Scientific Games Corporation 2020

Introduction to SGC

Scientific Games Corporation (SGC) is a multi-national company that manufacturers slot machines. As a primary and world-leading gaming manufacturer, SGC also provides gaming technology for casino operators, the lottery, sports betting, online gaming, and more.

SGC filed their annual 10-K financial report with the SEC on February 18, 2020. Because of the legal requirements for SEC reports to be honest and easy-to-read, reviewing their report annually is a treasure trove for slots players. Together, we’ll learn about the state of the world’s gaming industry in early 2020.

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Most people who read these reports are financial investors, not slots players looking for advantage plays which is the intent of this post. If you plan to invest in SGC, naturally you’ll want to perform your review of their annual and quarterly reports.

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Overall Risk Factors

Form 10-K annual financial reports filed with the SEC begin with describing risk factors for the industry segments where SGC does business. Included in this section are forward-looking statements by company officers, both required to be honest assessments.

These statements are not meant to be a profit forecast.

These are the best thoughts of gaming experts regarding their overall corporate position within the gaming industry. As Scientific Games Corporation is a world-leader beside International Game Technology PLC, we’ll learn the state of the gaming industry wherever SGC does business

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Risk factors are known issues which are having a negative impact on SGC. Factors include possible future risks and uncertainties in the portions of the world’s gaming industry where SGC does business. Even consolidated into general topics, there are 37 risk areas, far too many to fully mention here.

Forward-Looking Statements are how SGC lays out its expectations, plans, and strategies for the future. These company plans are dependent upon risks and uncertainties in the world’s gaming industry. I’ll focus on ten areas in which a slot enthusiast might be interested.

My selected Top 10 risk areas include:

1. Unfavorable U.S. and international economic conditions
2. Changes in the replacement cycle of gaming machines
3. Ownership changes and consolidation in the gaming industry
4. Gaming opponents attempting to curtail legalized gaming
5. Failure to succeed in ongoing research and development activities
6. Responsiveness to customer demand for creating appealing products
7. Failing to maintain intellectual property protection efforts
8. Obtaining and renewing lottery contracts
9. Security and integrity of SGC systems, products, and data privacy
10. The uncertainty of Brexit

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, in some ways it’s possible they might fail.

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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 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 general entertainment with playing slots. I suggest we wish SGC and its competitors well.

Overview

Scientific Games Corporation’s corporate headquarters are in Las Vegas, which makes sense given Nevada’s leadership role in the world’s gaming industry. Besides numerous smaller sites, SGC’s most extensive facilities supporting their business segments 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

As of the end of December 2018, Scientific Games Corporation employed ~9,800 persons worldwide, including ~4,700 employees in the U.S. and ~5,100 employed internationally. Total SGC employees increased by 100 in the last year, with all added to SGC’s international facilities.

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Total assets were $7.809 billion, slightly up from last year’s $7.718 billion. SGC’s total assets are 57%, 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 53% of IGT’s. That means they’ve undergone a 4% increase in market share, double last year’s increase in market share. For billion-dollar companies, that’s another significant growth!

Scientific Games Corporation has four business segments:

• Gaming
• Lottery
• SciPlay (formerly Social)
• Digital

Research and Development decreased by 7% in the last year, down $14 million to $188 million spent in 2019.

Gaming

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. states, territories, and a federal district regulating Class III gaming which allow their gaming devices. Further, they do business in 181 international gaming jurisdictions.

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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These are central servers, computers that remotely change the odds of winning for slot machines in a casino. Ladbrokes Coral Group, a subsidiary of GVC Holdings PLC, provides central servers for SGC.

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

1. Ainsworth Game Technology
2. Aristocrat Leisure Ltd.
3. Aruze Gaming America Inc.
4. Multimedia Games Inc. (a subsidiary of EVERI Inc.)
5. International Game Technology PLC
6. Inspired Entertainment Inc. (SGC’s primary U.K. competitor)
7. Konami Digital Entertainment, Inc.
8. Novomatic Group of Companies

The casino management system market is also highly competitive. For this sub-market in the gaming industry, their primary competitors are:

• Aristocrat
• International Game Technology PLC
• Konami Digital Entertainment, Inc.

Lottery

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.

Forty-eight U.S. gaming jurisdictions offer SGC-provided instant-style lottery games or draw-style lottery games. Many international gaming jurisdictions have both styles but how many they have can vary widely.

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

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In the last year, Scientific Games Corporation began offering instant-style lottery games at an additional eleven U.S. gaming jurisdictions.

Only SGC’s lottery contracts with Pennsylvania expire in 2021 unless renewed this year. Three renewed state contracts extend through 2025, 2027, or 2028. SGC has a lottery contract with Italy to 2028 but failed to renew its contract with the U.K.

SciPlay (formerly Social)

Scientific Games Corporation’s SciPlay business segment, formerly called Social but remained SciPlay after the minority interest merger in 2018, includes online games as well as on mobile smart devices. Nearly all revenue is through the sale of virtual, in-game currency.

SciPlay is non-wagering gameplay where players can make purchases during gameplay, but any winnings are not real money. Instead, winnings are for in-game use only.

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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, and reading

Digital

Scientific Games Corporation’s digital business segment provides technology solutions for software design, development, licensing, maintenance, and support services. Interactive casino solutions provide full gaming process solutions as well as player management services.

Otherwise, SGC’s digital segment provides sports betting services to operate sports books including pari-mutuel betting and more. These betting services also include player management services.

Also, this digital segment is where software technology solutions exist within SGC for online gaming for real-money gambling.

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.

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Specifically, they feel they are ready for further deployment, as they call it, because of their:

• Game content
• Platform technology
• Distribution capabilities

Summary of SGC

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.

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