U.S.-based Scientific Games Corp on Friday announced Kevin M. Sheehan as the company’s new chief executive and president. Additionally, he will serve on the company’s board of directors.
Mr Sheehan will be replacing Gavin Isaacs, who will become vice chairman of the board of directors, the firm said.
Mr Sheehan joined Scientific Games from casino cruise operator Norwegian Cruise Line Holdings Ltd, where he served as CEO and president for seven years.
“Mr Sheehan and Mr Isaacs have assumed their new roles effective today [Friday] following yesterday’s approval by the board of directors,” Scientific Games said in a press release.
Scientific Games stock price was down 14.1 percent on Friday following the announcement.
“While the change was shocking, we believe most investors will have some level of familiarity with Mr Sheehan. That said, Mr Sheehan’s background will for sure leave questions for investors given his lack of experience in the gaming industry,” said Deutsche Bank Securities Inc in a note on Friday.
“Furthermore, gaming, especially the equipment sales side of the business, is a relationship business and we believe Mr Isaacs was influential to operations, even in his CEO role, to gaming product sales,” wrote analysts Carlo Santarelli and Danny Valoy.
Commenting on the leadership change, Mr Isaacs said: “Today we are one company with three strong businesses – gaming, lottery and interactive. Our integration is behind us and our business strategies are delivering solid results. With our momentum building, I’m moving from an operational leadership position to a more strategic role.”
He added: “This is the right time to grow our leadership team and have someone of Kevin’s talent, experience, and financial acumen take us to the next phase of growth and innovation”.
Scientific Games, originally a specialist in lottery equipment and management, in November 2014 acquired slot machine and floor management systems specialist Bally Technologies in a transaction valued at US$5.1 billion. The deal came approximately one year after Bally Technologies acquired Nevada-based table games equipment and slot machine supplier SHFL entertainment Inc in a US$1.3-billion transaction.
“We believe the appointment of Mr Sheehan marks a shift in the company’s focus from integration to deleveraging,” said John DeCree, an analyst at Union Gaming Securities LLC.
“While the CEO change caught the market off guard, we believe the arrival of Mr Sheehan is a positive given his proven experience and success with navigating challenging operating conditions and leveraged balance sheets,” added Mr DeCree.
Scientific Games on Friday said its net loss for the second quarter of 2016 nearly halved from the prior-year period, to US$51.7 million.
“This is an exciting time to join Scientific Games,” said Mr Sheehan. “Scientific Games offers an unrivalled comprehensive suite of products and services for our customers around the world and is well positioned to continue to grow,” he added.
Higher quarterly revenue
The casino equipment and lottery services firm on Friday reported a 5.5-percent year-on-year increase in second quarter revenue, to US$729.2 million. Such growth included an 11.3-percent increase in revenue from gaming machine sales, to US$154.4 million, the firm said in a filing to Nasdaq.
Scientific Games posted operating income of US$59.1 million in the quarter ending June 30, compared to an operating loss of US$0.1 million in the year-earlier period. The firm reported attributable earnings before interest, taxation, depreciation and amortisation (EBITDA) of US$279.7 million, above market consensus of US$276 million. It was a 5.2-percent increase year-on-year, “driven by higher revenue and a benefit from completed integration actions,” said the company.
“Across our global operations, we continue to manage costs and execute on our strategies to deliver consistent revenue growth. Our ongoing implementation of process improvements is generating operating efficiencies which, combined with fiscal discipline in our capital spending and a focus on improving our core working capital, is leading to higher cash flow and reducing our leverage,” said Michael Quartieri, Scientific Games chief financial officer, in a statement.
“Since closing on the Bally acquisition in 2014, our total debt has been reduced by more than US$250 million,” he added.
Total gaming revenue was US$441.9 million in the quarter to June 30, down by 1.1 percent from a year earlier. Revenue from gaming operations totalled US$186.0 million, a 2-percent decline from the prior-year period, the company said.
Scientific Games said the number of gaming machines shipped during the second quarter increased by 863 units, to a total of 7,668 new gaming machines. International shipments increased by 7 percent year-on-year to 2,990 units, including 125 units for new casino openings and expansions, said the firm.
Gaming systems revenue stood at US$59.5 million, compared to US$77.6 million in the year-ago quarter.
Total lottery revenue reached US$203.9 million, up by 7.2 percent from the prior-year period, “despite the unfavourable impact of US$6.6 million due to the expiration of the China Sports Lottery validation contract and US$1.2 million of unfavourable currency translation,” said Scientific Games.
Revenue from the interactive segment grew by 62 percent year-on-year to US$83.4 million, primarily due to a 68-percent increase in social gaming revenue.
“We look at the core traditional slot gaming businesses and the lottery business as relatively flattish, while the proportionally smaller technology businesses have greater growth prospects,” said analysts David Katz and Brian Davis, from Telsey Advisory Group LLC.
Scientific Games generated about US$15 million in free cash flow in the three months to June 30, “which was below expectations,” said Cameron McKnight of Wells Fargo Securities LLC in a note on Friday.
“In our view, Scientific Games is in blocking and tackling mode with debt reduction. Scientific Games has no upcoming maturities. In 2018, notes are due (US$250 million) and the revolver likely will need to be refinanced,” said Mr McKnight.
The company paid down US$80 million of debt in the quarter, with total debt standing at US$8.1 billion as of June 30. The firm reduced 2016 capital expenditure guidance to between US$260 million to US$280 million.
(Updated at 10.25pm, Aug 5)
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