consequently, in the last year, SGC removed the risk from their annual financial report to the SEC.

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The six newly reported risks included above are:

Security and integrity of SGC systems, products, and data privacy
Maintaining SGC’s new global enterprise resource planning system
Complex revenue recognition standards for products and services
Level of company indebtedness
Maintaining company cash flow for operating activities
Decision-making influence of individual common stockholders

Naturally, these are new risk areas SGC feels compelled to include this year. It seems reasonable that they’d add data privacy as a risk, given national concerns recently raised by Facebook and other privacy issues.

Further, SGC has some risk concerns regarding their new resource planning system. I didn’t even know they had one. Did you? By reviewing these financial reports, these are the sorts of things we can learn.

We can make what we will of the other business risks. Several company concerns seem to be implied, like high indebtedness and operating cash flow. Also, there are one or more company stockholders with enough influence that they are trying to influence company direction?

I wonder. Maybe I should buy some SGC stock to get in on that conversation, even if only from the sidelines. I’m not sure how much I’d be able to share publicly. Plus, I’m only interested in anything having to do with slots. It’s something to consider for next year’s Scientific Games Corporation 2020.

Risk, Loss, and Profit [Reviewing Scientific Games Corporation 2019]

Overview of Slots Manufacturer SGC

Scientific Games Corporation is incorporated in Delaware, as is typical for many other companies. That happened in 1984. In September 2017, SGC began the arduous process of changing their state of incorporation from Delaware to Nevada. This switch finalized in early 2018.

Their corporate headquarters are in Las Vegas, which makes sense given Nevada’s leadership role in the world’s gaming industry. Be near your market, yes? Amongst numerous smaller sites, SGC’s most extensive facilities supporting various segments of their company are in:

Las Vegas – Corporate, Digital, and Gaming
Chicago – Digital, Gaming, and Social
Georgia (the state, not the country) – Lottery
India – Digital, Gaming, Lottery, and Social

Their game development studios are in Las Vegas, Sydney in Australia, Manchester in England, and the cities of Bangalore, Chennai, and Pune in India. Most of the lottery research and development team is in Alpharetta, Georgia. Social gaming R&D personnel are in Cedar Falls in Iowa, Austin in Texas, Chattanooga in Tennessee, and Tel Aviv in Israel. Digital gaming R&D personnel are in Greece, India, Sweden, and the United Kingdom. Other R&D staff is in Reno as well as Vienna in Austria.

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As of the end of December 2018, Scientific Games Corporation employed ~9,700 persons worldwide, including 4,700 employees in the U.S. and ~5,000 employed internationally. Total SGC employees increased by 1,100 in the last year, with 1,000 of them added to their international locations.

Total assets were $7.718 billion, slightly down from last year’s $7.725 billion. SGC’s total assets are 53%, somewhat more than half when compared to International Gaming Technology PLC, another global leader in the gaming industry.

Last year, SGC’s total assets were 51% of IGT’s. That means they’ve undergone a 2% increase in market share. For billion-dollar companies, that’s a significant growth! Hopefully, we’ll learn more about why and how this growth is happening for SGC.

Here’s a clue. In the last year, Scientific Games Corporation has updated its branding by removing “interactive gaming” and replacing it with “social and digital gaming.” In this way, they have increased organizational structure from three to four business segments:

Gaming
Lottery
Social
Digital

They have spent between $180 million and $200 million per year over the last three years in research and development activities in these four business segments.

Make Things Happen Poster Board [Reviewing Scientific Games Corporation 2019]

Gaming Business Segment

Scientific Games Corporation rightly points out that the international gaming industry requires continuous and diverse development of new technologies, products, and game themes. To be successful, SGC needs to meet this need.

SGC’s gaming products are in all U.S. gaming jurisdictions. Meaning, they are in all U.S. states, territories, and a federal district that regulate gambling to allow their gaming devices. Further, they do business in 176 gaming jurisdictions outside of the U.S.

Growth in the gaming business segment occurs when new casinos open and existing casinos expand. Further, the replacement rate of slot machines by casino operators also drives gaming industry growth. In turn, both growth drivers are themselves impacted by any changes in the availability of player disposable incomes.

A significant portion of SGC’s gaming business benefits is from a contract with a U.K.-based business. This contract represents a substantial portion of SGC’s server-based gaming business.

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So, if you were wondering where those central computer servers come from, the servers that remotely change the odds of winning for slot machines in a casino, look no further. It’s with Ladbrokes Coral Group, a subsidiary of GVC Holdings PLC. I wonder if they have contracts with other slot manufacturers?

Scientific Games Corporation states they have eight primary competitors within the gaming business segment. They are:

Ainsworth Game Technology
Aristocrat Leisure Ltd.
Aruze Gaming America, Inc.
Everi Games, Inc.
International Game Technology PLC
Inspired Entertainment Inc. (SGC’s primary U.K. competitor)
Konami Digital Entertainment, Inc.
Novomatic Group of Companies and PlayAGS, Inc.

The casino management system market is also highly competitive. For this sub-market in the gaming industry, their primary competitors are only Aristocrat, IGT, and Konami.

A Row of Colorful Slot Machines [Reviewing Scientific Games Corporation 2019]

Lottery Business Segment

There are ~180 lotteries world-wide categorized as either draw or instant lottery games. Draw games involve picking a set of numbers which match those from a drawing held sometime later. Instant games involve scratching off a protective coating from a pre-printed ticket.

Numbers of U.S. gaming jurisdictions having each lottery game style are:

46 offer draw-style lottery games
44 offer instant-style lottery games

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Both the draw lottery and instant lottery markets are highly competitive including an ongoing price-based competition. Primary competitors for each lottery style include:

Draw lottery: IGT, Intralot S.A., and Tattersalls Group
Instant lottery: IGT and Pollard Banknote Limited

In the last year, SGC began offering instant-style lottery games at an additional 11 U.S. gaming jurisdictions. SGC’s lottery contracts with Florida, Pennsylvania, and Maryland all expire in 2019 unless renewed this year. Georgia’s agreement extends through 2025. SGC also has two lottery contracts with the U.K. and Italy.

A Convenience Store Gas Station [Reviewing Scientific Games Corporation 2019]

Social Business Segment

Scientific Games Corporation’s social business segment includes games online as well as on smart devices such as mobile phones and tablets. Social gaming is non-wagering gameplay. It is where players have the option to spend real money during gameplay, but any winnings are not real money. Instead, winnings are for in-game use only.

Last year, SGC did not yet have a social business segment. Instead, their so-called interactive business segment combined both online social gaming with real-money online games.

As I’d suggested in last year’s analysis of SGC, social and real-money online games are the separate business segments. Frankly, they are not the same activity or business. That SGC created social and digital out of their interactive business segment is a good idea.

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As I had explained, the same game played for real-money gets a different response from players if it is instead for fun. A slots business needs to understand that a popular social game isn’t necessarily popular when it’s for real-money gaming and vice versa.

Competition in the social gaming business industry is fierce. SGC competes with:

Similar offerings from other slots companies
Social gaming options from entertainment companies
Other forms of online entertainment such as
- Video gaming
- Social media
- Reading

Social Gaming Platforms [Reviewing Scientific Games Corporation 2019]

Digital Business Segment

In January 2018, SGC completed its acquisition of NYX which formed the basis of SGC’s digital business segment. This acquisition allows SGC a competitive offering allowing interactive casino operators to utilize the NYX distribution platform and random number generator services via SGC’s remote gaming servers.

A few months later, in mid-May, the U.S. Supreme Court made its decision to lift the federal ban on sports betting. This ruling opened a path forward for sports wagering in those states prepared to offer this new type of gaming.

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SGC believes itself to be well-positioned with supporting these states as well as to support its growth as more and more states approve sports wagering. Specifically, they feel they are ready for further deployment, as they call it, because of their:

Game content
Platform technology
Distribution capabilities

Wyoming Horse Racing [Reviewing Scientific Games Corporation 2019]

Summary of Scientific Games Corporation 2019

Scientific Games Corporation is in the business of providing slot machines, casino management software, lottery tickets, social games, and real-money online gambling solutions for casino operators.

In the last year, SGC has significantly grown in market share compared to its primary competitor, International Game Technology PLC. Further, they’ve split their interactive gaming division into social and digital gaming, in part to support online sports wagering.