Global Gaming Technology

Transcription

17 August 2015
Global Gaming Technology
Initiating Coverage
Executive Summary - (Pg 3)
Global Lottery Industry- (Pg 7)
Gaming Hardware- (Pg 18)
Class II Revival - (Pg 25)
Video Lottery Terminals - (Pg 26)
Gaming Operations- (Pg 29)
Electronic Table Games- (Pg 33)
Interactive Gaming - (Pg 37)
IGT - Buy - (Pg 50)
SGMS - Hold - (Pg 58)
Expectations Rightsized, Now Worthy of a LookInitiating Coverage of IGT & SGMS
On the back of a much anticipated wave of consolidation, we are initiating coverage of
the gaming technology sector. 2015 and 2016 will serve as integration periods for these
transactions, as manufacturers work to extract efficiency from their respective mergers. The
industry backdrop remains mixed, though continued stability within the lottery segment and
better regional gaming trends do offer some level of optimism. We are assuming coverage
of International Game Technology, PLC with a Buy rating and $24 PT and Scientific Games
with a Hold rating and $14 PT.
The global lottery business represents a platform of stability. We believe the traditionally
stable lottery market will persist, with inflation + type growth rates. We do expect some nearterm uncertainty to cash flow from volatility in currency and a handful of key lottery contracts
over the next two years. Overall the lottery business represents the primary cornerstone of
the gaming technology segment.
The Interactive sector represents the smallest segment for gaming manufacturers, but
also the area with the most upside. We remain optimistic about the interactive segment,
but do see M&A as the primary driver of growth in the segment, limiting the ability of some
participants. While small, we view interactive as another important cornerstone of growth for
the gaming manufacturing segment.
Gaming Hardware, remains more competitive than ever. While IGT and SGMS represent
the largest of the group, competition persists from those looking to close the gap. Today,
replacement demand remains lackluster while new opening demand is volatile and well off
prior peaks. We believe that both IGT and SGMS will struggle to materially expand ship share
beyond current levels, despite their recent mergers.
The Gaming Operations segment has faced multi year headwinds that appear to be
stabilizing. IGT faced the most acute challenges in this environment. Improving regional
gaming trends should help bolster yield performance. We see IGT’s gaming operations
starting to stabilize, and believe SGMS will struggle to grow its footprint, as a result.
Analysts
Christopher Jones
Tel: 702-691-3212
[email protected]
John DeCree
Tel: 702-691-3213
[email protected]
(IGT, Buy, $24) Our positive outlook and $24 price target on IGT is predicated on a compelling
execution story, backed up by a free cash flow story driven by a commanding position in the
lottery business. The company is on track to achieve $230MM in merger synergies with 2/3
expected in 2015 and the benefits to be felt in 2016. These synergies will support strong
flow through and add to a free cash flow story with a dividend yielding 5.4% today. Add to
this a commanding interactive business that continues to grow. Further, encouraging trends
are emerging from IGT’s gaming hardware business along with early indications suggest
stabilization within its gaming operations business.
(SGMS, Hold, $14) The recent consolidation gives the combined SGMS's a broad set
of complementary products and services to drive efficiency. Management has guided to
$235MM of cost synergies related to its most recent acquisition. While soft targets like cost
synergies have been accelerated, deleveraging has been far slower to commence. We are
confident that the SGMS team can achieve the identified cost synergies. However, our Neutral
view is predicated on our view that thus far, a challenging operating environment has offset
these benefits; and believe things are moving along slowly for SGMS from the perspective
of deleveraging. We look to the call option on the company’s bank debt and lack confidence
SGMS will be in a position to refinance this debt by year-end owing to softer than expected
free cash flow. In the end we are left with a show me story in a race to refinance.
*Please see analyst certification and required disclosures starting on page 67 of this report.
© 2015 Union Gaming Group. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic or
mechanical, including photocopying or by any information storage and retrieval system, without permission in writing from Union Gaming Group.
August 17, 2015
Gaming Technology - North America
Contents
Contents ........................................................................................................2
Executive Summary........................................................................................3
Global Lottery Industry ..................................................................................7
Gaming Hardware ........................................................................................ 18
Class II Revival—Oklahoma .......................................................................... 25
Video Lottery Terminals ............................................................................... 26
Gaming Operations ...................................................................................... 29
Electronic Table Games ................................................................................ 33
Interactive Gaming ...................................................................................... 37
International Game Technology ................................................................... 50
Scientific Games Corp................................................................................... 58
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August 17, 2015
Executive Summary
We are initiating research coverage of the gaming equipment, technology, and lottery
sector and are assuming coverage of International Game Technology, PLC (IGT, Buy, TP:
$24) and Scientific Games Corporation (SGMS, Hold, $14).
Industry Executive Summary
The Gaming Technology sector has finally seen the wave of consolidation investors have
been waiting on for years. 2015 and 2016 will serve as integration periods as both
manufacturers work through merger synergies and look to extract efficiencies from their
respective transactions. The industry backdrop remains mixed, with the lottery and
interactive businesses providing pillars of support while the traditional gaming
technology segments remain more challenging, though better regional gaming trends do
offer some level of optimism.
The global lottery business represents a platform of stability for an otherwise unstable
gaming operations and hardware business. We believe that the traditionally stable
lottery market will persist with inflation-plus type growth rates. Only in the face of the
most severe economic corrections has the lottery segment experienced negative
growth. We therefore remain optimistic for the lottery segment overall. We do,
however, expect to see some near-term uncertainty to cash flow from volatility in
currency. In addition, a handful of key lottery contracts will create some uncertainty
within the lottery business. These include IGT and its Italian Lotto contract along with
increasing competitive pressure for upcoming instant ticket contracts, including
Massachusetts, Ohio and Michigan. Longer term, we see the convergence of the lottery
business and the gaming business to potentially change the face of the gaming industry.
Overall, the lottery business represents the primary cornerstone of the gaming
manufacturing segment today and represents a level of stability to cash flow not seen
in the gaming manufacturing segment for years. Please see page seven for an in-depth
review of the global lottery business.
The Interactive sector represents the smallest segment for gaming manufacturers,
while also representing the area for the most upside in terms of topline growth. It
also represents the space with the most competition globally, primarily on the social
media front. The expansion of Asia and other emerging economies are shifting the
interactive segment to mobile, a trend that gaming manufacturers are struggling with
given their level of heightened regulation relative to more traditional mobile game
developers. The recent explosion of Fantasy Sports in North America magnifies the
challenge this segment faces in the interactive sector. However, we believe the
regulated channel will eventually emerge as the winner here. Real money online
gaming has been a disappointment to traditional gaming technology manufacturers,
though we maintain that over time, we will see more US states legalize online gaming.
We remain especially optimistic about the interactive segment, but do see M&A as the
primary driver of growth in the segment, limiting the ability of some participants.
While small, we view interactive as another important cornerstone of growth for the
gaming manufacturing segment today. Please see page 37 for an in-depth review of
the Interactive segment as it pertains to the gaming manufacturers.
Gaming Hardware, despite the recent spate of M&A, remains more competitive than
ever, with little to suggest this will change soon. Back at the last peak in gaming
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August 17, 2015
manufacturing sales around 2007, there was one dominant player (IGT) and a handful of
smaller players. Today, there are at least five manufacturers that command at least five
percent or more of the casino floor share. While IGT and SGMS represent the largest of
the bunch, considerable competition persists from the likes of Aristocrat and Konami
looking to close the gap, while Aruze, Ainsworth and others look for their moment to
shine as well. Today, replacement demand remains lackluster and new opening
demand is volatile and well off prior peak levels. We expect unit shipments to be
especially volatile by manufacturer, as innovation and bundling drive demand and
operators have little reason to support the growth of the major manufacturers. We
believe that short of a technological innovation, gone are the days of disproportionate
floor shares driven by IP. We believe that both IGT and SGMS will struggle to materially
expand ship share beyond current levels, despite their recent mergers. We are neutral
to negative on the gaming hardware segment, as we believe recent mergers did little
if anything to change the increasingly competitive nature of the market. Please see
page 18 for an in-depth review of the gaming hardware business.
Gaming Operations: The gaming operations segment has faced challenging headwinds,
as casino operators have been converting portions of their leased and daily fee games to
for sale machines in an effort to retain more of the economics. In addition, the space
has seen considerable movement in terms of talent, primarily impacting IGT and
Aristocrat, but other manufacturers as well. One could make the argument that the
recent spate of mergers has actually helped fuel the volatility in gaming operations, as
talent moves around the field. Several competitors also drove the challenges in the
business, as manufacturers started offering more content in 80/20 revenue share
programs and lower daily fees. Finally, there is evidence to suggest that operators have
allowed floor share devoted to gaming operations to reach its lowest levels in years. The
one positive is that improving regional gaming trends should help bolster yield
performance, but we view the space as challenged, perhaps permanently. We see IGT’s
gaming operations starting to stabilize, benefiting from the inclusion of Spielo titles and
improving market conditions. We believe SGMS will struggle to materially grow its
footprint, as the primary share donor in the space is finally showing signs of recovery.
We are neutral on the gaming operations segment. Please see page 29 for an in-depth
review of gaming operations business.
International Gaming Technology - Investment Case Summary
We are initiating coverage of International Gaming Technology (IGT) with a Buy rating
and a $24 price target.
We view IGT as an execution story, backed up by a strong free cash flow profile. Unlike
SGMS, IGT does not face a heavy debt burden. IGT’s challenges are related largely to
operational execution, mainly righting several wrongs on the traditional gaming front.
As such, the company is on track to achieve $230MM in merger synergies with twothirds expected in 2015 and the benefits to be felt in 2016. The important part is that
these synergies will be achieved without highly disruptive headcount reductions in
customer facing positions. These synergies will support strong earnings flow-through
and only add to the free cash flow story with the annualized dividend yielding 5.4%
today, supported by a dominant position in the system side of global lottery business.
Add to this a commanding interactive business that continues to grow and provide IGT
access to the large and growing mobile and interactive segment detailed in this report.
With this is the foundation of the story, we see additional building blocks to support our
more optimistic view. Encouraging trends within IGT’s gaming hardware business, as
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August 17, 2015
two new cabinets, the Crystal Dual and the S3000, are beginning to gain traction. There
are some early indications that IGT is seeing some stabilization within its gaming
operations business. Collectively, these two items represent the most challenging part
of the IGT story, but also the area that could potentially drive the most upside. The new
leaders of IGT have already started to address the human capital issue that has plagued
the legacy IGT in recent years. The change, while filling gaping holes in management is
also changing the culture, which over the last several years, had been to lead from the
top, exclusively. Providing some level of divisional and regional autonomy will go a long
way to reversing the talent drain at IGT. Chatter on the street suggests that IGT could
announce some more high profile additions sooner than later. Please see page 50 for
our full investment thesis on IGT.
Scientific Games - Investment Case Summary
We are initiating coverage of Scientific Games Corp. (SGMS) with a Hold rating and a
$14 price target.
The recent consolidation of WMS, Bally, and SHFL under the SGMS umbrella gives the
combined company a broad set of complementary products and services to market and
a considerable opportunity to drive efficiency across the supply line. Management has
guided to $235MM of cost synergies related to its most recent acquisition (of Bally)
while also suggesting that some synergies remain from previous acquisitions. With the
release of its 2Q15 earnings, the company announced that it had pulled forward
expectations for its ability to achieve synergies. Although we are confident that the
SGMS team can achieve the identified cost synergies, we believe a challenging operating
environment will push out implementation or offset the benefits in the face of slower
demand on the traditional gaming front.
SGMS recently reported 2Q15 earnings, which sent the company’s shares down 15%.
Although this made for a more attractive entry point, we are not convinced the
company is out of the woods yet. We believe things are moving along slowly for SGMS
from the perspective of shareholders and, more importantly, for bondholders looking
for a quick move in deleveraging. We look to the call option on the company’s bank debt
and see investors worried that SGMS won’t be in a position to refinance this debt by
year-end owing to softer than expected free cash flow earlier in the year. While soft
targets like cost synergies have been accelerated, deleveraging has been slower to
commence in the face of softer performance by gaming operations, softness in the for
sale segment of WMS, and question marks around the commencement of video lottery
operations in Greece. The instant ticket business and interactive performance remain
bright spots, but these are offset by other challenges. In the end we are left with a
show me story in a race to refinance the companies considerable leverage position. Will
2H15 performance be enough to give the company the lift it needs to hit the refi
market?
Leverage is our primary concern out of the gate. On a 2015 consolidated pro forma
basis, we estimate SGMS’s total leverage (excluding EBITDA from JVs) at roughly 8.6x.
Despite the high debt leverage, we peg interest coverage above 1.5x, which we expect
to improve as the company hits its synergy targets. Please see page 58 for our full
investment thesis on SGMS.
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August 17, 2015
Industry Valuation Trends
Given the recent consolidation and major transactions in the gaming technology,
valuation discovery has proven difficult, at least on a relative basis. Furthermore,
traditional gaming technology investors prefer the P/E ratio for their relative valuation;
however, the metric is less insightful given the complexity of mergers, integrations and
balance sheets. For SGMS, the transaction leverage will likely keep the company at a
net loss for the foreseeable future. While IGT’s earnings are in the black, management
indicated the accounting adjustments related to the transaction and change in reporting
standards will create volatility in comparable earnings figures and therefore guided to
2015 EBITDA. Given the comparability issues, we will primarily speak to our EBITDA
estimates and use the EV/EBITDA multiple for comparative valuation across the
industry.
On average the sector is trading at 9x 2016 EBITDA. The US-listed manufacturers are all
trading at a relative discount to the internationally-listed names. However, the US
companies carry a larger debt loads than their international peers. Currently, SGMS is
trading at 8.5x 2016 EBITDA while IGT is around the 7x mark.
Figure 1. Comparative Valuation
Company
Ticker
08/17/15
Current
Price
52 Week
Low
High
YTD
%∆
Market
Cap
Enterprise
Value
Stock
Rating
Price
Target
Adjusted EBITDA
2014A
2015E
2016E
EV/ EBITDA
2014A 2015E 2016E
Net Debt/EBITDA
2014A 2015E 2016E
GAMING TECHNOLOGY
International Game Technology
IGT
$18.69
$16.98
$25.35
(16.2%)
$3,712
$12,145
Buy
$24
$2,025
$1,602
$1,753
6.0x
7.6x
6.9x
4.2x
5.3x
4.8x
SGMS
$12.00
$7.25
$17.12
(5.7%)
$1,099
$9,358
Hold
$14
$519
$991
$1,097
18.0x
9.4x
8.5x
16.1x
8.4x
7.5x
GCA
$4.96
$4.58
$8.53
(30.6%)
$327
$1,335
Not Rated
NA
$80
$203
$222
16.8x
6.6x
6.0x
13.8x
5.3x
4.7x
Amaya Gaming Group Inc.
AYA-TSX
$29.54
$22.07
$39.25
3.5%
$3,962
$8,965
Not Rated
NA
$309
$625
$771
29.0x
14.3x
11.6x
6.9x
3.4x
2.1x
Ainsworth Game Technology Limited
AGI-ASX
$2.89
$2.03
$3.79
22.5%
$931
$873
Not Rated
NA
$89
$76
$94
9.8x
11.5x
9.3x
(0.8x)
(1.0x)
(0.9x)
Scientific Games Corp
Global Cash Access Holdings
Aristocrat Leisure
ALL-ASX
$8.84
$5.23
$8.85
34.8%
$5,603
$7,083
Not Rated
NA
$209
$505
$582
33.9x
14.0x
12.2x
(0.8x)
2.2x
1.6x
Konami Corp
9766-JPY
$2,537.00
$1,900
$2,690
14.3%
$351,649
$302,384
Not Rated
NA
$26,132
$37,520
$37,033
11.6x
8.1x
8.2x
-
(1.2x)
(1.5x)
17.9x
10.2x
9.0x
6.6x
3.2x
2.6x
Sector Average
Source: Union Gaming Research, FactSet Research Systems.
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August 17, 2015
Global Lottery Industry
The Lottery: A Mature, Stable Business
The global lottery industry (excluding VLTs) is a mature $284B business spanning more
than 170 countries. In absolute dollars, the United States is the largest lottery market in
the world, with $66B of sales representing 23% of total global sales, though China is
closely behind, with $56B of sales representing 19.7% of the global total. Although
lotteries operate in more than 170 countries around the globe, we can see how
concentrated the business is with the US and China representing more than 40% of
global sales and the top 10 lottery markets constituting 78% of total 2014 sales.
According to the World Lottery Association (WLA), lotteries globally serve many
purposes, with 41.1% of proceeds going to state and government treasuries, 28%
directly funding education, 20.8% going to humanitarian causes, and the balance
assisting sports, social, and cultural activities. Given the vast global reliance on lottery
sales, we expect the lottery business to remain an extraordinarily stable business
(certainly relative to the gaming technology and equipment segment) and that it will
remain tightly focused on its key markets.
Figure 2. 2014 Global Lottery Sales, by Region
(in U.S. $millions)
Africa
Australasia
Asia, Middle East
Europe
Central, South America, Caribbean
North America
TOTAL
% of total
Lotto
495
4,297
46,626
45,628
5,255
14,743
117,043
41.2%
Numbers
2
11
5,211
679
933
10,185
17,021
6.0%
Keno
23
107
601
6,888
106
3,862
11,587
4.1%
Other
117
13
6,088
7,163
18
926
14,324
5.0%
Toto
69
7
14,438
10,268
109
502
25,392
8.9%
Draw
9
65
6,837
10,801
747
1,208
19,668
6.9%
Instant/
Pulltab
151
507
8,349
27,699
147
42,440
79,293
27.9%
Total
Sales
867
5,007
88,149
109,126
7,315
73,864
284,328
100.0%
Source: Union Gaming Research, La Fleur’s 2014 World Lottery Almanac.
The global lottery industry grew from $187.1B in 2004 to $284.3B in 2014, representing
a compound annual growth rate (CAGR) of 4.3% over the past ten years. Most recently,
global lottery sales grew 0.1% in 2014. In the past 10 years, lottery sales have declined
only once, evidencing the stability of the business. US lottery sales have grown at a
CAGR of 3.8% since 2004, including a gain of 3.3% annual gain in 2014. We continue to
expect global lottery sales to grow in line with or slightly above inflation, in line with its
historical trend. As we think about future growth of the lottery business, we do see a
few catalysts, including some untapped markets and the penetration of online and
social media channels, particularly in the US, though the timing of these catalysts remain
uncertain.
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August 17, 2015
Figure 3. Global Lottery Sales (USD Billion)
$300.0
Figure 4. Global Lottery Sales YoY % Change
50.0%
Total Sales (US$ Billion)
YoY % ∆
40.0%
$250.0
30.0%
$200.0
20.0%
$150.0
10.0%
$100.0
0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(10.0%)
$50.0
(20.0%)
$0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Global Lottery
US Lottery (excl. VLT)
(30.0%)
Global Lottery
Global Lottery (excl. US)
Source: Union Gaming Research, La Fleur’s.
US Lottery (excl. VLT)
Global Lottery (excl. US)
Source: Union Gaming Research, La Fleur’s.
Lottery Products and Offerings
LOTTO/SPIEL
The largest lottery segment, or game, by total sales is Lotto/Spiel, at $117B in 2014 and
accounting for about 41% of total global lottery sales. It is unsurprising that Lotto is the
most common and universal offering in the lottery industry. This segment includes
games such as Mega Millions and Power Ball in North America. The Spiel lottery offering
is a second wager or follow-up wager most commonly offered in Europe. In the US,
Lotto sales totaled $10.9B in 2014, accounting for 16.4% of the $66B domestic lottery
industry. So although Lotto is the most common game globally, it is less common in the
US, where instant tickets are the most popular.
INSTANT TICKET/PULL TABS
Instant tickets are the next largest category behind Lotto, representing 27.9% of global
lottery sales in 2014, though disproportionally weighted toward the US, which
accounted for 51% of the global instant ticket market with over $40.4B of sales in 2014.
Collectively, Lotto and Instant Ticket sales represent just shy of 70% of the global lottery
business. Given the concentration of these two games across global lottery markets,
they are the primary focus of major lottery providers and operators.
OTHER GAMES: NUMBERS, KENO, AND SPORTS LOTTERY
The remaining types of lottery offerings represent between 4% and 9% of total global
sales, including sports lottery (9%)—lottery tickets tied to the outcome of sporting
events—the one section of the lottery business in which the US does not participate
given its sport betting laws. Closely behind are draw games (6.9%), which are largely
specific to Spain and Japan, followed by numbers games, which represent 6% of total
global lottery sales and are a largely US and Chinese game that offers a fixed payout on
a set of numbers. Keno represents about 4% of global lottery sales.
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August 17, 2015
Lottery Competitors and Participants
The lottery industry today is largely an oligopoly between IGT and SGMS. The instant
ticket segment is more of a three-horse race among IGT, SGMS, and Pollard Banknote
Limited, and it is a more local business, heavily concentrated in North America and a few
other key markets. In contrast, the lottery systems business has a dominant leader, IGT,
followed by several smaller providers. Other players in the lottery business tend to focus
on more locally geographic business and include providers such as Intralot SA (INLOTATH, Not Rated) and Novomatic AG (Private, Not Rated), which is also a more widelyknown VLT provider.
Figure 5. Major Publicly Traded Lottery Companies
Company
Ticker
08/17/15
Current
Price
52 Week
Low
High
YTD
%∆
Market
Cap
Enterprise
Value
Adjusted EBITDA
2014A
2015E
2016E
EV/ EBITDA
2014A 2015E 2016E
LOTTERY OPERATORS
IGT
$18.69
$16.98
$25.35
(16.2%)
$3,712
$12,145
$2,025
$1,602
$1,753
6.0x
7.6x
6.9x
SGMS
$12.00
$7.25
$17.12
0.5%
$1,099
$9,426
$519
$991
$1,097
18.2x
9.5x
8.6x
PBL-TST
$7.48
$3.82
$8.50
39.9%
$181
$253
$26
$26
$32
9.8x
9.6x
8.0x
INLOT-ATH
$1.58
$0.99
$1.89
45.0%
$241
$738
$175
$188
$208
4.2x
3.9x
3.6x
Greek Organisation of Football Prognostics
OPAP-ATH
SA OPAP
$7.90
$5.65
$12.55
(11.2%)
$2,434
$1,868
$346
$389
$463
5.4x
4.8x
4.0x
Tatts Group Limited
$3.98
$3.02
$4.20
15.0%
$5,797
$6,321
$498
$527
$556
12.7x
12.0x
11.4x
9.4x
7.9x
7.1x
Scientific Games Corp
Pollard Banknote Limited
INTRALOT SA
TTS-AU
Sector Average
Source: Union Gaming Research, FactSet Research Systems.
INSTANT TICKET COMPETITIVE LANDSCAPE
There are three major players in the instant ticket business: SGMS, IGT, and Pollard. A
fourth competitor, Intralot, has recently pushed itself into the fold with its entry into the
US market via Ohio, though its efforts have been largely unsuccessful so far. As a result,
we still view the instant ticket business as a three-player game. Since there are only a
few distinct competitors in the instant ticket business, it is not uncommon for a group of
providers to work together in a joint venture (such as Northstar in New Jersey) or
through cooperative service programs. These partnerships are sometimes preferred by
lottery organizations for diversification of supplier, though they also benefit the lottery
providers/operators by sharing upfront costs.
The US and Canada make up over 53% of the global instant ticket market, with the top
10 markets making up more than 90% of all instant ticket sales globally. Since there is
much smaller proliferation of meaningful contracts outside of North America, the real
opportunity for instant tickets is in North America. US instant ticket sales totaled $38.7B
in 2014, having grown at a CAGR of 5.4% over the past 10 years, including 4.3% growth
in 2014.
In the US, five states (California, Florida, Massachusetts, New York and Texas) each
generate over $3B of instant ticket sales, comprising over 44% of total US instant ticket
sales, notable contract renewals in the instant ticket business are coming up soon in
Massachusetts ($3.38B) and Ohio ($1.42B). Although we do not expect major market
share disruptions from these renewals, we are aware that Pollard Banknote has made
considerable technology investments in its printing capabilities and is currently seeking
to expand its production and distribution. So we do not foresee total contract losses for
any of the three incumbents, but we do see the potential for market share or capacity
shifts among the three main competitors.
9
August 17, 2015
LOTTERY SYSTEMS COMPETITIVE LANDSCAPE
The lottery systems contract business is less concentrated than the instant ticket
industry. Although the top 10 global lottery markets still account for a healthy 78% of
the Lotto industry, the business is far more geographically dispersed. In addition, more
options and game types rely on systems contracts beyond Lotto, including numbers (a
predominantly US phenomenon); totalizer (sports lottery), which largely excludes the
US; and traditional draw-based lotteries, which includes Spain’s Navidad game, the
largest individual lottery event in the world.
There is a greater competition in these markets at the surface, with IGT in a
commanding position thanks to its contracts with several of the largest lotteries
globally. From there, SGMS and Intralot are at odds over the second and third spots
among systems providers, while smaller players—Morpho (SAFRAN), KEBA, and
EDITEC—battle it out for smaller markets.
The good news for incumbent operators is that changing lottery systems providers is no
small task, with very significant upfront costs both in procuring the lottery and in
replacing or adding new terminals. As such, a provider seeking to go after a major
systems contract would need either a strong balance sheet or an external capital
partner with deep pockets.
The most notable upcoming contract renewal in the systems business is the Italian
lottery in 2016, the largest single lotto contract in the world. The figure below lists the
top 10 Lottery markets in the world by 2014 sales.
Figure 6. Top 10 Lottery Markets in 2014
United States
China
Italy
France
Spain
United Kingdon
Germany
Japan
Korea
Canada
Top 10 Total
As % of Global Total
Lotto
10,865
36,748
9,507
4,003
5,232
7,237
7,272
2,656
2,775
3,492
89,787
76.7%
Numbers
9,900
3,543
0
0
4
0
0
694
0
171
14,312
84.1%
Keno
3,441
142
0
2,247
11
0
171
0
0
421
6,433
55.5%
Other
677
0
3,280
102
156
0
730
0
65
249
5,259
36.7%
Toto
0
9,991
2,185
2,405
501
0
266
0
4,447
456
20,252
79.8%
Draw
739
0
47
0
8,364
0
455
4,679
112
123
14,519
73.8%
Instant/
Pulltab
40,437
5,582
11,435
7,043
327
3,866
374
444
135
1,988
71,631
90.3%
Total Sales
66,059
56,006
26,454
15,800
14,595
11,103
9,269
8,473
7,534
6,901
222,192
78.1%
% of Global
Lottery
23.2%
19.7%
9.3%
5.6%
5.1%
3.9%
3.3%
3.0%
2.6%
2.4%
78.1%
10
August 17, 2015
Major Lottery Markets
The lottery may appear to be a truly global business, but it is actually heavily
consolidated. As we noted earlier, the top 10 lottery markets account for almost 80% of
total worldwide lottery sales. Since lottery operators are generally compensated
according to the level of wagering, given their size and popularity, these 10 markets
tend to attract the most attention from lottery providers. Although smaller markets
might represent important potential for future growth, existing key markets are
immensely important for an operator’s ongoing cash flow and overall profitability. Thus,
maintaining existing contracts is generally more of a focus than acquiring new contracts,
with the exception of major markets that could privatize.
ITALIAN LOTTERIES
In 2014, IGT (formerly GTECH) generated services revenue of €423MM from the Italian
Lotto and €370MM from instant ticket sales in Italy, for a total of €793MM of Italianlottery-related revenues (excluding VLTs). IGT has historically achieved a 30% operating
margin and a ~42% EBITDA margin on its Italian business, which includes sports betting,
VLTs, etc. If we apply these margin rates just to the Italian lottery business (excluding
VLTs), we estimate that IGT generates operating income in the range of €238MM and
EBITDA of €333MM from the Italian lottery. This suggests that the Italian lottery
business accounts for about 40% of legacy GTECH operating income and 33% of its
EBITDA. We suspect that the percentage contribution of EBITDA is higher given the
significant amortization associated with the upfront Italian lottery payment and that the
operating margin would be lower.
Figure 7. Italian Instant Ticket Wagers and YoY Growth
€ 12.0
Figure 8. Italian Lotto and 10eLotto Wagers and YoY Growth
Wagers (billions)
120.0%
100.0%
€ 10.0
€ 8.0
Wagers (billions)
35.0%
30.0%
€ 7.0
25.0%
€ 6.0
80.0%
€ 8.0
20.0%
€ 5.0
15.0%
60.0%
€ 6.0
40.0%
€ 4.0
10.0%
€ 3.0
5.0%
€ 4.0
20.0%
€ 2.0
€ 2.0
0.0%
€ 1.0
€ 0.0
(20.0%)
€ 0.0
0.0%
(5.0%)
2007
2008
2009
2010
Wagers
2011
2012
2013
(10.0%)
(15.0%)
2007
2014
2008
2009
2010
Wagers
YoY %
Source: Union Gaming Research, company documents.
2011
2012
2013
2014
YoY %
NORTH AMERICA LOTTERIES
North America is the third-largest lottery market in the world. Though most lotteries
outside the US are held at the federal level, the US lottery is held at the state level.
Seven of the top 20 lotteries in the world are actually US states.
Unlike other global lottery markets, the most important segment of the US lottery is the
instant ticket/pull tab category, which typically represents roughly 60% of total lottery
sales in the US, though these levels do vary. For instance, instant ticket sales represent
an average of 70.8% of weekly lottery sales in Massachusetts and 60% of total lottery
sales in Connecticut. The rest of lottery sales come predominantly from Lotto, mostly
11
August 17, 2015
large intrastate offerings, such as PowerBall and Mega Millions, at roughly 16%,
followed by numbers draw, which accounts for roughly 15% of total US lottery sales.
Figure 9. Top 10 State Lottery Markets by Segment Type 2014
State
1 New York
2 Florida
3 California
4 Massachusetts
5 Texas
6 Georgia
7 Pennsylvania
8 New Jersey
9 Illinois
10 Ohio
TOP 10 TOTAL
Total US
Top 10 % of Total
Instant
Ticket
$3,677
3,417
3,289
3,383
3,280
2,445
2,456
1,532
1,757
1,425
$26,661
$38,740
68.8%
3 Digit
$874
340
136
323
259
482
330
437
258
339
$3,777
$5,819
64.9%
4 Digit
$831
258
28
0
88
213
239
268
202
186
$2,313
$3,665
63.1%
Lotto Total Pull Tab
$1,247
$0
1,326
0
1,375
0
324
1
699
0
378
0
723
0
670
0
557
0
374
0
$7,673
$1
$12,114
$106
63.3%
0.7%
Keno
$684
0
188
814
0
193
0
0
0
298
$2,177
$3,354
64.9%
Other
$2
27
19
9
57
312
52
1
16
122
$618
$1,048
59.0%
Total
$7,314
5,368
5,035
4,854
4,385
4,022
3,800
2,908
2,792
2,743
$43,220
$64,847
66.6%
Lottery Spend
Per Capita
$370
270
130
720
163
398
297
325
217
237
$313
$214
145.8%
In the US, the overall lottery business (excluding VLTs) has been growing at a rate of 3%4% per year, with the five- and 10-year CAGRs at 4.1% and 3.8%, respectively. Instant
ticket sales continue to grow at a pace of inflation plus, with respective five- and 10-year
CAGRs of 5.0% and 5.4%, making it a remarkably stable business. Lottery and numbers
games are growing more slowly, with at five- and 10-year CAGRs of 2.8% and 1.7%.
In the past 20 years, the overall US lottery market has contracted only in 1998 and 2009,
with both declines attributable to broad-based economic recessions. The stability of the
instant ticket business has kept overall growth rates in line with a rate of inflation or just
ahead of it, whereas other segments of the lottery are typically more volatile.
Figure 10. US Lottery Sales by Segment (Excl. VLTs)
$70
Figure 11. US Lottery Sales and Growth Rates
YoY % ∆
Sales US$ B
2010
2011
2012
2013
2014
Lottery Sales (US$ B)
$60
8.0%
$50
$25
$40
$23
$22
$23
$23
$23
$24
$26
$26
6.0%
$23
$21
4.0%
$30
2.0%
$20
$10
2009
10.0%
$23
$26
$28
$30
$30
$30
$31
$32
$35
$37
$39
0.0%
$0
-2.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Instant Ticket
Traditional Lottery
Total Lottery YoY %
Source: Union Gaming Research, company documents, La Fleur’s.
Instant Tickets
$30.3
$30.7
$32.1
$35.3
$37.1
$38.7
Traditional Lottery
$22.7
$23.5
$23.4
$25.0
$25.7
$26.1
Total
$53.1
$54.2
$55.5
$60.3
$62.8
$64.8
YoY % Growth
Instant Tickets
(0.5%)
1.1%
4.7%
9.9%
5.2%
4.3%
Traditional Lottery
(0.5%)
3.5%
(0.5%)
7.0%
2.4%
1.8%
Total
(0.5%)
2.1%
2.4%
8.7%
4.1%
3.3%
Rolling 5-Year CAGR
Instant Tickets
Traditional Lottery
Total
5.8%
0.7%
3.4%
3.4%
1.9%
2.7%
2.5%
0.1%
1.5%
3.5%
2.0%
2.9%
4.0%
2.3%
3.3%
5.0%
2.8%
4.1%
We see two primary issues beyond larger economic pressures affecting the overall US
lottery business in the future—important license renewals and new market expansions.
12
August 17, 2015
US CONCESSION RENEWALS
In the US instant ticket business, the dominant service provider is SGMS, while the rest
of the market is split between IGT and Pollard Banknote. Although we do not expect IGT
to make any aggressive moves in the space, management at Pollard Banknote recently
invested heavily in expanded printing systems, with management citing an effort to
expand the company’s market share in late 2015 and beyond. It isn’t uncommon for
lottery jurisdictions to have contracts with all three of the major providers. As such,
come renewal time, it is less about what new entrants might do and more about what
your existing competition will do. We believe pressure in the printed ticket business will
come more from Pollard and less from IGT over the next year. Of course, Intralot
remains a wildcard, as does the potential for consortium bids for larger concessions.
Within the US systems contracts, the business has a clear leader in IGT/GTECH. Here
again, the most recent new market entry as the establishment of Wyoming as a lottery
market, awarded to Intralot. Given SGMS’s considerable capital constraints postmerger, we would be surprised to see SGMS take any aggressive moves, bidding on
long-term lottery system contracts, given the necessary upfront cost associated with
these businesses. The same cannot be said for Intralot, despite some its recent missteps
in some of its markets, the company appears more focused on growth. We do wonder
however, how hard IGT or SGMS fought for Wyoming, holding back for larger, more
lucrative markets.
New market expansions/privatizations: The newest US lottery market is Wyoming,
having gone live in August of 2014. If one discounts Utah as a market that will never
have a lottery, there are actually only a few states remaining in the US with private
lottery potential. The most notable is Alabama, which has flirted with lottery in the past
and is currently considering expanding gaming to racetracks in the state. We believe
that once you sin a little, it’s easier to sin a lot. If we see gaming in Alabama, lottery is
close behind. Other states with the option include Hawaii and Alaska, though timing and
likelihood are far less obvious.
13
August 17, 2015
Figure 12. US Lottery Instant Ticket Contracts by State
Est. Contract
Value ($M)
State
Instant Printer
Est. Contract
Value ($M)
Contract Start
Contract End
Renewal Options
Minnesota
Scientific Games
$2.1M (FY14)
May-10
May-16
Exercised
2 (1 yr.)
GTECH
$0.3M (FY14)
Dec-11
May-15
Exercised
Jan-18
2 (1 yr.)
Pollard Banknote
$2.2M (FY14)
May-10
May-16
Scientific Games
$5.6M/yr.
Jul-11
Jun-15
Exercised
6 (1 yr.)
Pollard Banknote
$2.3M/yr.
Apr-11
Jun-15
6 (1 yr.)
$0.1M
Dec-11
Jun-15
6 (1 yr.)
$0.9M/yr.
Aug-08
Aug-15
Exercised
4 (1 yr.)
State
Instant Printer
Contract Start
Contract End
Renewal Options
Arizona
GTECH (CSP)
Jan-10
Jan-16
4 (1 yr.)
Scientific Games
Jan-10
Jan-18
GTECH
Jan-10
Pollard Banknote
Jan-10
Jan-18
2 (1 yr.)
$6.5M/yr.
Aug-09
Aug-16
3 (1 yr.)
Scientific Games
$100M
Dec-13
Nov-19
1 (3 yrs.), 3 (1 yr.)
Pollard Banknote
$50M
Dec-13
Nov-19
1 (3 yrs.), 3 (1 yr.)
Montana
Scientific Games
Nebraska
GTECH (CSP)
Arkansas
Scientific Games (CSP)
California
GTECH
Colorado
Scientific Games
GTECH
Pollard Banknote
Connecticut
Nov-19
1 (3 yrs.), 3 (1 yr.)
Mar-11
Jun-17
Exercised
$1.5M
Apr-11
Jun-17
Exercised
$1.55M
New Hampshire
Scientific Games
Jun-17
Exercised
New Jersey
Northstar New Jersey
Aug-12
Aug-17
2 (1 yr.)
New Mexico
GTECH
GTECH
Aug-12
Aug-17
2 (1 yr.)
Pollard Banknote
Aug-12
Aug-17
2 (1 yr.)
$2.8M/yr.
Jan-12
Jan-18
3 (1 yr.)
$0.98M
Dec-14
Sep-15
4
D.C.
Scientific Games
GTECH
New York
3
Jun-17
Jul-11
Jun-17
4 (1 yr.)
$1.6M/yr.
Jul-12
Jun-15
1 (2 yrs.)
Oct-13
Jun-29
Open
$0.98M (FY14)
Mar-10
Mar-18
Exercised
Scientific Games
$0.145M (FY14)
Mar-10
Mar-18
Exercised
Scientific Games
$98.2M
Aug-11
Aug-18
None
Pollard Banknote
$63.7M
Aug-11
Aug-18
None
GTECH
$20.5M
Aug-11
Aug-18
None
North Carolina
GTECH 4
Jan-06
Jan-17
Ohio
INTRALOT (CSP)
$13M
Jul-09
Jun-15
None
1 (2 yrs.)
Exercised
Scientific Games
$24M
Jul-07
Jun-15
Exercised
1 (2 yrs.)
Pollard Banknote
$7M
Jul-07
Jun-15
Exercised
Aug-13
Aug-23
Annual renewal
$1.5M (FY14)
Mar-10
Jun-17
Exercised
$1.03M (FY14)
Jun-10
Jun-17
Exercised
$0.07M (FY14)
Jul-10
Jun-17
Exercised
$24.8M (FY14)
Aug-07
Jun-17
Exercised
Jul-09
Jun-16
Exercised
$0.98M
Dec-14
Sep-15
4
$45M/yr.
Sep-08
Sep-18
Exercised
GTECH
$0.5M/yr.
Oct-08
Sep-18
Pollard Banknote
$0.5M/yr.
Feb-09
Sep-16
$22M
Sep-03
Sep-18
Exercised
Jan-06
Dec-15
None
GTECH
$1.445M
Mar-13
Mar-15
3 (2 yrs.)
Pollard Banknote
Pollard Banknote
$0.25M
May-15
May-17
2 (2 yrs.)
Scientific Games
$26.7M/yr.
Jul-11
Jan-21
None
Pennsylvania
Jul-11
$1.5M
$18.7M (FY14)
Pollard Banknote
Idaho
GTECH
Mar-11
Georgia
Dec-13
GTECH
Scientific Games
Delaware
Florida
$25M
$17.6M
Missouri
Oklahoma
Scientific Games (CSP)5
Oregon
GTECH
Illinois
Scientific Games (CSP)1
Indiana
GTECH2
$5.7M (FY14)
Apr-13
Mar-18
6 (30-day)
Puerto Rico
Pollard Banknote2
$0.5M (FY14)
Apr-13
Mar-18
None
Rhode Island
Scientific Games
$3.6M
Jul-13
Jun-16
5 (1 yr.)
Scientific Games 2
$2.9M (FY14)
Apr-13
Oct-18
6 months
South Carolina
SciGames (CSP)
$6.6M/yr.
Oct-13
Sep-18
1 (2 yrs.)
Scientific Games
Jan-13
Dec-15
3 (1 yr.)
South Dakota
Scientific Games
$0.6M (FY13)
Aug-10
Aug-16
Exercised
GTECH
Jan-13
Dec-15
3 (1 yr.)
Tennessee
Jan-15
Dec-22
7 (1 yr.)
Pollard Banknote
Jan-13
Dec-15
3 (1 yr.)
Texas
Scientific Games
$10.3M/yr.
Sep-12
Aug-18
2 (3 yrs.)
Iowa
Kansas
Kentucky
Pollard Banknote
$2.4M (FY14)
Oct-08
Sep-15
1 (1 yr.)
Pollard Banknote
$4.6M/yr.
Sep-12
Aug-18
2 (3 yrs.)
GTECH
$0.98M (FY14)
Aug-08
Sep-15
1 (1 yr.)
GTECH
$4.6M/yr.
Sep-12
Aug-18
2 (3 yrs.)
Scientific Games
$0.35M (FY14)
Aug-08
Sep-15
1 (1 yr.)
Vermont
Pollard Banknote
$1.2M/yr.
Jan-14
Jan-17
2 (1 yr.)
Scientific Games
$6.7M (FY13)
Jun-11
Jun-18
8 (1 yr.)
Virginia
GTECH (CSP)
$39M
Oct-14
Oct-17
None
GTECH
$0.2M (FY13)
Jun-11
Jun-18
8 (1 yr.)
Pollard Banknote
$4M/yr.
Oct-14
Jun-20
5 (1 yr.)
GTECH
$2.8M/yr.
Oct-14
Jun-20
5 (1 yr.)
Scientific Games
$2.8M/yr.
Oct-14
Oct-19
5 (1 yr.)
Scientific Games
$30M-$31M
Mar-14
Mar-20
4 (1 yr.)
$5-$5.3M
Mar-14
Mar-20
4 (1 yr.)
$2.5-$2.8M
Mar-14
Mar-20
4 (1 yr.)
$4.5M
Feb-12
Feb-15
2 (1 yr.)
Pollard Banknote
Dec-11
Dec-16
10 yrs.
$18M
Dec-10
Oct-20
None
$5.86M/yr.
Apr-14
Jun-20
Open
Pollard Banknote
$20.7M
Sep-13
Sep-17
1 (3 yrs.)
GTECH
Scientific Games
$2.9M
Sep-13
Aug-20
Exercised
Pollard Banknote
GTECH
$2.9M
Sep-13
Aug-20
Exercised
Scientific Games
$13M (FY14)
Oct-12
Oct-15
2 (1 yr.)
Pollard Banknote
$3.4M (FY14)
Oct-12
Oct-15
GTECH
$0.2M (FY14)
Oct-12
Oct-15
$189M
Jan-09
Dec-16
None
Louisiana
Scientific Games
Maine
Maryland
Massachusetts
Michigan
Pollard Banknote
Washington
West Virginia
GTECH
Wisconsin
Scientific Games
Nov-09
Oct-15
Exercised
2 (1 yr.)
GTECH
Nov-09
Oct-15
Exercised
2 (1 yr.)
Pollard Banknote
Nov-09
Oct-15
Exercised
CSP=Cooperative Services Program
3
Northstar New Jersey has contracted separately with GTECH, Pollard Banknote and Scientific Games.
1
Subcontractor through private management agreement with Northstar Lottery Group
4
GTECH, Pollard Banknote and Scientific Games are subcontractors.
Supplier agreement with GTECH Indiana
5
Combined instant and online costs with contract/Contract began 8/9/13 and ends 8/8/2023 (original plus nine renewals)
2
14
August 17, 2015
Figure 13. US Lotteries’ Systems Contracts
Syystem Vendor
GTECH
Est. Contract
Value ($M)
$8.7M (FY14)
California
GTECH
$545M-$1.07B
1.36% sales ($4B); 1.2% (over $4B)
Oct-03
Oct-19
Colorado
GTECH
1.5249% of non-TVM sales + 1.2276% (TVM sales)
Nov-14
Jun-21
2 (2 yrs.)
Florida
GTECH
1.0699% (system sales)
Jan-05
Sep-15
Exercised
Georgia
GTECH
$74.9M
$28M/yr./(sys)
$5M (ITVMs)
$600M-$625M
0.99%-1.15% (net sales)
Sep-03
Sep-18
Illinois 1
Indiana
GTECH
$57M (FY13)
1.78% of total sales
Jul-11
Jan-21
None
GTECH
$10.6M (FY14)
1.83% of total sales (SG's fee)
Apr-13
Jun-28
10 yrs.
None
State
Arizona
Vendor Fee
3.7% of system sales
Contract Contract
Start
End
Aug-06
Aug-16
Renewal
Options
Exercised
Scientific Games
$8.6M (FY14)
Apr-13
Mar-16
Kansas
GTECH
$5.6M (FY14)
Jul-08
Jun-18
None
Kentucky
GTECH
$7.1M (FY13)
1.5% (system) & 0.438% (instant) sales
Jun-11
Jun-18
8 (1 yr.)
Massachusetts
GTECH
$66.8M
Purchase
Michigan
GTECH
$426M
1.18%-1.2757% of total sales
Jan-09
Jan-17
4 (1 yr.)
Minnesota
GTECH
$9.4M/yr.
1.8% (instant & system sales)
Jun-02
Feb-16
Exercised
Missouri
GTECH
$120M
Jul-05
Oct-15
7 yrs.
GTECH
$112M
4.2222% (total net draw sales)
Oct-15
Jun-22
1 (3 yrs.)
4 (1 yr.)
Nebraska
GTECH
$8.3M/yr.
4.5% (system) + 8.0651% (instant)
Jul-11
Jun-17
Northstar NJ
$27.2M (FY14)
1.05% (net total sales)
Oct-13
Jun-28
3 yrs.
GTECH
$624.7M
0.8195% of total net sales
Sep-09
Aug-17
3 yrs.
North Carolina
GTECH
$27.3M (FY13)
Jan-06
Jan-17
None
Oregon
GTECH
$6.6M (FY14)
1.6999% of system & instant sales
Nov-08
Sep-20
1-10 yrs.
Rhode Island
GTECH
South Dakota
GTECH
Tennessee
GTECH
$130M
Texas
GTECH
$728.9M
Virginia
GTECH
Washington
GTECH
West Virginia
Wisconsin
New Jersey 1
New York
1
5% of system & instant sales
Jul-03
Jun-23
None
Aug-09
Aug-19
Exercised
Apr-15
Apr-22
7 yrs.
Dec-10
Aug-20
3 (2 yrs.)
$150M
Oct-07
Oct-17
Exercised
$103M
2.075%-2.435% of system sales
Jul-06
Jun-16
Exercised
GTECH
$40M
Jul-08
Jun-15
1 (1 yr.)
GTECH
$103M
2.54% (combined total net sales)
Jun-04
Jun-15
Exercised
$2.1M (FY13)
Subcontract through PMA with Northstar New Jersey
Arkansas
INTRALOT
$11M/yr.
2.45% of sales
Aug-09
Aug-16
3 (1 yr.)
D.C.
INTRALOT
$38M
Nov-10
Sep-19
5 yrs.
Idaho
INTRALOT
$4.7M (FY14)
1.98% of sales
Feb-07
Oct-17
3 yrs.
Louisiana
INTRALOT
$69M
Jul-10
Jun-20
2 (1 yr.)
Montana
INTRALOT
$3.3M/yr.
5.8% of instant & system sales
Mar-06
Mar-16
Exercised
N. Hampshire
INTRALOT
$50M
Jul-10
Jun-20
Exercised
New Mexico
INTRALOT
$2.3M (FY13)
Nov-08
Nov-16
Exercised
Ohio
INTRALOT
$47.3M (2 yrs.)
0.9999% (system); 0.320% (instant)
Jul-09
Jun-15
3 (2 yrs.)
S. Carolina
INTRALOT
$67.8M
Fixed fee
Nov-08
Nov-18
None
Vermont
INTRALOT
$3M (FY14)
Jun-10
Jun-16
2 (2 yrs.)
Wyoming
INTRALOT
$1.6M/yr.
11.89% (total sales)
Apr-14
Aug-19
3 (5 yrs.)
Exercised
Connecticut
Scientific Games
0.844% of sales
May-08
May-18
Delaware
Scientific Games
$125M
5.371% (online) + 1% (VLT net)
Feb-03
Feb-18
None
Iowa
Scientific Games
$6.2M/yr.
Jul-11
Jul-18
3 (1 yr.)
Maine
Scientific Games
$2.2M/yr.
3.5% of online sales
Apr-14
Jun-20
Open
Maryland
Scientific Games
$194M
Oct-05
Jun-16
Exercised
North Dakota
Scientific Games
$33M
10.473% of sales + CIP
Jul-14
Jun-22
2 yrs.
Oklahoma2
Pennsylvania
Scientific Games
$7.7M (FY14)
Aug-13
Aug-23
Annual
Scientific Games
$38.7M (FY14)
0.835% of system & instant sales
Jan-09
Dec-18
Exercised
2
Combined instant and online costs with contract/Contract began 8/9/13 and ends 8/8/2023 (original plus 9 renewals)
15
August 17, 2015
EUROPEAN GROWTH MARKETS
Lotto accounts for 60% of total European lottery sales and is experiencing a flat to
slightly negative revenue trend. The proliferation of gaming options in Europe makes for
some volatility in lotto sales. As a result, there is less opportunity to expand the market,
with growth opportunities contained mostly to share shifts and the opening of a few
new key markets. From a market perspective, the most important items for the
European lottery outlook are:





Renewals of Italian lottery contracts
Turkey
Rollout of VLTs in Greece
Competition
Asia/Middle East
Renewals of Italian Lottery Contracts. The single most important item for IGT today is
the renewal of its Lotto contract in Italy in 2016, followed by its instant ticket contract
renewal in 2019. As we discussed briefly earlier, the Italian Lotto and instant ticket
business is a significant contributor to IGT’s overall earnings and cash flow. Fortunately,
IGT, the incumbent lottery provider in major markets, has been very successful in
renewing its contracts. However, political pressures, new competition, and recent
industry consolidation leave investors less than certain. The risk on major lottery
contract renewals is the potential price tag. The privatization of the Turkish lottery in
2014 is one of the most recent examples of how a lottery concession bidding war can
cause major heartburn. In July 2014, Net Sans-Hitay, a consortium of lottery operators,
including SGMS, won the 10-year lottery concession with a leading bid of US$2.76B.
However, the partnership was forced to abandon the concession in April 2015 after
being unable to obtain financing due to the devaluation of the Lira. The second highest
bidder, a consortium of investors in a JV called ERG-Ahlatci, are poised to take over
concession, which originally bid US$2.75B, just below Net Sans-Hitary’s original winning
bid. The botched license award this year come after a previous failed attempt in 2009 to
privatize the Turkish lottery after two bidders failed to meet the US$1.6B minimum bid.
Both IGT and SGMS reiterated their intention to maintain capital discipline, and the risk
in Italy is that an aggressive third bidder could push the price beyond the required
return by IGT, either forcing the operator to over pay or back out. While Turkey
accepted the highest licensing fee, as an incumbent operator in Italy, IGT does have a
distinct advantage in the renewal process with proven success.
 The initial Italian Lottery RFP process has been delayed, as there have been a
handful of last minute adjustments made to the overall parameters of the bid. Initial
expectations had been for the RFP to be issued in July, with bids submitted in early
fall. That has not played out, but expectations are still for the process to be
completed by year end, 2016, as the Italian government is likely anxious to receive
its initial Euro350mm payment by year end 2015.
Rollout of VLTs in Greece. Although we haven’t discussed the VLT business in any depth
yet, the opportunity in Greece has been a key growth prospect this year for lottery
providers and slot manufacturers. However, a recent tiff with the government over
hardball negotiating tactics has left the rollout of VLTs uncertain and on hold. Apparent
last-minute changes to the regulations had been rebuffed by Greece’s exclusive lottery
operator, Greek Organisation of Football Prognostics S.A. (OPAP-ATH, Not Rated) earlier
this month, with the lottery operator halting the rollout of 16,500 VLTs until better
terms are met. The last minute changes to regulations included lower jackpots,
16
August 17, 2015
implemented daily loss limits and reduced the permissible time on machine. OPAP
officials claimed the more restrictive regulations made the VLT opportunity no longer
viable. IGT and SGMS were contracted to provide 5,500 and 5,000 VLTs, respectively in
the first deployment of 16,500. A second deployment of ~18,000 units is expected to be
awarded by an ongoing tender process. OPAP halting the deployment is likely a hardball tactic aimed forcing regulators, who are in dire need of tax dollars, to roll back the
new restrictive regulations. Ultimately, we expect a compromise will be met; however,
the ongoing political and financial crisis in Greece does not give us any further comfort
that the VLT opportunity remains viable.
Competition. Given Europe’s heavier exposure to lottery systems, competition there is
greater than that in the US. IGT (via GTECH) still dominates the market, and SGMS and
Intralot battle it out over second and third places.
Asia/Middle East. Lottery is a relatively new phenomenon in Asia, but it is even more
concentrated there, with 93% of the $88B of annual lotter sales in Asia/Middle East
coming from China and Japan. The Asian lottery business remains an area of growth,
given continuing economic expansion in the region.
ONLINE LOTTERY SALES (Covered in More Detail in Interactive Section)
Reversal of the wire act pushes the lottery online. Illinois and New York State both sued
for the right to sell lottery tickets online. We believe this was just the beginning as state
lottery officials eye the frictionless distribution of lottery sales versus the existing
network of terminals in state markets.
Lottery operators look to the online and mobile markets as the last pillar of growth. As a
general rule, US-based lottery operators are considerably behind their non-US
counterparts when it comes to the distribution of lottery products. Today, in only a
handful of states are lottery sales done online, and their contribution to revenue is
statistically insignificant. In contrast, outside the US, online revenues can equal up to
60% of revenues.
17
August 17, 2015
Gaming Hardware
We believe that North America is a roughly 900,000-slot market. We don’t believe the
overall installed base will grow, as we expect casino expansion to cannibalize existing
markets, as it has for several years. For example, we believe a casino opening in
northern New Jersey will result in a reduction of floor capacity in Atlantic City and
Pennsylvania—and potentially New York as well. We don’t foresee much relief in this
scenario and believe that the downside risks exceed the upside potential. Not only is
new supply cannibalizing existing slot floors, but non-gaming amenities are also
cannibalizing the installed base as casino operators and customers alike focus more on
non-casino entertainment. Further, the advent of more mobile gaming options will only
accelerate the decline in the number of slot floors as another channel of gaming content
distribution becomes more popular.
In 2014, North American gaming machine shipments totaled roughly 69,000 units, down
about 40,000 units (42%) from 2013. The drop in unit volume resulted from a slowdown
in openings, the maturity of the Illinois VLT market, and the completion of major VLT
replacement cycles, namely in Canada.
New Opening Pipeline Is Minimal Over Next 12 Months. Looking at the rest of 2015
and into 2016, we see little reason to get optimistic about the pace of new unit sales as
there is little to suggest that better days are ahead. First, the new casino pipeline is
minimal in 2015 and early 2016. Although the current pipeline indicates some casino
openings in late 2016, including those in New York, we suspect that some projects could
be pushed into 2017 as construction delays and opening timelines are often pushed
back. For example, the Lago Resort & Casino was originally slated to open at the end of
2015, but an environmental suit has stopped site work, pushing the project into 2016
and potentially beyond. The Philadelphia Live project, which is planned for a 2017
opening, could also be delayed pending an appeals court ruling in November over the
project’s casino license.
Figure 14. North America Casino Pipeline
Figure 15. North America New Unit Forecast
US Casino Pipeline
Hollywood Plainridge Park
Market
Massachusetts
Opening
6/24/2015
Slots
1,250
Wild Rose Casino - Jefferson
Harrah's Cherokee Valley River Casino
Nambe Falls Casino
Scarlett Pearl
Iowa
North Carolina
New Mexico
Mississippi
8/1/2015
9/1/2015
11/1/2015
12/31/2015
525
1,200
180
1,350
16,000
Lago Resort & Casino
Desert Diamond West Valley Casino Resort
Hollywood Jamul Indian Village
Kansas Crossing Hotel & Casino
New York
Arizona
California
Kansas
Early-2016
Early-2016
Mid-2016
Mid-2016
2,000
1,000
1,700
625
12,000
Nassau and Suffolk OTBs (VLTs)
MGM Grand National Harbor
Rivers Casino & Resort at Mohawk Harbor
New York
Maryland
New York
Mid-2016
Late-2016
Late-2016
2,000
3,600
1,150
8,000
Montreign Resort Casino
2
Margaritaville Oklahoma
Live! Hotel & Casino Philadelphia 3
Wynn Everett
New York
Oklahoma
Pennsylvania
Massachusetts
Late-2016
Late-2016
Late-2017
2018
2,150
750
2,000
3,000
4,000
MGM Grand Springfield
Resorts World Las Vegas
Crown Las Vegas
TOTAL
Massachusetts
Nevada
Nevada
2018
2018
2018
3,000
3,500
2,500
33,480
1
1
2
3
New Slot Demand
14,000
10,000
14,975
6,000
2,000
12,000
4,505
2,000
0
2015
2016
2017
2018
Construction on Lago Resort suspended in July for environmental/site issues
Margaritaville is expansion of River Spirit Casino
Live! Philadelphia construction pending November ruling on licensing
18
August 17, 2015
VLT Replacement Cycle Nearing an End. The replacement cycle for VLTs is mixed, with
Oregon having run through most of its program and little expectation for expanded VLT
replacement, though speculation about some Canadian provinces persists. Demand will
probably need to come from international markets, where we look to the eventual rollout of VLTs in Greece and potential new markets opening. We know some states are
currently considering expanded gaming, and proposals for VLTs in bars and taverns have
been floating around the Pennsylvania legislature for some time now, though it is
unclear if any of these markets would gain traction anytime soon.
Slot Demand Remains Weak. The most concerning issue is that of the overall level of
play on gaming machine hardware. Simply put, customers are playing less and less on
traditional slot machines, especially in markets that offer alternative entertainment,
such as table games, night clubs, and other non-gaming amenities. The end result is that
there is less incentive for operators to replace aging slot machines. Nowhere is this
more evident than in Las Vegas, where the installed base of slot machines is 15% below
its peak, even though market visitation has surpassed prior peaks. Annual slot handle is
off about 22% from the prior peak on the Las Vegas Strip, representing a CAGR of (3.0%)
for 2006-2014; the installed base has declined at a CAGR of 2.0% over the same period.
Figure 16. Las Vegas Strip Installed Base
52,000
5.0%
Slot Machines
2.5%
52,346
54,000
Figure 17. Las Vegas Strip Slot Handle
2.5%
$50.0
$50.6
0.0%
0.0%
$45.7
$40.0
$39.6
(2.5%)
48,699
(5.0%)
46,363
46,000
44,932
(7.5%)
44,000
44,533
49,343
49,574
50,001
49,890
5.0%
Slot Handle (US$ B)
$50.3
50,000
48,000
$60.0
42,000
$38.7
$39.3
$39.0
$38.5
$39.3
$30.0
(5.0%)
(7.5%)
$20.0
(10.0%)
(10.0%)
$10.0
(12.5%)
(12.5%)
40,000
(15.0%)
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Union Gaming Research, Nevada Gaming Control Board.
(2.5%)
$0.0
(15.0%)
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Union Gaming Research, Nevada Gaming Control Board.
Although the number of slot machines appears to have recently stabilized, it has taken
years to reach this point. In markets such as Atlantic City, it’s easy to point to
competitive incursion from nearby jurisdictions, generally lower visitation, and casino
closures for lack of slot demand. However, in Las Vegas, the environment is different,
with growing visitation and some modest openings (The Cromwell, SLS, etc.).
Non-Gaming Amenities Cannibalizing Slot Floors. Gaming equipment manufacturers
and industry pundits suggest that Las Vegas operators have driven down slot demand by
focusing on non-gaming customers and that this trend has begun to spread to more US
regional markets. Our frequent conversations with regional property managers often
suggest that their capex allocations and wish list items are for new F&B outlets (meeting
and retail spaces) and more hotel rooms. Very few, if any, operators discuss the need
for more gaming machines.
19
August 17, 2015
Scale Remains Important for Gaming Equipment. When it comes to selling slot
machines, growing from 1% per annum to 5% is easier than growing from 5% per annum
to 10%, and going from 10% to 20% is impossible without protection of intellectual
property. Barriers to entry to the for-sale gaming hardware segment are getting lower,
as the hardware becomes increasingly standardized PC motherboards, 3x LCD screens,
graphics cards, and third-party TITO (ticket in/ticket out) and bill validators. History tells
us that developing a handful of for-sale games that play above house average is
considerably easier than creating and maintaining a portfolio of games that perform at
or above house average. As a result, operators have the incentive to allow a bank or two
of smaller operators on their floors, as it promotes the diversity of their floors,
especially when they perform. The recent spate of gaming technology mergers affirms
this dynamic, including those of Multimedia Games, WMS, and, to a lesser extent,
Bally. All were once smaller manufacturers that rose to attain mid-teens market
shares at the expense of larger manufacturers, mainly IGT and Aristocrat.
Skill-Based Gaming. In Nevada, regulators approved a foray into exploring technology
behind skill-based gaming and slot machines. Although it is too early to guesstimate the
potential impact or how a skill-based slot machine would operate, some industry
professionals hypothesize (or hope) that this innovation will reinvigorate the slot floor.
The notion of skill-based gaming is the industry’s latest response to the structurally
declining popularity of traditional slot machine games with a generational shift owing to
the aging of the core slot customer and the emergence of a younger demographic that is
more interested in table games, night clubs, social gaming, and other forms of
entertainment.
Skill-based gaming plays into the younger generation, which grew up on video games.
Increasing similarities between slot machines and classic video games will, in all
likelihood, only further broaden the appeal of the casino floor to younger customers.
The push by Nevada comes after New Jersey approved regulations authorizing skillbased gaming in February. One of the first skill-based casino elements we have seen was
a free-throw basketball competition during March Madness at the Borgata. Although
New Jersey has authorized skill-based gaming, Nevada is focused on developing the
technology and innovation to maximize the casino floor presence.
Initial concepts of how skill-based slots would work provide theory behind a dual
approach, using a slot game with video-game-like components, namely in the bonusing
sequence. Preliminary math would set a base rate payout for the slot (e.g., 88%-90%)
and would allow the player’s skill to dictate the payout ratio to as high as 98% for the
best performers. Conceptually, this would leave operators with a median hold rate of
somewhere between 5% and 6%, similar to or slightly below average slot hold rates in
the US today. The lower hold rate (or higher return to player) would have the economic
impact of keeping players on the game longer, so the time on machine would increase
and could require slot floor managers to up the size of slot counts to accommodate
more players staying longer on each machine. If the concept is successful, the benefits
could be great, including greater time on machine, higher slot handle, and appealing to
a younger demographic—all of which would stimulate demand for technology from
manufacturers.
Major slot manufacturers have been relatively quiet about what they might have in their
pipelines to meet this potential new category of skill-based slot machines, but several
smaller technology companies are hard at work. We expect some of these smaller
20
August 17, 2015
companies that are focused solely on skill-based game development and innovation to
be primary targets for major equipment manufacturers as the idea advances.
At this point, outside of technological innovation, the only catalyst for acceleration in
new unit sales will be new casino supply or operators upgrading their floors. We see the
possibility of a floor upgrade tied to improvements in casino performance on the slot
floor, which has been elusive thus far. Many markets seem to be thriving with expanded
table volumes as younger players seem to gravitate to these games over slot games.
Core Slot Customer. Although it’s fairly widely known that the core slot customer is a
female baby boomer, customer segmentation goes beyond basic demographics. From a
slot manufacturer’s perspective, the top 5% of slot customers account for nearly 50% of
total slot handle in the US. Furthermore, the top 20% of customers account for more
than 75% of domestic slot handle. This creates a scenario where manufacturers are
focused primarily on meeting the demands of a small percentage of slot customers.
However, time and time again, we have seen new games and new titles miss the mark
with consumers. An extremely challenging balancing act is at play—one that requires
servicing your top 5%-20% of customers while also creating content aimed at gaining
new, loyal customers. And it seems to be a nearly impossible battle. However, skillbased games could be a catalyst that broadens the customer set.
Figure 18. North America LTM Ship Share Trends
50.0%
Figure 19. Current North America Ship Share LTM as of 4Q14
Ainsworth,
4.3%
NA Ship Share (LTM)
45.0%
Multimedia
Games, 4.6%
40.0%
Bally
35.0%
Bally, 20.7%
30.0%
Konami, 13.0%
25.0%
WMS
IGT
Aristocrat
20.0%
WMS, 13.6%
Aristocrat,
14.4%
15.0%
Konami
Ainsworth
10.0%
Multimedia Games
5.0%
1Q13
2Q13
Bally
3Q13
WMS
4Q13
IGT
1Q14
Aristocrat
2Q14
3Q14
Konami
(Excludes Spielo, but includes Ainsworth and GCA, not shown on chart)
4Q14
IGT, 29.5%
Source: Union Gaming Research, company documents. (Excludes Spielo)
Increasingly Competitive Gaming Hardware Cycles. Like cars, gaming hardware goes
through product cycles. These cycles tend to have a profound impact on hardware sales,
assuming they are not hampered by limited amounts of game content or technical
problems with hardware. The cycle typically begins when awareness about a pending
new platform rises. New orders for the older platform tend to drop off as casino
operators delay replacing machines until the new platform is available. Manufacturers
will sometimes respond with incentives for old hardware to keep sales volume up until
the new product is ready, recognizing that they can often afford the discounts as the
production line is fully depreciated and manufacturing efficiencies are at their peak. The
manufacturer will launch the first iteration of the new product line, which must often
meet considerable pent-up demand. The margin on these new machines is at its lowest
point as manufacturing is in the earliest phase and production inefficiencies are not yet
developed. It often takes six months or more before a manufacturer drives down
production costs for new hardware. At that point, it’s not uncommon to see different
versions of the cabinet start shipping, including uprights or widescreen, etc.
21
August 17, 2015
With that in mind, we see manufacturers at different stages of hardware cycles.

IGT. The company is ramping up production of its newest hardware, the Crystal
Core video reel and the S3000, with the latter being IGT’s latest offering. At this
point, the production efficiency of Crystal Core is nearing optimal levels, and peak
margin on this machine should come within a quarter or two. The newer S3000 is
beginning to experience a solid lift in demand but will probably need a few more
quarters before reaching optimal production efficiency. Although the
consolidation of IGT’s production facilities and migration of the Spielo platform to
Reno are going well, they could delay the achievement of production efficiencies
for both of IGT’s newest cabinets. Both products are still enjoying the benefit of
product launches, with the S3000 being well received given the mixed
performance of some existing mechanical reel on casino floors.

SGMS. The WMS camp is well into its second year of shipping the Blade cabinet.
However, on the 2Q15 earnings conference call, the company noted that its WMS
cabinet line had been underperforming owing to customer concerns that SGMS
was planning to stop support for the WMS cabinet. Company management has
insisted this isn’t true, having just released the WMS S32 (32-inch screen) Blade
cabinets. At Bally, cabinet designs are also a couple of years old, with the Pro 2
Curve, Pro 2 Wave, and V24 and V34 offerings all fairly well established. However,
speculation and industry contacts suggest that the company is setting up to launch
a joint operating system that uses shared components across both (WMS and
Bally) product lines. The existing Bally and WMS hardware platforms are already
extremely similar, having been designed by the same person. As such, the writing
on the wall is for SGMS to launch a whole new set of cabinets and hardware
offerings at this year’s G2E in Las Vegas. Though it’s not clear if it will share a
similar architecture, SGMS’s SHFL division recently launched a new platform under
the Dualis label, supported by a portfolio of new and existing titles. The SHFL
segment of games is specific to the Austral/Asian segment, playing with a level of
volatility more to the region’s liking.

Konami. One of the most anticipated products in gaming hardware is the Podium 2
cabinet. With Konami completing the expansion of its Americas headquarters in
Las Vegas, the company is eager to ramp up production. The original Podium
cabinet took the gaming tech world by surprise, as it moved Konami from a lowsingle-digit to a low-teens floor share in a matter of years, latching onto important
opening cycles in markets such as Pennsylvania. The manufacturer drove market
share gains with a strong mixture of price and performance that the likes of IGT
and Bally couldn’t match. With performance softening on legacy Podium cabinets,
the manufacturer is probably eager to ramp up the Podium 2. We expect new
production versions to be displayed at G2E this year.

Aristocrat/VGT. Aristocrat has seen growing success with its year-old Helix
cabinet. The cabinet was a success with operators, as the hardware was largely
compatible with the bulk of Aristocrat’s game library. Furthermore, the system is
largely adaptable in its configuration. We argue that the Helix was Aristocrat’s first
truly competitive cabinet, with its prior Viridian cabinet not very competitive
relative to offerings from Aristocrat’s US peers. As such, the Helix cabinet is still in
growth mode and is probably the main rival to larger manufacturers today.
Industry conjecture suggests that Aristocrat is underpricing its Helix cabinet to gain
share, though we believe it’s exploiting the rise in the US dollar, as the company
22
August 17, 2015
reports in Australia dollars. There has been roughly an 8.5% appreciation in the US
dollar vs. the Australian dollar since the beginning of the year, providing cover for
pricing shifts at Aristocrat.

Global Cash Access (GCA). GCA has made it clear that the next 12-18 months will
be rebuilding months, with the company looking to double the number of game
design studios. We expect new versions of all of Multimedia Game’s cabinet
designs over the next 12-18 months, as the company seeks to make good on its
merger. With its licensing and compliance expertise, we believe GCA can improve
on Multimedia Games’ shortcomings in providing a product that is compliant in far
more jurisdictions and compatible with a much larger library of content. The
company has also indicated that it aims to benefit from some of the recent
mergers in the industry, filling in some of the holes left as a result.
Gaming Hardware Segments Highlight Industry Challenge. Figure 19 illustrates two
major points for the gaming hardware business today. First, it’s no longer a two-horse
race. Second, the merged operations of IGT/GTECH and BYI/WMS/SGMS are fairly close
to parity. In the case of the latter, there is little evidence to suggest that either will see
outsized gains in unit shipments, with the growing pool of smaller manufacturers.
Figure 20. Total Slot Units Shipped
50,000
Units Shipped
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
0
IGT+Gtech
Konami
BYI+WMS
Ainsworth
Aristocrat
GCA
ASP Pressure Persists. For years, one of the strengths of the gaming hardware business
was continued ASP performance. Although unit shipments would fluctuate depending
on replacement demand and new openings, slot manufacturers remained disciplined on
pricing and were able to maintain stable margin performance. This dynamic is one of the
reasons greater industry consolidation took so long, as strong margins supported stable
cash flows and elevated valuations. With a more competitive environment from the rise
of smaller manufacturers gaining a foothold, the industry has seen more and more
pressure on ASPs. Of course, the buyer never complains about lower pricing, and the
industry seems to point a lot of fingers as to who is responsible for the pricing pressure,
with evidence suggesting that it’s not just one operator.
23
August 17, 2015
Figure 21. Recent Market-Wide ASP Trends
Figure 22. Big Three Long-Term ASP Trends
$20,000
$20,000
$19,000
$18,000
$18,000
$16,000
$17,000
$16,000
$14,000
$15,000
$12,000
$14,000
$10,000
$13,000
$8,000
$12,000
WMS
IGT
Aristocrat
Ainsworth
Multimedia Games
WMS
Sep-14
Jan-14
May-14
Sep-13
Jan-13
May-13
Sep-12
Jan-12
May-12
Sep-11
Jan-11
May-11
Sep-10
Jan-10
May-10
Sep-09
Jan-09
BYI
May-09
Sep-08
Jan-08
Sep-07
BYI
May-08
$6,000
$11,000
IGT
Unfortunately, without exclusive content or technology, it is hard to envision a scenario
where the industry as a whole will see ASPs rise. Rather, we believe ASPs will reflect
industry demand for specific hardware or content, as well as the success of game and
hardware development. At the same time, other dynamics are at play, with some
manufacturers assuming heavier debt burdens that put pressure on managements to hit
more consistent volume and revenue numbers with less discipline around price.
Strong US Dollar Gives Foreign Manufacturers Flexibility. Foreign manufacturers could
use currency to their benefit, as the stronger US dollar allows for price adjustments
while maintaining margin in reported currencies. Regardless of how it happens, there is
little evidence to support firming of ASPs in the foreseeable future.
IRS Change on Tax Reporting. The IRS is seeking to push though changes in legislation
that shift the automatic filling of a 1099G tax form from $1,200 to $600. The challenge
to the rule is especially strong from the high-limit slots rooms, where $600 wins are not
all that special or uncommon. We argue that this is the law of unintended
consequences, as technology has recently allowed players to file these forms
automatically, with the form being self-generated the minute the player hits this level.
There is no question that this will have an impact on the business as some regulated
markets actually require “cooling off” periods that force players to pause play for
several minutes. We believe the increased paperwork will have a similar impact on the
business.
24
August 17, 2015
Class II Revival—Oklahoma
There is a showdown brewing in the small gaming hardware segment known as Class II
casino games. These games are effectively electronic games that play a simulated bingo
game with the payout based on play levels within the casino, not on a set of payout
tables. As a result, they see lower coin in and lower payouts. Class II games are a rarer
breed these days in the US and are generally the exclusive domain of Native American
tribal and lottery operators. As tribal casinos have achieved federal recognition and
have struck compacts with states, they have adjusted their casino floors to feature Class
III gaming (traditional slot machines), though there is still a substantial base of Class II
games, as well as a sizable customer base that still prefers the less volatile game play.
Oklahoma is one of the largest, if not the largest, Class II gaming markets and looks to
be the stage for the next major battle in the gaming tech space. The Oklahoma
Gambling Compliance Unit estimates the Class II installed base in the state at 30,000
units, representing a little less than half of the 65,000 total gaming machines in
Oklahoma (the balance consist of Class III games). One of the largest players in this
market is GCA (by virtue of its acquisition of Multimedia Games), which we estimate has
about 8,600 Class II games in Oklahoma, representing about 29% of the Class II market
in the state and about 13% of the total floor share. Much of GCA’s exposure to
Oklahoma is with the Chickasaw Tribe, which accounts for about 5,500 of GCA’s 8,600
units in Oklahoma, based on our estimates. Aristocrat, by virtue of its acquisition of VGT,
is the other major Class II player, with an installed base of over 20,380 units in the US,
most of which are located in Oklahoma, though an exact number is not available.
Contract expirations in Oklahoma are likely to result in a multiyear market share
battle. It is fairly common knowledge that relatively long-dated contracts for these
machines begin to mature in 2015, with a few thousand machines coming off contract
each year for the next few years. According to historical filings by GCA’s Multimedia
Games subsidiary, GCA has 1,400 units in Oklahoma expiring this year and another 604
expiring in 2016. Given the rather anemic growth the industry faces today, we expect a
fairly unhealthy fight. In one corner we have GCA seeking to defend its share. We
believe the Chickasaw Nation (one of the largest licensors of Class II games) is unlikely to
hand over such a large floor percentage to one supplier in such a competitive
environment. So although we believe GCA will retain some share, it will probably lose a
portion of its market presence, as it makes the most business sense (save drastic price
cuts). Making a push to gain share here is Aristocrat, the recent acquirer of VGT, which
is also a strong Class II supplier. Aristocrat has been very clear in its intent to go after
this market in a large way with its recent acquisition. The company has recently been
aggressive with its Class III Viridian cabinet, putting pressure on other manufacturers, so
we expect similar aggressive moves in Oklahoma.
Beyond the two Class II heavyweights, GCA and Aristocrat, two potential wild cards,
SGMS and IGT, could enter the race in a meaningful way. SGMS and IGT are both large
manufacturers with Class II capacity and have a preference for the recurring revenue
business, but they are both far underrepresented in Oklahoma. Given the dynamics of
Class II and its bingo legacy, it’s difficult to sell a Class II machine on its math model,
leaving game graphic design, price, and terms as the primary determinants. We expect
pricing and game design or proven performance will be the focal point. In the end, we
believe the Chickasaw Nation and its customers will be the winners in this showdown.
25
August 17, 2015
Video Lottery Terminals
The term VLT is often used to classify a large array of similar games; however, it is
important to note that there are considerable variations in the dynamics of these games
across jurisdictions. For example, Maryland and Vest Virginia slot machines in casinos
are often referred to as VLTs because the state lotteries own the machines and/or
manage the central systems that link the games. However, in jurisdictions like New York
and Washington, the VLTs are more akin to the true form of video lottery, in that a
central system determines each result across all of the linked machines from a finite
number of possible outcomes—sort of like a stack of video instant lottery tickets.
Major VLT markets in the US include West Virginia, Oregon, Montana, New Mexico, New
York, and South Dakota. Canada is also a large VLT market with upwards of 35,000 units.
IGT, via Spielo, is the systems provider for the Canadian VLT market, but several other
major vendors also supply the actual VLTs, including Aristocrat and SGMS (via Bally and
WMS), and we expect recent consolidation will allow for one or two more suppliers to
enter the market. Since the replacement cycle has recently ended, we do not foresee a
major refresh in Canada for the next four to six years. Although there is no required
timetable on the VLT refresh in Canada, we generally view the market as a seven-year
replacement cycle.
Figure 23. North America VLTs, by Major Market
United States
Delaware
Illinois
Louisiana
Montana
New Mexico
New York
Ohio
Oregon
Rhode Island
South Dakota
West Virginia
US Subtotal
2010
2011
2012
2013
2014
7,070
6,924
6,764
14,450
17,892
3,325
12,469
14,164
16,943
3,309
12,524
12,358
5,945
9,052
17,420
12,203
5,850
9,198
17,570
14,115
16,644
3,233
17,183
1,787
12,163
5,850
9,128
16,064
6,561
7,920
13,644
16,695
2,985
17,551
3,229
12,023
5,787
9,133
14,868
6,534
17,467
13,315
16,698
3,574
18,146
8,585
11,920
5,787
9,046
14,083
99,981
98,685
102,931
110,396
125,155
(1.3% )
4.3%
7.3%
13.4%
YoY % Change
Canada
Alberta
Atlantic Lottery
Manitoba
Quebec
Saskatewan
5,983
7,303
5,755
11,614
3,984
5,982
7,102
5,786
11,932
629
5,991
6,957
5,794
11,527
3,955
5,976
6,974
5,776
11,635
3,929
5,976
7,039
6,317
11,513
3,960
Canada Subtotal
34,639
31,431
34,224
34,290
34,805
(9.3% )
8.9%
0.2%
1.5%
130,116
(3.3% )
137,155
5.4%
144,686
5.5%
159,960
10.6%
YoY % Change
North America Total
YoY % Change
134,620
26
August 17, 2015
In Europe, Italy and the UK are two of the larger VLT markets that garner significant
attention. Italy is often looked on as one of the high-water marks for VLT programs. We
already know this is a significant market for IGT, via its GTECH/Spielo subsidiaries; UKbased Inspired Games and Novomatic Group are two other major suppliers of VLTs in
Italy and, more broadly, Europe.
We estimate the VLT installed base at 45,000 machines in Italy and that Novomatic is
the market share leader with about 24,000 VLTs (44%), followed by IGT (Spielo) with
over 10,000 terminals (23%) and Inspired Gaming with a little less than 10,000 (20%).
We see an opportunity for IGT to gain some share as a combined entity with Spielo. One
of the greatest opportunities for revenue synergies between IGT and GTECH is the
Italian market, namely porting IGT’s vast legacy content library onto games in Italy,
which should help Spielo’s market share grow. IGT historically was unable to enter the
Italian market, largely from machine compliance issues. The tax regime on VLTs in Italy
is considerably different from what we see more commonly in the US. In Italy, the
gaming tax is based on handle (total wagers or credits played), rather than net win after
payouts or coin-in (amount of money deposited into the game). Because of this
dynamic, game manufacturers have been forced to reduce payout percentages from the
typical low 90%s to the low 80%s to maintain profitability with a higher tax liability.
Greek VLT Market—Next Big Opportunity—On Hold for Now. The anticipated rollout of
16,500 VLTs in Greece this summer is hung up as the Hellenic Gaming Commission
recently amended VLT regulations that forced OPAP to halt the deployment of games.
Greece has the pedigree to be a lucrative VLT market, with a successful lottery and
some very successful small casinos, but the industry consensus is that there is plenty of
untapped gaming demand. Estimates from local Greek media outlets suggest that there
have been over 150,000 illegal gaming machines operating in Greece, which highlights
the potential demand for regulated VLTs. As regulated VLTs roll out, we expect the
illegal gaming machines to begin to be enforced and phased out.
When the Greek VLT deployment issues are ironed out, we see a significant opportunity
for both IGT and SGMS. First, IGT (via GTECH) has already been awarded the systems
contract for the Greek VLT business. OPAP owns the VLT concession in Greece and is
authorized to deploy and operate the first 16,500 VLTs, of which 5,500 have been
awarded to IGT and 5,000 to SGMS. Inspired Gaming has also signed a contract to
provide OPAP with 3,960 VLTs, with the balance of 2,040 expected to be supplied by the
SYNOT Group.
Suppliers Could Net $25MM-$35MM Annually from Greece. Although the economics of
the VLT opportunity in Greece are less clear, we did estimate the potential revenue
opportunity for suppliers in the first wave of VLT deployments based on ship share.
According to reports filed by OPAP related to VLT regulations and the licensing process,
the Greek VLT market is estimated at €0.6B-€1.2B. The low end of this estimate is based
on VLT yield (GGR/machine/day) of €60, with the high end around €86. Using this range
of assumptions, we estimate that IGT could generate $26MM-$38MM of annual fee
revenue from its 5,500 machines (assuming a spot rate of 1.1 USD per 1.0 EUR). For
SGMS, we estimate a similar opportunity, at $24MM-$35MM, based on a slightly lower
installed base.
27
August 17, 2015
Figure 24. OPAP VLT Revenue Opportunity Estimates
IGT
SGMS
Inspired
SYNOT
Total
5,500
33.3%
5,000
30.3%
3,960
24.0%
2,040
12.4%
16,500
IGT
SGMS
Inspired
SYNOT
Total
€ 87
€ 106
€ 124
€ 45
€ 54
€ 64
€ 361
€ 440
€ 518
Annual revenue opprotunity based on 80/20 fee (millions)
€ 60 /day
€ 24
€ 22
€ 17
€9
€ 73 /day
€ 29
€ 27
€ 21
€ 11
€ 86 /day
€ 35
€ 31
€ 25
€ 13
€ 72
€ 88
€ 104
Annual revenue opprotunity on 80/20 (USD millions)
$60 day
$26
$24
$19
$73 day
$32
$29
$23
$86 day
$38
$35
$27
$79
$97
$114
VLT Ship Share
VLTs
Ship share
Annual GGR Estimates (millions)
€ 60 /day
€ 120
€ 110
€ 73 /day
€ 147
€ 133
€ 86 /day
€ 173
€ 157
$10
$12
$14
Source: Union Gaming Research, OPAP, company documents.
Round Two Has 18,500 Incremental VLTs Up for Grabs. OPAP also has a mandate to
issue four to 10 concessions for a second wave of some 18,500 VLTs. This second wave
is currently out for bid. We expect IGT and SGMS to participate in the second round, but
Novomatic, the largest supplier of VLTs in Italy, did not receive an allocation in the first
round of VLTs. We expect Novomatic and Intralot to be primary participants in the next
wave of VLT deployments in Greece.
28
August 17, 2015
Gaming Operations
The gaming operations business shifts down with cyclical performance, and low barriers
to entry are making long-term dominance in the highly contested segment increasingly
challenging. In good economic times, operators tend to eschew leased operations
because they exert pressure on cash flow. In softer economic times, they favor the
machines as content is maintained for a fixed fee. We are now at the bottom of the
cycle, with gaming operations’ floor share around 8%-9% overall but as low as 2% in
some markets.
Bedrocks of the gaming operations industry include Wheel of Fortune, MegaBucks, and
Wizard of Oz. In these examples, developers have been fortunate to find brands that
have continued to resonate with patrons for years and even decades. However,
evidence suggests that even these perennials are starting to age, leaving operators and
developers desperate to defend these pillars of stability.
Newer games are proving to have far shorter lifecycles and entail rising costs to acquire
intellectual property content, licensed brands, and programmer talent. More recent
trends highlight the success of specific game designers, leaving manufacturers in a
position to either pay up for their talent or see their floor share decline as performance
of their installed base of games wanes. We believe this points to greater volatility in
placements on casino floors. As such, we believe it’s even more likely that the segment
will see greater fragmentation as developers move to more independent operations.
Recent consolidation has displaced key human resources, creating invaluable
opportunities for small manufacturers. The recent uncertainty of consolidation and
integration has displaced valuable human resources in both sales and game
development. Whether these top industry professionals chose to flee the risk of
headcount reductions during post-merger integration or were misappropriated by
management, smaller competitors in the gaming tech space found a vast pool of
talented and tenured employees who had developed deep relationships with the casino
organizations. In the case of both IGT and SGMS, the damage is largely done. For IGT,
the departure of key talent had been an issue for several quarters leading to the merger
with GTECH. We believe the combination of IGT and GTECH will stabilize the human
capital leakage at IGT. The disruption at SGMS, caused by a string of industry-changing
consolidations, is finally diminishing. SGMS was quick to set upper management ranks as
it rolls WMS, Bally, and Shuffle under one roof and is now in full integration mode.
Nowhere is the displacement of human resources more evident than in the hypercompetitive gaming operations segment, where the dismissed team of High Five Games
made its way from IGT to Aristocrat. The end result is an almost one-for-one loss of
segment market share from IGT to Aristocrat. Although this is the most blatant example,
there are others. At the end of the day, content is king, and keeping designers and
programmers happy is at the core of success in gaming operations. The challenge is that
although they might control the intellectual property for brands, larger operators don’t
control the talent.
The impact of pre-merger fallout at IGT is most obvious at Aristocrat, with the stillstrong performance of High Five Games studio, now in partnership with Aristocrat. For
the 12 months ended March 2015, Aristocrat had 9,071 Class III slot units installed in
North America, up from 8,207 at mid-2014 and 7,562 at the end of March 2014. In
29
August 17, 2015
addition to increasing its installed base, Aristocrat has improved its average daily yield.
It appears that most of the share gain has been at the expense of IGT, whose gaming
operations market share decline continues to decline, along with its average daily fee.
IGT still has a fairly commanding lead in gaming operations, largely thanks to the stillcommanding presence of its Wheel of Fortune and Mega Bucks offerings, though these
perennials are beginning to show signs of age. As Aristocrat builds its presence, there is
greater risk that floor share growth will moderate, as the company will have to strike a
balance between expanding floor share and maintaining an adequate pipeline of new
titles. As we have seen time and time again, the lack of content from a supplier usually
leads to a decrease in floor share. Our recent visit to the Southern Gaming Conference
suggests that for now, Aristocrat is well positioned for near- and medium-term growth.
IGT, as the largest operator in this field, has been one of the hardest hit so far. The
company’s domestic installed base at the end of calendar 1Q15 totaled 43,600 units,
down from over 54,000 at the end of 2013. Although IGT still has a stronghold in the
space with its Wheel of Fortune game, there is evidence that the game is beginning to
show signs of age. IGT’s domestic yields on its installed base of gaming ops machines
have also been under pressure. Here, the company has a higher proportion of variable
fee games; in a declining yield environment, this mix adds pressure relative to IGT’s
peers, which have a more balanced mix of variable and fixed-fee participation games.
With the exception of calendar 4Q14, IGT’s daily yield has recorded year-over-year
declines every quarter since calendar 4Q11 as the installed base has declined by more
than 10,000 units. IGT’s challenges in gaming operations are not news, and stabilizing
this business is one of the new company’s first orders of business. We see some early
relief with the integration of the GTECH original Sphinx 3D, which is becoming
increasingly popular. With the distribution and production capabilities of IGT’s US
business, Sphinx 3D could be the near-term answer for IGT in stabilizing the gaming
operations business.
Gaming Operations Outlook
Overall Installed Base Continues to Contract. Although some operators have gained
market share and have expanded their installed bases at the expense of larger
competitors, the overall installed base of gaming participation units is on a downward
trend. As a result, our forecast for the gaming operations business is unsurprisingly
cautious.
30
August 17, 2015
Figure 25. North America Installed Base by Major Manufacturer
90.0K
Installed Base by Major Supplier
80.0K
6.8K
6.6K
6.4K
70.0K
6.8K
7.2K
6.9K
7.6K
7.9K
8.2K
8.6K
9.1K
9.1K
40.4K
39.3K
38.0K
36.7K
60.0K
50.0K
43.4K
43.4K
42.7K
43.0K
42.6K
42.5K
41.4K
41.3K
40.0K
30.0K
9.4K
9.6K
9.6K
9.6K
9.7K
9.9K
10.0K
9.4K
8.7K
8.7K
9.1K
8.9K
16.2K
16.7K
17.2K
17.3K
17.3K
17.3K
17.1K
17.0K
16.7K
16.3K
15.8K
15.3K
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
20.0K
10.0K
0.0K
Bally
WMS
IGT
Aristocrat
The recent trend of declining gross gaming yields in the US and subsequent contraction
in the installed base have many concerned about the longevity of this business model,
especially as much of the declines in yields and machine counts stem from waning
demand on the casino floor as the traditional core slot customer ages.
Flashy new titles presented at G2E year in and year out are aimed at attracting a
younger demographic, but the interest in slot machines is shifting largely to interest in
table games, electronic table games, and non-gaming amenities. Although this is most
evident in destination markets, we see similar dynamics at play in regional markets, with
almost every property manager focusing capex dollars on new F&B outlets, hotel rooms,
and meeting spaces, rather than adding slot machines or upgrading slot floors.
Figure 26. Gaming Ops Yields
W/P/D
$75
$70
$72
Legacy WMS
$68
$71
$72
Inclusion
of BYI
$69
$67
$65
$65
$66
$67
$65
$64
WMS/SGMS
∆ in Reporting
$58
$60
$55
$60
$55
$57
$58
$57
$55
$55
$56
$55
$53
$50
$53
$50
$50
$48
$42
$41
$42
$42
$41
4Q13
$43
3Q13
$43
2Q13
$43
1Q13
$45
$40
$54
$54
$43
$45
$46
$35
Aristocrat
IGT
1Q15
4Q14
3Q14
2Q14
1Q14
4Q12
3Q12
2Q12
1Q12
$30
SGMS
Source: Union Gaming Research, company documents. IGT/Aristocrat, North America Only.
31
August 17, 2015
Casino expansion in the US is also at play, as core slot players focus more on
convenience than on loyalty. As a result, slot floor managers have little need to keep a
huge base of premium wide-area progressive (WAP) games to attract customers, as it’s
a costly way of getting traffic in the door.
In major markets throughout the US and North America, slot floor counts have
apparently been stabilizing as the opening schedule has largely stalled for now. This has
allowed slot floor managers to right-size the overall installed base.
Gaming Operations Pricing Model Appears Broken. A trend we have seen in many
markets in the past 12 months is conversion of leased or daily fixed-fee units to owned
units. This raises the economic issues at play. In our view, the gaming operations pricing
model is largely misaligned between equipment manufacturers and casino operators,
particularly for the premium and WAP categories. It is becoming increasingly difficult for
manufacturers to convince casino operators to pay premiums or fixed fees for a game.
For games that operate under a revenue share, the terms often leave operators with
less incentive to place premium-priced games in ideal locations. As casino operators
become more sophisticated in player analysis and ROI, their focus is shifting more to
profitability and less on gross gaming revenue and win per unit. A slot manager has little
incentive to put its best-performing games in the best locations, as a less expensive
game could generate higher profits, even with a lower yield than an expensive premium
participation game generating higher yields. In many cases, the house average game
could be more profitable for a casino than an expensive premium participation unit
generating above-average yields given the lower cost. As a result, slot floor managers
are optimizing profitability, leaving major premium participation games in less desirable
floor locations and largely underperforming their potential.
Conclusion re: Gaming Operations
With this economic shift, we conclude that slot manufacturers that can adjust pricing for
a win-win scenario could gain an edge. Nonetheless, we believe a change in the pricing
model would be quickly adopted by the rest of the industry. Ultimately, pricing power
has shifted to the casino operators, with more players and content available for the
gaming operations segment and overall slot demand declining.
32
August 17, 2015
Electronic Table Games
Deal-Assisted ETGs Present Greatest Opportunity
The writing is on the wall that electronic table games (ETGs) are finally making their
move into the mainstream North American gaming market. We see the greatest
opportunity with live dealer assist machines. In this scenario, the economic proposition
of ETG is preserved while much of the feel of a live table game is also preserved, with
the interaction of a live dealer. The cost benefits remain, as dealer assist tables have
lower labor costs: A dealer can cover more positions and less surveillance is needed
since live chips are not used and players don’t physically interact with dealer or the felt.
Today, evidence suggests that casinos are struggling with labor pressures around
traditional table games. In Las Vegas, a shift in blackjack odds is being adopted by more
and more operators. Although pundits will point to demand for higher margins, the
other side of the equation is that average bet sizes have not grown in line with inflation
or, more specifically, wage inflation at casinos. Recently, a couple of casinos started
altering the odds on one of the more traditional wagers in craps, reducing the amount
of odds available on pass line bets. We view these changes as margin control, as other
parts of the casino floor (such as baccarat) are seeing lower profitability and subdued
average bet sizes, and operators need to address rising wage pressures.
Rightsized Casino Floors Provide Opportunity for ETGs. On the Las Vegas Strip, casino
operators face considerable excess square footage on their casino floors, as declining
win per day performance on traditional slot machines has driven a decade long decline
in slot volumes. This is especially acute on the Las Vegas Strip. Unsurprisingly, ETGs have
begun to materialize up and down the Las Vegas Strip. We believe this is only the
beginning, as operators and floor managers seek to further integrate the hardware into
their overall floor layouts. We believe that markets such as Mississippi, Atlantic City,
Pennsylvania, and California all present compelling opportunities for ETGs as well. We
see high labor costs, high slot taxes, and excess floor space as primary catalysts for ETG
demand, combined with some evidence that ETGs are beginning to attract the more
elusive younger demographic to casino floors.
Buying into Growing Table Game Trend—A Millennial Trend? Evidence suggests that
the surge in the table game business (excluding baccarat) that North American casinos
are experiencing today is due in part to increased activity from the millennial
generation. Like so many of their activities, live table games provide a far greater sense
of community and interaction than traditional slot machines. However, higher table
minimums or lack of familiarity with the games keeps many players away from live table
games. Thus, ETGs appear to provide this bridge, allowing for lower bets and a more
comfortable learning environment for new table game players.
With this in mind, we believe it’s only a matter of time before operators see greater
adoption of ETGs, specifically dealer assisted games. It’s important to note that the slow
adoption of ETGs is uniquely a North American issue as the games have been fairly well
embraced in many European and Asian casino markets. Thus, there is evidence to
support the economic viability of ETGs on a casino floor. We believe that as customers
adopt and adapt usage, the pace of ETG installations will accelerate.
For now, growing demand for ETGs probably represents a net negative for traditional
slot machine manufacturers, as budgets for these games typically come out of slot
33
August 17, 2015
machine budgets. For now, that might be right. However, manufacturers of electronic
table games maintain that ETG play doesn’t represent a threat to slot volumes. Rather,
they believe that play in the North American market comes from unique players in the
form of additional coin-in, from incremental play by existing customers, or from new
play reflecting a generational divide that has the ETG player less inclined to play a slot
machine and also less willing to make the commitment to live table games.
We estimate that the global EGT market has no more than 100,000 positions. We
arrive at that number with the assumption that Asia represents 7,000 units, North
America 15,000, and Europe around 60,000. However, the profitability of the Asian ETG
market is probably several times greater per seat than that of the European market.
Based on research provided by Union Gaming Securities Asia, we believe the Asian ETG
market could essentially double over the next five to seven years, driven by the
considerable number of new casinos opening in the market, with Macau representing
more than half of this opportunity. We conclude that the US market could see similar
growth, though there is less of a defined catalyst that supports this outlook.
To be clear, there are US casino markets where ETGs just don’t make a lot of sense—
yet. For instance, in Louisiana, where casino floor sizes on riverboats are capped,
operators are probably less willing to commit the square footage for ETGs, especially
given the vibrancy of their existing live table games business.
For the operators discussed in this report, the ETG segment is either largely overlooked
(IGT) or somewhat marginalized by virtue of their inclusion in a larger corporate entity
(SGMS).
Challenges for ETGs Do Exist; Here Are a Few
Organized Labor. Dealer unions are no friend of ETGs, as they view the level of
automation as a direct threat to lucrative dealer jobs. This threat might exist, but the
reality is that while live dealer costs have swelled over the years from scheduled wage
increases and other costs, such as health care, the size of the average wager has actually
declined in markets such as Las Vegas and even Macau. As a result, it is increasingly
difficult for casinos to cover costs pertaining to the live table game business. We see a
real economic benefit from allowing ETGs at the lower end of the ETG wager scale.
Transition Between ETGs and Table Games Removes Player Momentum. One
challenge that doesn’t have an immediate near-term fix is dealing with the transfer
between ETGs and live table games. Manufacturers will insist that ETGs today do not
necessarily draw core table game customers, so it’s not that big of a deal. However, if
casinos are looking to use ETGs in and around their live table game businesses, the
transition is more of a challenge. In addition, the advent of digital currency is a growing
topic within the casino industry.
Complex Regulatory Environment. ETGs face a far more varied set of regulations across
jurisdictions. There are standout examples where an ETG with an automated dealer will
be taxed as a slot machines (often higher), while the addition of a live dealer will cut the
tax dramatically with a minimal change to the hardware. As such, rollout and expansion
aren’t any less vibrant; they just face a slightly longer path as regulatory and compliance
issues are addressed.
Proprietary Edge Limits Development. One of the primary reasons many gaming
hardware manufacturers have limited their investment in the development of ETGs is
34
August 17, 2015
the view that their edge is intellectual property and there is little IP in traditional ETGstyle table games. However, we are seeing more evidence that this isn’t actually true. IP
has been used by manufacturers, such as Paradise and its LT Games hardware, to limit
competition in Macau. Further, we see more and more proprietary programing adding
to the core game. Although manufacturers are careful not to mess with the core math of
the traditional table game, they are willing to add customized elements that effectively
drive up bet frequency and/or size, thereby boosting yield from their ETGs.
Overview of Primary ETG Competitors
Interblock (Private, Not Rated). Dominant in Europe, Interblock’s distinctive and highend ETG offerings stand out in its placements in North America. Globally, Interblock has
30,000 installations, with roughly 10% in North America. The manufacturer aims to
expand considerably in North America as the number of approved jurisdictions
increases. Asia also presents a sizable but more competitive environment, given some of
the local incumbents. In Europe, Interblock’s most popular game is roulette. In the US,
primarily owing to its installation in Resort World New York, it is also well known for
entirely automated baccarat and sic bo. The company continues to develop its platform,
including some success with proprietary games and side wagering, but the core games
remain central to its product.
LT Game (a div. of Paradise Entertainment, Not Rated). If you have been on a casino
floor in Macau in the past several years, you have seen an LT Game multi-game
platform. The company largely dominates the ETG market in Macau. In the past year,
the company entered into distribution agreements with IGT in North America and
Ainsworth in Australia. LT Game is largely known for its baccarat product, though the
company is starting to make inroads into other categories. At the end of 2014, the
company operated 3,539 machines, with the vast majority in Macau.
The rapid expansion of LT Game’s footprint has largely resulted from casino operators
struggling to deal with excess casino demand and the Macau government’s cap on table
capacity. The Macau government allows 60 ETG positions for every live table game. LT
Game also enjoys the benefit of its parent company’s casino operations in Macau (aka
satellite casino arrangement), serving as an important channel. The Macau gaming
market has changed, but the importance of ETGs has not. On the contrary. The
installation of ETGs helps operators maintain margins on lower-denomination wagers.
The real opportunity lies in Macau casino operators rebalancing their Macanese dealer
pools.
IGT. IGT has only itself to blame for losing the war on ETGs. Investors can add ETGs to
the list of missteps that the legacy IGT has made in the past year or so, as the company
made a conscious decision to all but step away from developing its ETG business
because it was unwilling to commit capital to develop a business where it lacked some
competitive advantage—in IP or otherwise. Today, IGT maintains a presence in the
segment with its Revolution Roulette multi-seat ETG offering and probably with some
legacy Golden Baccarat positions. However, its distribution agreement with LT Game
reflects an understanding that its customers are at least interested in the segment,
while also hindering the manufacturer from entering the segment directly. IGT is made
up of multiple M&A transactions, leaving us to believe that someday, IGT is likely to
make a move in the ETG arena, especially if the space continues to develop.
ShuffleMaster (SHFL, a div. of SGMS). An investment in the ETG segment is impossible
without fully understanding SHFL, the largest North American ETG provider. SHFL, a
35
August 17, 2015
division of SGMS, offers a broad selection of table game products, with a heavy
emphasis on ETG and card shufflers and chippers. Nonetheless, SHFL contributes just
about 6% of SGMS’s revenue. SHFL’s dominant position comes from its alluring multiposition blackjack offering, a crowd favorite in markets where live table games are still
illegal. SHFL’s recently released stadium product has seen success in North American
and many Asian markets. The challenge and risk with SHFL is its position within SGMS.
As described in the company section of this report, SGMS is constrained in the segments
of the business in which it can commit capital. SHFL’s segments have become
increasingly competitive, suggesting a need for greater capital investment. However,
this could prove challenging, forcing SGMS to be more strict on capital allocation until
reaching its deleveraging goals.
Aruze. Aruze is making a push into the automated EGT segment via its G Station
products. The company continues to push to expand its footprint of North American
regulated markets craps (Shoot to Win).
Novomatic. A predominantly European operator, with an early move into ETGs, the
company is a fully integrated gaming technology company, with a broad base of
offerings along with a considerable number of operating licenses, largely in Europe.
Conclusion re: ETGs
We foresee an increasing level of contribution to and demand for ETG hardware,
although we don’t see ETGs replacing slot machines as the primary business of gaming
technology companies. Whether it is higher labor costs or the move to a digital currency
on casino floors, we anticipate greater demand for ETGs in the coming years. Thus, we
believe demand for this type of technology will grow, with the possibility of increased
M&A around the space.
36
August 17, 2015
Interactive Gaming
Social Gaming the Primary Focus
The global games business is a $75B industry (according to the social gaming industry
tracker NewZoom), and we peg the addressable market for the gaming tech
companies at $35B. Today, gaming tech companies compete in three segments—PC
games, Facebook, and mobile, which NewZoom estimates at 40% ($30B), 17% ($12B),
and 12% ($9B) of the $75B market, respectively. Gaming tech operators really compete
in only a little less than half of the large PC games category, with midcore and web
games. As it stands today, we estimate the global addressable market for gaming tech
companies at roughly $35B. This fully excludes console-based games and the massive
multiplayer online segment of PC games.
The same NewZoom survey suggests that the industry will continue to grow, reaching
$102.9B by 2017, with the addressable market expected to total $52.4B, or 51% of the
total market. NewZoom’s view is that this growth will be driven by a handful of catalysts
that are already very much in play today.
GLOBALIZATION OF THE GAME INDUSTRY
Today, the Western world dominates the games industry, with 51% of revenues coming
from North America, Western Europe, and Oceania (Australia). The view is that by 2017,
these same markets will represent only 43% of the $102.9B market, with China and
South America expected to play a large part in this shift. The expansion of mobile
gaming is also expected to be a primary driver, as media and brands historically tied to
PC games or other media make their way to social media and mobile outlets. The good
news is that gaming manufacturers are not tied to segments that are expected to bear
the brunt of this shift, as PC and console games appear likely to moderate as mobile and
tablet-based games become more prolific and advanced. Further, PC ownership in the
Western world continues to fall, while mobile and tablet ownership grows.
STRATEGIES IN SOCIAL GAMING VARY GREATLY
To compete and grow, social media strategies must adapt and roll with the times.
Successful social media game companies must be in the right segment and offer a
diverse platform.
The Right Segment: PC and Console Games Out, Mobile Games In. Ten years ago, apps
were hardly a thing, and PCs ruled the world, as did consoles like Xbox and Sony
PlayStation. Today, growth in the gaming market is coming largely from the mobile
segment, as Western economy PC ownership has generally plateaued, with global PC
shipments expected to decline in coming years. But don’t count out the PC just yet.
According to NewZoom, PC player-ship accounted for 37% of activity on Candy Crush
Saga in 2014 in the US and Western Europe. We believe that “for-money” casino games
probably have an equal if not higher percentage, especially among online poker players.
In the US, mobile versions of online casinos in New Jersey are just now coming into their
own, as the market faced considerable regulatory hurdles.
One item probably keeping social media games on PCs is their integration into the
Facebook.com environment, but that is quickly changing. Consider this, as of 1Q15,
Facebook had 1.44B monthly active users (MAUs), of whom 193MM were PC-only
users, 581MM were mobile-only users, and 1.24B used a combination of both. That is
37
August 17, 2015
a dramatic shift from 1Q13, when Facebook had 1.11B MAUs, of who 359MM were PConly users, 189MM were mobile-only users, and 751MM used a combination of both.
Facebook’s total user base grew 29.8% and mobile-only users surged 207%, but PC onlyusers declined 46%. Mobile-only users of Facebook went from 25% of mobile to 46.5%,
accounting for almost half of all mobile users. The statistics are probably skewed to
some degree by higher growth in markets with greater mobile penetration and tighter
focus on mobile by Facebook itself, but the statistics support developers’ expectations
of minimal growth from the PC category. Developers will have to create content
appropriate for mobile smartphones and, more importantly, tablets, which are replacing
PCs in Western countries, whereas PC ownership is already very low in developing and
emerging markets.
Offer a Diverse Operating Platform. In a perfect world, manufacturers want to be on all
platforms. The most important today are Facebook.com and Apples iOS, with games
that work equally well on iPhone and iPad. A distant but growing segment is Android. If
operators want to grow on international platforms, they need Android, as it is a
dominant platform in Europe and in some Asian markets, such as South Korea. Tracking
performance in all these categories can be a challenge, as each delivers performance in
a different manner. For Facebook.com, performance is tracked in daily and monthly
active users (DAUs and MAUs). For iOS and Android, performance is tracked by in-app
revenues (those generated directly through the app). As one can see in Figure 26, most
of the gaming tech companies with a dedicated focus on the social media game segment
are well positioned. However, some players from outside the traditional gaming sector
outrank and outperform the casino sector offering. Perhaps more telling is that other
social media game offerings consistently outperform casino games in DAUs and MAUs,
but casino-style games generally carry higher yields, measured by average revenue per
active daily user (ARPDAU).
Figure 27. Facebook Casino-Style Games Ranking, by MAU July 2015
Game
Developer
Texas HoldEm Poker
Zynga
Estimated MAUs Overall Rank
8,988,456
62
Slotomania
Playtika / Buffalo Studios
3,252,786
132
DoubleDown Casino - Free Slots
DoubleDown Interactive
3,125,376
141
BINGO Blitz
1,905,553
204
House of Fun - Slots
Pacific Interactive Limited
1,713,705
230
Caesars Casino
1,706,074
225
Jackpot Party Casino Slots
Williams Interactive, Inc.
1,557,152
259
myVEGAS Slots
PLAYSTUDIOS
1,541,418
254
DoubleU Casino
DoubleUGames, inc.
1,506,926
255
Bingo Bash
BitRhymes
1,466,454
274
Mynet Ã‡anak Okey
Mynet
1,251,194
317
High 5 Casino Real Slots
High 5 Games
1,040,742
367
Lucky Slots
Blue Shell Games
696,678
542
Backgammon Live
Developer 1591781
641,718
579
Let's Vegas Casino-Slot Roulette
Developer 1550721
507,433
691
Jackpotjoy Slots
iwi
499,662
699
Best Casino Slots Bingo & Poker
diwip
415,365
796
Mirrorball Slots
Plumbee
377,386
824
GamePoint Bingo
GamePoint
337,034
961
Texas HoldEm Poker Deluxe
IGG Inc.
279,415
1,100
Slot Galaxy
Galaxy Star Entertainment
267,040
1,111
Hollywood Spins
Product Madness
246,516
1,241
Big Fish Casino Slots & Poker
Big Fish Games
245,185
1,261
Grand Poker
Playality
241,642
1,208
Source: Union Gaming Research, AppData.
38
August 17, 2015
Figure 28. Top Facebook Developers by MAU July 2015
Developer
Estimated MAUs
App 1
App 2
App 3
App 4
App 5
149,530,037
Candy Crush Saga
Candy Crush Soda Saga
Farm Heroes Saga
Pet Rescue Saga
Bubble Witch 2 Saga
42,011,802
Spotify
3 Microsoft
36,868,380
Microsoft Live
Bing
MSN
Bing Bar
4 YouTube
36,329,422
YouTube
YouTube Unstaged
5 TripAdvisor
30,871,202
TripAdvisor
TripAdvisor Traveller Reviews
Cities I've Visited
What State Are You?
What Obnoxious Traveler Are You?
6 Zynga
31,080,477
Texas HoldEm Poker
FarmVille 2
Words With Friends
FarmVille
Hit It Rich! Casino Slots
7 Supercell
28,870,494
Clash of Clans
Hay Day
Gunshine.net
8 Pinterest
25,324,581
Pinterest
Pinterest Page App by Woobox
1 King
2 Spotify
Skype
9 Miniclip.com
25,176,435
8 Ball Pool
10 Pretty Simple
24,722,795
Criminal Case
Magical Ride
My Shops
11 Social Point
19,951,089
Dragon City
Monster Legends
Social Wars
12 Tinder
18,476,595
Tinder
13 Etermax
17,495,167
Trivia Crack
Angry Words (Apalabrados)
WordCrack
Bingo Crack
14 Badoo
13,061,425
Badoo
Webcam Twister
Want to meet him?
Encounters2 (r)
15 Kiloo Games
12,530,766
Subway Surfers
16 HTC Sense
11,307,968
HTC Sense
HTC Sense
HTC Sense
17 Peak Games
11,304,205
101 Okey Plus
Okey Plus
Bil ve Fethet
Okey
18 Electronic Arts
11,081,804
EA SPORTS FIFA Ultimate Team
Bejeweled Blitz
SCRABBLE
MONOPOLY: Millionaires
Zuma Blitz
19 Yelp
10,376,628
Yelp
20 Timehop
9,160,594
21 SGN
9,914,858
Cookie Jam
Panda Pop
Panda Jam
Downhill Snowboard
Jewels of the Amazon
22 SoundCloud
8,877,824
SoundCloud
SoundCloud DropBox
23 Wooga
8,925,475
Pearl's Peril
Diamond Dash
Jelly Splash
Bubble Island
Monster World
24 4shared
8,712,231
4shared
25 Ask.fm
8,106,398
Ask.fm
Ask.fm rating
26 Samsung Electronics
8,312,779
SamsungGalaxy
Samsung Mobile
SamsungGalaxy Note
SamsungMobile
27 Mark Dimas
8,785,030
Change.org
28 Playtika / Buffalo Studios
8,324,353
Slotomania
BINGO Blitz
Caesars Casino
WSOP Texas Holdem Poker
Farkle Pro
29 waze
7,865,173
Waze
30 Jelly Button Games LTD
8,061,195
Pirate Kings
Match King Go
31 Amazon Services LLC
7,696,449
Amazon
Amazon
32 9GAG
7,508,334
9GAG
33 Developer 1443601
7,641,029
Viber
34 Yahoo!
7,640,220
Yahoo
Hala Madrid!
Yahoo! Social Bar
Yahoo! Pages
Yahoo! Fantasy Basketball
35 Shazam Entertainment Limited
7,287,440
Shazam
36 Scribd
7,057,610
Scribd
37 Gameloft
7,098,313
Despicable Me: Minion Rush
UNO & Friends
Asphalt Airborne
Green Farm 3
Gangstar Vegas
38 RockYou!
6,590,223
Kitchen Scramble
Zoo World
City Girl Life
Fashion Designer
Mall World
39 Netflix.com
6,991,842
Netflix
Netflix Updates
40 CookApps
6,361,538
Buggle
Pengle
Pudding Pop
Solitaire in Wonderland
Pig & Dragon
41 SlideShare
6,095,465
SlideShare
42 Nordeus
5,934,823
Top Eleven Be a Football Manager
43 Sony Computer Entertainment Inc.
6,024,136
PlayStation Network
44 FunPlus Game
5,803,380
Family Farm
45 Blogmusik
5,425,858
Deezer
46 Geewa
5,359,497
Pool Live Tour
47 Pandora
5,130,831
Pandora
Pandora
48 Octro, Inc.
4,784,710
TeenPatti
Indian Rummy
4,825,274
50 Thunderpenny
4,963,616
51 GAMEGOS
4,625,909
52 Airbnb
4,259,362
Airbnb
53 Foursquare
4,305,877
Swarm
54 Twitter
3,991,757
55 Woobox
4,149,577
56 Dailymotion
3,990,931
57 MindJolt
4,057,902
58 MegaZebra
3,785,208
59 Mynet
3,553,292
Mynet Ã‡anak Okey
60 Groupon
3,105,654
Groupon
61 Goodreads
3,478,121
62 Bandsintown
3,525,082
Bandsintown
3,228,919
The Sims FreePlay
64 Globo.com
3,253,216
65 Cheerful, inc.
3,392,023
Flipagram
Cheers
66 Qublix
3,224,697
Safari Escape
Crystal Island
67 True Software Scandinavia AB
3,161,942
Truecaller
68 Etsy
2,927,498
Etsy
3,049,081
Tango
70 DoubleDown Interactive
2,922,321
DoubleDown Casino - Free Slots
71 runtastic
3,041,705
Runtastic.com
Runtastic Road Bike
72 Out Fit 7 Limited
3,249,224
My Talking Tom
Talking Pierre for iPad
Talking Ginger for iPad
Talking Ginger
73 Rovio
2,979,427
Angry Birds Friends
Angry Birds Go!
Juice Cubes
Bad Piggies Best Egg Recipes
Angry Birds Ultrabookâ„¢ Adventure
74 Rotten Tomatoes
3,023,731
Rotten Tomatoes
Rotten Tomatoes Mini Site Widget
75 GoFundMe
2,730,531
GoFundMe
76 Tetris Online
2,779,482
Tetris Battle
Tetris Friends
Monster Fusion
Monster Fantasy
Lost Trails
77 Wattpad
2,917,802
Wattpad
78 Taringa!
2,763,793
Taringa!
79 piZap
2,725,042
piZap
Pizap Photo Votes
80 Rounds
2,714,525
Rounds
81 Boyaa
2,556,617
Poker Texas Boyaa
82 Ludia
2,506,344
Family Feud & Friends
The Price Is Right Slots
Who Wants To Be A Millionaire
The Price Is Right Game
83 BuzzFeed.com
2,530,891
BuzzFeed
Hotness
84 Williams Interactive, Inc.
2,363,554
Jackpot Party Casino Slots
Gold Fish Casino Slots
85 PurpleKiwii
2,240,548
Monster Busters
86 Clear Channel Broadcasting, Inc.
2,325,041
iHeartRadio
87 LOVOO GmbH
2,397,541
88 MediaFire
2,175,269
MediaFire
89 The Guardian
2,239,254
The Guardian
90 myYearbook
2,286,085
MeetMe
2,069,020
Twoo
92 Quora
2,123,006
93 Flipboard
2,121,689
Flipboard
94 Target Corporation
2,081,703
Cartwheel by Target
95 Product Madness
2,093,232
Heart of Vegas REAL Casino Slots
Hollywood Spins
3D Slots
Celebrity Slots
96 Terra Networks
2,009,248
Terra
Terra Gadgets
97 Glu Games Inc
1,984,421
Racing Rivals
Dino Hunter: Deadly Shores
98 Nokia
2,074,236
99 Halfbrick
1,997,756
Jetpack Joyride
Fruit Ninja Frenzy
2,427,322
Sports Heads Football 2
Super Sports Heads Football
Parking Mania
Renegade Racing
Ragdoll Achievement Game
100 Vipo Komunikacijos
Miniclip.com
Mini Pets
Jelly Mania
Up Beat Game
Social Empires
Revienta el teclado
Badoo
Timehop
PlayStation Network Application
Royal Story
Family Farm Seaside
Pirates Poker
Reversi Live!
Gomoku Live!
Super Ferme
Geewa.com
Fashland - Dress Up for Fashion
Solitaire Story
Obyo Games
Twitter
Twitter
Wish
Cafeland
Marketland
Foursquare
Twitter
Twitter
Dailymotion
Dailymotion VideoTab
Math Minute
Word Search
Dots II
The Official Paddle Ball
Mahjong Trails
Suburbia
Solitaire Castle
Mahjong
Diamond Slots
Mynet
Mynet Ã‡anak 101 Okey
Tavla
Mynet Ã‡anak Ä°haleli Batak
Solitaire Tales
Solitaire Atlantis
Bubble Age
Bouncing Balls
Goodreads
Globo.com
piZap.com
Jurassic Park Builder
CartolaFC
Lovoo
The Guardian Volatility Index
Quora
Jackpot Dreams Casino
Nokia
39
August 17, 2015
Figure 29. Android Playstore Developer Ranking (July 2015)
Developer
1 King
2 Machine Zone, Inc.
3 Supercell
4 Playtika
5 Zynga
6 Com2uS
7 Empire Game Studio
8 Big Fish Games
9 IGG.COM
10 SGN
11 Electronic Arts Inc
12 GREE, INC
13 Pandora
14 Kabam
15 Kabam
16 Williams Interactive
17 TinyCo
18 PlayStudios
19 Pacific Interactive LTD.
20 mobage
21 Double Down Interactive, LLC.
22 GSN.com
23 ELECTRONIC ARTS
24 Miniclip.com
25 Glu
26 Buffalo Studios, LLC
27 socialpoint
28 gumi Inc.
29 Etermax
30 Cie Games
Est. Revenue
$450,677,238
$294,986,492
$171,518,290
$63,861,865
$56,502,600
$54,653,246
$51,419,802
$46,937,900
$38,224,604
$36,621,527
$35,561,944
$30,680,736
$30,336,368
$29,154,520
$22,783,016
$20,805,335
$20,425,269
$18,189,299
$17,911,835
$17,453,553
$17,114,770
$16,887,983
$16,402,522
$15,161,982
$14,354,662
$14,298,019
$13,539,927
$13,489,597
$13,202,787
$12,329,091
Figure 30. iOS North America Developer Ranking July 2015
Developer
1 King.com Limited
2 Machine Zone, Inc
3 Supercell Oy
4 Big Fish Games, Inc
5 Pandora Media, Inc.
6 Double Down Interactive, LLC
7 Electronic Arts
8 Zynga Inc.
9 Playtika LTD
10 Home Box Office Inc.
11 Spotify
12 Kabam Inc.
13 Game Show Network
14 SGN
15 Funzio, Inc
16 TeamLava, LLC
17 Glu Games Inc.
18 Phantom EFX, Inc.
19 Disney
20 Playstudios, Inc.
21 Etermax
22 BitRhymes
23 Mojang AB
24 Match.com, LLC
25 Product Madness, Inc
26 Warner Bros.
27 Com2uS Corp.
28 Pacific-Interactive ltd
29 Zoosk, Inc.
30 Buffalo Studios, LLC
Est. Revenue
$568,544,398
$459,090,454
$241,686,168
$140,248,942
$111,214,572
$106,675,097
$93,907,657
$90,149,725
$83,467,107
$63,808,329
$52,935,913
$52,791,753
$46,789,316
$41,415,489
$35,178,974
$34,454,642
$34,102,781
$31,839,286
$28,994,170
$27,600,770
$27,338,716
$26,850,800
$25,441,559
$25,351,549
$24,908,380
$22,268,693
$20,728,960
$20,585,009
$20,579,655
$19,530,154
We believe that all operators should want to have the most expansive social media
presence as possible, which means having an offering across all three major platforms
and offering a wide array of games across different segments of the social media game
segments. In our view, near-term growth for the more mature players, DoubleDown and
Playtika, will be limited without strategies that include non-casino games.
From our perspective, the companies discussed here have three choices. They can stay
within the casino segment, a segment that isn’t their exclusive domain, as exhibited by
the likes of Zynga, or they can expand into other segments, taking the fight to their
competitors’ playing fields. If they opt to fight, they must choose whether to go after
the casual segment or the midcore segment. Both are widely competitive, and both are
dominated by just one or two developers.
40
August 17, 2015
Major Social Media Game Segments



Casual: Candy Crush, Texas Hold Em Poker, Slotomania, DoubleDown Casino
Midcore: Clash of Clans
Core: League of Legends, Minecraft, CounterStrike
CASUAL GAMES
Casual games have little to no learning curve and can be played at leisure and
convenience. Casino-style games tend to fall in this category. Today, companies such as
IGT, SGMS, and Aristocrat simply port video reel slot content from their remote game
servers and adapt the content for social play. The development of casino games such as
poker and blackjack applies intelligence from their real money operations, but the math
and development behind these games isn’t anything proprietary or unique. For this
reason, the rollout and development of social casino gaming has been profitable for
operators, as they have avoided heavily investing in game development and marketing.
Moving beyond this, it’s a blank slate, as casual games and different core games have
considerably higher development costs and even higher marketing costs.
In the casual game category, moving into the non-casino game segment looks appealing.
Operators such as Zynga have done the reverse, having commanded a position in the
casual non-casino segment and then moving into the casino segment with Zynga Poker,
a dominant offering in the category today.
Although it’s difficult to suggest that gaming manufacturers can take on the likes of
Candy Crush, the industry does employ a considerable amount of game development
talent that must meet far more stringent demands of regulators and operators. As such,
there seems to be an opportunity for manufacturers to make inroads into the casual
corner of the social gaming industry.
MIDCORE
Assuming an operator opts not to pursue a large role in casual gaming, the next and
only other reasonable choice is the midcore segment, which arose from the idea that
there are players who want more. There are core (read “hard core”) gamers who would
spend five hours a day or more playing PC or console-based games. These games often
have steep learning curves and are not intended for casual play. In the midcore
segment, one finds games that are more engaging than casual games but because they
typically have more mobile interfaces, they have minimal learning curves and can be
played on a more casual basis. As such, players can lead busier lives, with jobs, kids, etc.
The midcore segment is also benefiting from people’s dissatisfaction with casual games.
For players who started with casual games, midcore games offer a somewhat more
tangible experience.
The only manufacturer that is even considering midcore games today is Churchill
Downs’ BigFish Games business, which is following a strategy laid out prior to the
purchase by Churchill.
CONCLUSION RE: MAJOR SOCIAL MEDIA GAMES
Development cost is the main challenge in the casual and midcore segments. For
manufacturers to maintain growth, they must expand beyond ported slot content. This
will take capital, with midcore game development costs approximating $2MM-$5MM.
However, the real challenge is in marketing games in these segments, as games such as
41
August 17, 2015
Clash of Clans and Bomb Beach now command primetime national marketing fees.
These higher costs will all have a significant effect on the industry’s favorable margins.
We believe this will hinder some market participants, as cash for product development
will be carefully watched vs. cash available for debt service and capital returns.
Also Important Is Platform Development: Mobile All the Way. Today, the industry is
moving at an accelerated pace toward mobile applications. As noted earlier, between
1Q13 and 1Q15, Facebook’s total user base grew 29.8% and mobile-only users surged
207%, while PC-only users declined 46%. Mobile-only users of FB went from 25% of
mobile to 46.5%, almost half of all mobile users. A couple trends are driving this: First is
that growth rates are higher in emerging markets, such as China, Latin American and
Eastern Europe, where PC ownership is considerably lower than it is in Western
markets, such as the US, Australia, and Western Europe. Second, in Western markets,
the advent of more powerful tablets is causing a decline in PC sales. Consider that in
May 2013, iPhone and iPad game revenues for Playtika, DoubleDown, BigFish, Zynga,
and GSN were roughly the same. A little over two years later, iPad revenues are 168%
higher.
Figure 31. iPad and iPhone Revenue Trends
$25
US$ millions
R² = 0.8908
$20
$15
R² = 0.8704
$10
$5
iPhone
iPad
Jul-15
Jun-15
Apr-15
May-15
Jan-15
Feb-15
Mar-15
Dec-14
Oct-14
Iphone Trendline
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Jan-14
Feb-14
Mar-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
$-
Ipad TrendLine
42
August 17, 2015
Company Strategies
IGT
IGT’s social media strategy is defined by its DoubleDown casino offering. As an individual
app, its performance is one of the best among its peers. Importantly, the app is offered
across all platforms, including Facebook, iOS, and Android. Where the offering falls short
is when one looks at DoubleDown as a developer, as its rivals offer a wider variety of
apps. Though DD is probably not a fair comparison against Zynga, CZR’s Playtika/Buffalo
Studio developers far outperform DD on Facebook, largely because of the proliferation
of game offerings. IGT also offers casino customers offshoots of DoubleDown, whereby
IGT hosts sites that are branded by a casino operator as a form of marketing and
customer retention. Given DD’s relative maturity, we believe IGT can grow as it expands
the language and international experience of DD. However, we believe that meaningful
growth will come only with IGT’s expansion into other portions of the social media
segment. We will look for the integration of IGT’s legacy content library with GTECH’s
European interactive and online platforms as a focal point of growth in the near term.
SGMS
Relative to others in the gaming industry, SGMS has barely scratched the surface of the
interactive business. As a collection of several larger gaming companies that have
merged, it’s surprising that SGMS doesn’t have more of a social media presence. Its
strongest social media presence is via WMS’s legacy JackpotParty business, especially
via Facebook and, to a lesser extent, Android. The addition of Bally brings Dragonplay as
a further push into the segment. Compared with its gaming peers, the company doesn’t
rank in the iOS category, probably because of a difference in strategy, as the company
seeks to use its online social media via iOS and Android to market existing casino
operations. At present, the company has iOS and Android applications in Affinity
Gaming, Parx Casino, and Snoqualmie, which are extensions of SGMS’s Play4Fun
offering. Play4Fun are operator-specific websites that allow patrons to play casino
games for fun and accrue player points. At Parx, the platform takes it one step further,
offering customers the opportunity to play for fun, as well as the ability to purchase
virtual coins in a “for-fun” environment.
We believe that SGMS is positioning itself to make a similar but greater push into the
interactive segment with a recent agreement with Penn National. Today, Penn National
has a minimal online presence but with the recent appointment of Chris Sheffield as MD
of I-Gaming, the company aims to change this. Beyond this, we don’t believe that SGMS
will make much of a move in social media or online gaming, as we conclude that M&A is
probably its best strategy at this point. Given SGMS’s deleveraging needs, we don’t think
there is much appetite for M&A. Also, for SGMS to make a meaningful push to compete
against existing operators, such as IGT, CHDN, or CZR, would require a considerable
capital commitment that we don’t believe SGMS has the stomach for today.
CHDN
By way of its purchase of BigFish games, Churchill Downs is really the only gamingcentric company that operates outside the confines of for-fun casino games. The
company offers a host of casual games, including a strong position in the casino
segment. Its strategy is to expand its presence as it makes a pronounced move into the
midcore category while maintaining its strong position in the casual and casino game
segments. BigFish isn’t without challenges, as it has limited exposure to Facebook, with
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August 17, 2015
greater exposer to iOS and PC-based games. We believe BigFish will continue to broaden
its gaming offering while further focusing on Facebook and the mobile environment.
CZR
Caesars has been one of the first in the core casino space to move into social gaming,
seeking to leverage its vast player network and expansive reach of land-based casinos.
Slotomania remains a stable and core driver of Caesars’ social gaming offering, and the
company has very much borne out the importance of growth by acquisition, picking up
Buffalo Studios and Pacific Interactive since the Playtika (Slotomania) acquisition.
Caesars has focused primarily on casino-style gaming content for its online offering and
will probably continue to do so because it is strategically leveraging its player database
and aims to cross-sell from land-based casinos to online outlets. Social casino games
tend to carry higher monetization rates and higher margins given the cross-marketing
opportunities with the player database and land-based casinos. The overall Caesars
corporate family has a cost-savings initiative to eliminate mail-based marketing, shifting
entirely online and furthering its strategy to integrate its casino and online platforms.
Figure 32. Major Provider, Peer Average Daily User Trends
DAUs
7,000
$0.50
6,061
5,706
5,640
5,681
5,704
$0.40
2,300
1,929
1,800
1,910
1,600
1,816
1,400
1,833
1,705
1,300
1,775
$0.15
1,200
1,716
$0.20
1,690
$0.26
$0.25
2,000
1,690
$0.39
$0.43
$0.45
$0.45
$0.29
$0.28
$0.22
$0.22
3Q14
4Q14
$0.43
-
$0.46
$0.36
$0.30
3,000
1,000
$0.40
$0.41
$0.35
4,639
4,803
4,952
5,259
4,000
ARPDAU ($)
$0.45
6,000
5,000
Figure 33. Major Provider, Peer ARPDAU Trends
$0.14
$0.16
$0.17
$0.24
$0.26
$0.31
$0.21
$0.23
$0.22
$0.20
$0.10
$0.05
$0.00
1Q13
2Q13
3Q13
4Q13
CIE
1Q14
SGMS
2Q14
3Q14
IGT
4Q14
1Q15
1Q13
2Q13
3Q13
CIE
4Q13
1Q14
SGMS
2Q14
1Q15
IGT
M&A Driving Growth in All Interactive Segments
Without exception, manufacturers and gaming industry suppliers with the most
meaningful interactive gaming businesses have gotten a considerable leg up with M&A
activity in the space. To be clear, every major gaming technology company today—
without exception—has made some form of acquisition to better position itself in the
online and interactive gaming technology space. The largest acquirers of interactive and
social gaming technology include CZR, IGT, and CHDN, all of which have made material
M&A purchases. Thus, it appears that considerable growth in the interactive space is
most likely at the hand of larger M&A and less on the organic side. Although valuation
and purchase price multiples have increased, we believe that M&A will continue to drive
operators’ expansion into interactive gaming.
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August 17, 2015
SELECT RECENT INTERACTIVE M&A TRANSACTIONS







Churchill Downs
o Big Fish Games—$885MM ($485MM + $350MM earn-out). Expansive social
gaming site, initially an iOS platform, expanding onto Facebook. Upfront payment
of $485MM is 8.5x adjusted EBITDA, with the earn-out based on 9.0x EBITDA in
excess of $51.2MM.
IGT
o DoubleDown—$500MM ($250MM + $85M retention + $165MM earn-out). Social
gaming, expanded to include real money wagering sites. Initially Facebookspecific. Expanded to other formats.
Caesars Interactive Entertainment
o Playtika—Est. total acquisition cost of $125MM (Slotomania play-for-fun social
casino available on all major platforms—Facebook, Android, iOS, and Amazon.
o Buffalo Studios—$105MM ($45MM + $59MM contingent). Bingo Blitz play-forfun.
o Pacific Interactive—Est. $90MM price. House of Fun social casino-themed games.
Bally
o Dragonplay—$100MM ($51MM up front + $49MM earn-out). Social game casino
developer for Android, Facebook, and iOS.
o ChiliGaming—Social gaming developer and B2B online gaming platform. Heavy
exposure to Europe and France.
WMS
o Jadestone Group AB, online gaming solutions provider. Purchase price not
disclosed but paid for with cash on hand.
o Phantom EFX. Casino game developer for social media outlets. Purchase price not
disclosed.
Amaya Inc.
o Rational Group Ltd.—$4.9B. PokerStars and Full Tilt Poker, with 85MM registered
online poker players.
o Bwin.party (currently in negotiations).
Aristocrat
o GameAccount Network
o Product Madness
Other major deals in recent M&A history outside the gaming technology space include
SoftBank, the Japanese telecom company that spent $1.5B for a controlling stake in
Supercell (Clash of Clans), and Microsoft, which acquired Mojang, creator of the widely
popular Minecraft game, for a deal valued at $2.5B.
Real Money Online Wagering
One of the biggest disappointments within the US gaming technology space has been
with real money online gaming. With the reversal of the Wire Act in the USA, there
were great expectations that the U.S. would see a flurry of activity around the
legalization of online gaming. Efforts to effect a federal legislation never came close to
the executive level and today, political forces exist that are pushing to further reduce
the possibility federal legislation ever occurs. Today, the only states to allow full online
gaming are Delaware and New Jersey, follow by Nevada, which allows online poker. We
believe that opportunities exist for other states to follow suit. Market conjecture
suggests that online poker could pass in California and there have been rumblings of
online gaming legislation in Pennsylvania.
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August 17, 2015
There were high hopes for online gaming in New Jersey, as investors and operators
looked for the market to be a proving ground for the potency of the opportunity.
Unfortunately, multiple forces worked against efforts to establish a viable market,
beyond the challenges of Atlantic City. Geolocation requirement and verification proved
crushing, especially to anyone near a New Jersey border or using wireless computer
hardware. While the technology has been improved and the aggressiveness of the
implementation relaxed, the damage has been done. Second, financial service providers
have been hesitant to adopt and allow the use of their products within the online
gaming environment. While there has been some movement here, there are still major
holdouts. It’s worth noting that NJ online gaming has been seeing better performance
over the last several months.
In Europe, where online gaming has been around for years, the situation isn’t all that
much better. First, individual countries have been looking to further regulate their
markets, ring fencing the markets to players within their borders, locking out nontaxable gray market operators. While in markets such as the UK, regulators have taken
a more aggressive stance on operators domiciled in tax free regions of Europe. Despite
this, new opportunities continue to develop for the owners of casino content. Recently,
Spain opened up and launched its regulated market to online casino games. With as
many as 50 licenses awarded for the state, suggesting few if anyone in the market will
be that profitable, given the competition. 2Q15 revenues from Spain proved
disappointing, as performance suggest just a share shift vs a real market expansion of
the Spanish online gaming market. Of course, optimism rules supreme and it’s always
the next market that will be the winner. We look to the eventual regulation in Germany
and the potential of online poker in Russia as the next hopeful markets in Europe.
Looking forward, we look for online gaming regulation to be a slow, long process,
progressing state by state, much like regional gaming has over the last 20 years in the
USA. We would add that we look at the current trend of fantasy sports and note the
considerable similarities to it and online poker in the USA, before regulators shut it
down. Our only hope is that Fantasy Sports don’t suffer a similar fate and setback
efforts for regulated online gaming even further.
REMOTE GAME SERVERS (RGS)
Today, operators have limited exposure to the operation of B2C online gaming sites, as
they remain cautious not to compete with their customers. The end result is providing
B2B services to operators of online gaming sites globally, via their Remote Game
Servers, or RGS.
Initially heralded as the next major stage in the evolution of gaming technology, remote
game servers (RGS) are actually a very small part of the interactive business. By design,
at this point, every manufacturer can and probably does have a remote game server.
Simply, the RGS houses a manufacturer’s real money gaming software for use with
online gaming sites. In the US, the only states that uses theses platforms are Delaware
and New Jersey, since they are the only states with legal online casino gaming. As a
result, most RGS volume is done in Europe and the UK.
Remote game servers are not new. They were expected to be a backbone of network
gaming, a technology that never fully caught on with operators. Manufacturers use their
RGS capacity in different ways. In Europe, some manufacturers operate their own “formoney” online gaming sites that draw from their RGS to provide game content. In these
markets, competing online sites can, for a fee, draw from a manufacturer’s RGS. For
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August 17, 2015
example, bwin.party digital entertainment (BWIN) operates online gaming sites in the
UK and the US (New Jersey). Although bwin has its own in-house content, it will also
draw from IGT’s or other companies’ RGS content library for its own site. The likes of
bwin will seek to limit their use of third-party content, as it’s far more costly than
homegrown content, even though it’s frequently far more productive. It’s about balance
of content.
Most manufacturers have RGS technology, but the bottom-line contribution is
negligible. Fortunately, development costs are minimal, as manufacturers are simply
porting existing game titles to an online environment. Growth in this segment is
controlled as operators port more content and make it more globally accessible, often
updating for language and regional regulations as well as cultural preferences. We
foresee minimal growth in RGS without major changes in online gaming laws in the
United States and other populous nations with considerable per-capita GDP and
propensity to gamble.
INTERACTIVE LOTTERY
Even though interactive or online lottery is a new phenomenon in the US, it has been a
fact of life in Europe for years. Online lottery sales represent less than 1% of any US
market, but they command 40%-50% of sales in some markets in Europe.
In the most simplistic analysis, online lottery offers an unlimited number of distribution
points. This compares with the US method of distribution, which relies on liquor and
convenience stores. The latter is a far less efficient means of distribution and is probably
why New York and Illinois lottery commissions sued at the federal level to overturn the
Wire Act. Overturning the act allowed the online sale of lottery products and also fueled
a push for online gaming in North America.
We believe it’s only a matter of time before the US lottery market starts to look more
like the European lottery market with greater use of online distribution channels. US
lottery markets are starting to show signs of maturity, growing only because of new
market expansion and underlying inflation. As states seek to bolster revenues, the
expansion of online lottery sales appears to be an easy path.
We would note that recently, several US based credit card operators changed their
coding, allowing for the purchase of lottery tickets via credit cards. Traditionally,
lottery tickets have been a cash purchases. Allowing credit card sales will have two
impacts. First, it will allow for online purchases of lottery tickets. Second, it will allow for
the purchase of “gambling like” products via credit cards, a positive for the online
gaming industry.
I-GAMING: EUROPEAN INITIATIVE, WITH SPORTS BOOK OPPORTUNITY
In short, the only story in the online gaming market is one that includes the US. Will the
US ever allow online gaming? If the answer is yes, then online gaming will provide an
extraordinarily lucrative windfall for gaming tech operators, among other industry
participants. If the answer is no, then online gaming will continue to exist in limited
capacity in North America, in a sparsely populated Canada, in New Jersey, and, to a
limited extent (poker), in Nevada.
In Europe, increasing regulation has taken a toll on online gaming, as the ring-fencing of
markets has reduced play from external regions. In the UK, higher taxes and fees have
limited the appeal to players and operators. Thus, it’s difficult to foresee online gaming
47
August 17, 2015
growing in any meaningful way in the foreseeable future in Europe. Also, profit margins
for poker and sports book pale in comparison to those for online slot play and digital
table games. As a result of these broader industry headwinds, we have seen a move for
industry consolidation, with suitors like Amaya Gaming and GVC Holdings pursuing bwin
and the recent deal announced between Gala Coral and Ladbrokes in the UK.
MGM SPORTS BOOK AND ONLINE CASINO – A LOOK INTO THE FUTURE?
MGM is taking online gaming to a whole new level, as the company is well into the
development of an online gaming environment for its Nevada operations. Here, the
company is moving to a mobile-based sports book business that will allow patrons to
place wagers from their mobile devices anywhere on MGM’s properties. Patrons can
place more lucrative proposition wagers without returning to the sports book or
watching the event within the sports book. Probably more meaningful for the company
is that the system will also allow patrons to play slot machines on mobile devices while
on MGM’s properties; customers can play their favorite slots while sitting at the bar, by
the pool, or in their rooms. This strikes us as especially promising, as it is unlikely to lead
to more slot machines on site. Rather, we foresee a reduction in on-floor slot content,
pushing slot systems to the online side.
DAILY FANTASY SPORTS LEAGUES
Typical league entry fees for the mass market generally amount to $1—$25, but highstakes games can require entry fees north of $1,000. Competitors like FanDuel generally
take about 10% of the prize pool as a fee (or entry fee). FanDuel reportedly generated
$57.3MM of net revenue after $564.5MM of prizes paid in 2014, up from just $14MM in
2013.
At present, the business model is geared very much toward the high roller. FanDuel
suggests that about 80% of its revenue is generated by its top-quintile of players, some
of whom claim to spend as much as $35,000 a week or more. It has been reported that
some successful players have earned six figures in annual profits competing in daily
fantasy sports leagues.
The longevity of the business remains to be seen, and with two primary competitors,
FanDuel appears to be winning the race. We view this business as similar to online
poker, where liquidity is king. The greater the player base, the higher the prize pool, and
subsequently the higher the revenue. The business model requires substantial scale,
which means customer acquisition and retention costs will be high as long as it’s a free
market. Start-up costs, meanwhile, prove relatively minimal, at least for some of the
large gaming companies we know of, which could probably get started for a quarter’s
worth of capex. However, the operating model so far has proved unprofitable, as
customer acquisition remains highly competitive in this new business. Advertising costs
are significant, particularly during high-profile sporting events aimed at attracting new
players. Thinking about the cost of air time during the Super Bowl, it’s easy to see how
costs can be high.
At this point, it seems that since the business model operates much like online poker,
one might wonder how it is legal. The answer is hotly contested, though there appears
to be a loophole in the 2006 Unlawful Internet Gaming Enforcement Act, which cracked
down on online poker. The loophole appears to define fantasy sports as a game of skill,
exempting it from the online gambling rules.
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August 17, 2015
Considering how young the business is, many high-roller daily fantasy players are what
the online poker business refers to as “sharks,” preying on the many amateur players
(fish) out there. A similar dynamic existed for online poker in the US, where a small
percentage of well-funded, experienced, and focused players were able to win small
amounts from many leisure players. In an unregulated or uncompetitive environment,
we often see the “fish” pool dry up over time as people become sick of losing. This could
ultimately cause a liquidity crunch. This is another reason new customer acquisition and
retention are very important.
One thing daily fantasy sports has going for it that online poker or sports gambling never
had in the US is support from contingencies. The rise of fantasy sports in the US has
proved lucrative for professional sports leagues, allowing for rapid growth of new fans
and of committed fans who engage in sports as a result of fantasy leagues. For online
poker, land-based operators considerably opposed the notion, and for sports gambling,
the major sports leagues oppose it, for the most part. With support from the right
contingencies, like sports leagues, fantasy daily sports appear poised for growth and
acceptance.
FanDuel. The business model of this New York-based fantasy sports provider of daily
games revolves around small-stakes daily fantasy leagues. Essentially, for a few dollars,
a person can draft a fantasy sports roster each day and compete against thousands of
other players. Scale is the key to this business model. Given this scale, cash prizes on any
given day can total thousands or even hundreds of thousands of dollars and on occasion
can reach seven figures. At present, FanDuel has over 1MM paying users and controls
about two-thirds of the daily fantasy sports business. Key investors in the business
include private equity firms and the National Basketball Association, whose
commissioner has publicly supported legalizing sports gambling. It is estimated that the
last capital raise for FanDuel valued the company in excess of $1B.
DraftKings. It is estimated that DraftKings, the Boston-based No. 2 player in the daily
fantasy sports business, has just one third of FanDuel’s user base.
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August 17, 2015
We are initiating coverage of IGT with a Buy rating and a price target of $24, which
assumes a multiple of 7.5x our 2016 EBITDA estimate of $1,753MM.
Figure 34. International Game Technology FCF Yield
FREE CASH FLOW
Adjusted EBITDA
Interest expense, net
2015E
1,601.8
2016E
1,752.5
2017E
1,825.8
(423.2)
(434.8)
(424.7)
(80.9)
(244.7)
(282.8)
Maintenance capex
(467.0)
(400.0)
(400.0)
One-time cash charges
(111.0)
Free Cash Flow
Italy Lotto Renew al
Tax expense, net
0.0
0.0
$519.8
$673.0
$718.3
(387.0)
(276.4)
(110.6)
Other project capex
0.0
Net borrow ing
0.0
0.0
0.0
(160.0)
(280.0)
$132.8
$236.6
$327.7
FCF / Share (LTM)
$2.69
$3.41
$3.64
FCF Yield % (Current Price)
13.6%
17.3%
18.5%
FCF Yield % (Target Price)
11.2%
14.2%
15.2%
Free Cash Flow To Equity
Investment Case
We view IGT as an execution story, backed up by strong free cash flow. Unlike SGMS,
IGT does not face a heavy debt burden. IGT’s challenges are related largely to
operational execution, mainly righting several wrongs on the traditional gaming front.
As such, the company is on track to achieve $230MM in merger synergies with 2/3
expected in 2015 and the benefits to be felt in 2016. The important part being that
these synergies will be achieved without highly disruptive headcount reductions in
customer facing positions. These synergies will support strong earnings flow through
and only add to the free cash flow story with a dividend yielding 5.4% today, supported
by a dominant position in the system side of global lottery business. Add to this a
commanding interactive business that continues to grow and provide IGT access to the
large and growing mobile and interactive segment detailed in this report.
With this as the foundation of the story, we see additional building blocks to support
our more optimistic view. Encouraging trends within IGT’s gaming hardware business as
two new cabinets, the Crystal Dual and the S3000, are beginning to gain traction. There
are some early indications that IGT is seeing some stabilization within its gaming
operations business. Collectively, these two items represents the most challenging part
of the IGT story, but also the area that could potentially drive the most upside. In
addition, the new leaders of IGT have already started to address the human capital issue
that has plagued legacy-IGT in recent years. The change, while filling gaping holes in
management is also changing the culture, which over the last several years, has been to
lead from the top, exclusively. Providing some level of divisional and regional autonomy
will go a long way to reversing the talent drain at IGT. Chatter on the street suggests
that IGT could announce some more high profile additions sooner than later.
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August 17, 2015
Figure 35. IGT Legacy Revenue Mix LTM
March 2015
Figure 36. GTECH Legacy Revenue Mix LTM
March 2015
Figure 37. IGT Pro Forma Revenue Mix 2015E
Other,
$369
Other, $453
Interactive,
$355
Gaming Ops,
$853
Equipment
Sales,
$210
Gaming Ops,
$835
Gaming
Equipment,
$663
Lottery,
$2,275
Interactive,
$484
Gaming
Equipment,
$693
Lottery,
$2,049
Interactive,
$122
Gaming Ops,
$1,479
RECURRING REVENUE
With the combination of GTECH and IGT, the business model has shifted considerably
and is significantly geared toward recurring revenue. The lottery and gaming operations
segments combined constitute nearly 70% of net revenue, and when the interactive
segment is included, this recurring revenue stream steps up to nearly 80%. The volatile
equipment sales business is expected to account for less than 15% of overall net
revenue.
Because of the significant contribution of recurring revenue, we feel comfortable with
IGT’s dividend policy and expect the lower volatility of earnings from slot machine sales
to ultimately help the stock’s valuation. However, we believe a few things must happen
before the Street becomes comfortable with the recurring revenue and new business
model here. First, in view of how important the Italian lottery is, the market will need
some level of confidence in the renewal of these concessions. Second, we don’t expect
the stability of the business combination revenue model to immediately convince
investors, as traditional US gaming tech investors are probably all too familiar with the
quarterly volatility pre-consolidation. We expect a few quarters of consistency would
really help IGT’s valuation and get investors comfortable with the strong FCF profile of
the new recurring business model.
LOTTERY REMAINS CORNERSTONE OF FREE CASH FLOW – ITALIAN LOTTO
RENEWAL THE PRIMARY OVERHANG
We forecast that IGT’s lottery business will generate $2B of net revenue in 2015,
accounting for about 40% of total revenue. IGT’s lottery business is focused on North
America and Italy. We estimate that the American lottery business accounts for more
than 40% IGT’s lottery revenue, followed closely by Italian Lotto and instant tickets
(combined), with the balance coming from other foreign lottery markets.
The stability and recurring nature of IGT’s lottery business will largely support the free
cash flow story for IGT going forward. The most significant step in protecting IGT’s
current free cash flow stream is the successful extension of the Italian lottery. Although
expectations are high, uncertainty about IGT’s quest to renew its Lotto concession will
remain an overhang on the shares. However, we believe the prospects for IGT to lose
the Italian lottery are long. The size and magnitude of the venture will in itself be a
limiting factor for some. Leverage and being domiciled in North America will keep SGMS
from directly bidding on the contract, though the prospect of joint bids is very real.
Assuming a joint bid, execution is then the concern. We look at the Turkish lottery,
which saw irresponsible levels of overbidding, which ultimately resulted in the winner
51
August 17, 2015
defaulting and indications are that the next in line might not make it as well. If such a
string of events were to happen in Italy, it would be challenging for the Italian
government, which depends on revenue from the lottery.
STABILIZE, THEN GROW GAMING OPERATIONS, THE OTHER FREE CASH FLOW
IGT’s gaming operations business should contribute about $1.4B of pro forma net
revenue in 2015, with half coming from the legacy IGT North America business. The
Italian VLT business constitutes about 40% of net gaming operations revenue, by our
estimate, while the balance comes from the company’s combined international gaming
ops segments.
Figure 38. International Game Technology Installed Base (Pro Forma)
80,000
70,000
Installed Base
69,159
8,136
60,000
16,825
66,372
8,202
16,733
50,000
40,000
44,198
41,437
64,117
62,453
60,815
60,312
8,378
8,392
8,529
8,465
16,637
16,524
16,526
16,515
35,760
35,332
1Q15
2Q15
39,102
37,537
30,000
20,000
10,000
-
1Q14
Casino
2Q14
3Q14
4Q14
VLT Government Sponsored (ex. Italy)
VLT Italy Supplier (B2B)
The challenge to IGT—apart from the overhang of the Italian lottery—is its gaming
operations business. The company has seen its floor share and performance decline in
the past several years. Combined IGT’s global installed based has declined to 60,312,
down from 66,372 in 2Q14. In the Americas, the merged IGT installed base consists of
roughly 41,781, representing 70% of IGT’s total global installed base. We point to
several reasons for the decline in the industry discussion of this report. IGT has suffered
in the game development area, as key talent has left for what they view as a more
welcoming environment.
Mounting a recovery will be a challenge as it has historically taken missteps of a
competitor’s gaming operations business to fully regain valuable floor share. Despite
the odds, we are seeing early but positive signs. On IGT’s 2Q15 earnings call,
management noted that conversions from gaming operations to for sale had slowed
considerably and that sequentially, the decline in the installed base was only 400 units
in 2Q15, from 1Q15. Aiding this was the positive reception seen for GTECH’s legacy
Spielo gaming operations. Spielo is experiencing strong demand, specifically the 3D
Sphinx, Zuma and Bejeweled installations, offsetting some of the declines from IGT’s
legacy gaming operations platform. Finally, management noted that WAP yields have
actually improved. This is likely also from the inclusion of Spielo, as Spielo games are
traditionally fixed daily fee vs legacy IGT’s gaming operations, which are largely variable
52
August 17, 2015
daily fee machines. Historically, legacy IGT suffered disproportionality relative to its
peers given its heavier exposure to variable fee, but we believe that as regional gaming
trends improve, IGT should see a disproportional gain as yields improve from these
variable fee machines.
INTERACTIVE: DOUBLEDOWN AND CONTENT REMAIN GROWTH AND
VALUATION DRIVERS
IGT’s DoubleDown is an industry leader in social gaming, though the contribution by the
interactive business to the company’s overall earnings is relatively small. We project
about $485MM of net revenue from interactive in 2015, putting it at just less than 10%
of overall net revenue. The IGT legacy business constitutes about 75% of all interactive
revenues, with GTECH’s legacy operations making up the balance.
For growth, we believe IGT will continue to stay focused on exploiting its DoubleDown
platform. Daily active users of DoubleDown continue to grow, albeit at a more modest
pace. However, the monetization rate remains at an industry high and continues to push
higher. At present, DoubleDown features some of the industry’s highest daily revenue
per user, at over $0.45. IGT has boosted this metric for almost eight consecutive
quarters now and continues to push the envelope. While the platform stumbled in 2Q15
due in large part to system issues around platform migration, the completion positioned
DD for continued growth and diversification going forward. We believe IGT’s
combination with GTECH will only accelerate DoubleDown’s foray outside the US,
namely in Europe, which remains a relatively underpenetrated social gaming market for
DoubleDown. Penetration into mobile platforms remains the primary driver of higher
monetization rates. Looking into 2016 and 2017, we look to IGT’s implementation of its
OnPremise technology at MGM’s domestic properties, which will eventually offer
mobiles sports wagering and casino gaming at MGM’s properties. We would add that
DoubleDown represents an important cornerstone for IGT’s valuation, with further
growth of the platform driving the parent’s market valuation.
IGT CULTURAL CHANGE ONLY A POSITIVE
Over the last several years, IGT has been a source of challenging stories highlighting an
aggressive manage-from-above style. With sweeping changes done at the corporate
level and little consideration or input from regional or divisional management. In some
cases, entire teams or platforms fell into the hands of IGT’s competitors. The end result
has been a significant drain on human capital at IGT. We believe that IGT’s new
management has already made considerable strides in reversing this trend, as
highlighted by some of the improvements seen in the sales side of the organization. We
have also seen it at the manufacturing level, as optimism has replaced uncertainly at
IGT’s Reno facility. Market conjecture suggests that there are several high-profile
additions in the works that will further cement this new dynamic.
NEW CABINETS SPURRING GREATER DEMAND
Gaming equipment sales is the new IGT’s third-largest business, though it contributes
less than 15% of pro forma revenue. Much of this revenue is generated by the legacy
IGT equipment sales segment and is heavily skewed toward North America. Earlier in
the report, we chronicled the challenges that the gaming hardware segment faces, with
limited new supply expansion and increasing competitive pressures. For IGT, the lack of
innovative new hardware has weighed heavily on hardware sales, as prior management
took focused development dollars elsewhere.
53
August 17, 2015
2Q15 performance, however, was far better than most investors expected, with the
company shipping 10,147 units, up both sequentially and YoY. While the company
faces a very difficult 3Q14 comparison, we believe IGT’s for sale business is benefiting
from considerably better hardware along with a market with several manufacturers
poised to launch platforms at this year’s G2E. Finally, we believe that outside the USA,
the new hardware is getting a lift from the Spielo sales platform, which now has a
considerably larger portfolio of games to offer. New unit shipments for IGT’s legacy
operations have been tepid, though 2Q15 posted a rebound after a challenging 1Q15.
In the past two quarters combined, IGT has shipped only 900 new/expansion units. In
the past 12 months, legacy IGT shipped just 13,100 replacement units in North America.
This compares with nearly 29,000 units in the preceding 12 months. Further, ASPs have
been pressured for several quarters, owing primarily to the greater proportion of VLT
and VGT units shipped to markets in Canada and Illinois. As IGT rolls out its new
cabinets, we will look for some improvements in ASP, but given more tepid demand in
North America, our expectations are tempered.
Figure 39. International Game Technology Units Sold (Pro Forma)
14,000
Global Units Sold
12,701
12,000
10,000
2,643
10,147
9,839
9,528
9,401
3,365
2,494
10,058
8,000
6,000
2,187
1,358
8,170
6,474
6,907
6,828
7,960
595
6,233
4,000
2,000
1Q14
2Q14
3Q14
Replacement
4Q14
1Q15
2Q15
New/Expansion
54
August 17, 2015
Figure 40. IGT Crystal Dual Cabinet
Figure 41. IGT S3000 Cabinet
IGT has full production of its Crystal Core and S3000 running at its Reno headquarters,
with Spielo getting up to speed as production is consolidated under one roof. This has
allowed IGT to absorb more of the considerable capacity the Reno facility has to offer,
bolstering efficiency and driving margin improvements. As demand picks up, IGT’s
Crystal Core and S3000 are gaining traction at the same time manufacturing efficiencies
are improving, driving down production costs. The dual benefit of higher market
acceptance and lower production costs will give IGT a base from which to build in
coming quarters. With the For Sale business volatile and choppy, we believe IGT is finally
filling its order book for future orders as slot floors have more recently attracted the
latest and greatest cabinets in a more stagnant replacement cycle. While we expect a
considerable number of new cabinet launches at G2E this year, we believe IGT is well
positioned as its production will be fully ramped as these competitor’s face off. Early
indications are positive as IGT captured 35% floor share of the recently opened
Plainridge casino in Massachusetts. IGT placed around 400 machines out of 1,222 slot
machines, while the remaining positions went to ETGs.
55
August 17, 2015
Valuation
We value shares of IGT at $24, which represents a 7.5x multiple on our 2016 EBITDA
estimate of $1,753MM. Our price target was determined by a blend of both our review
of a range of EV/EBITDA multiples and a discounted cash flow analysis.
Figure 42. International Game Technology PLC Valuation
2015E
TOTAL
EV/EBITDA VALUATION
ADJUSTED EBITDA
EV/EBITDA
Total Enterprise Value
Net debt
Equity value
Diluted share count
Implied value per share
DISCOUNTED CASH FLOW
Adjusted EBIT
Tax expense
Marginal tax rate
Unlevered cash net income
(+) Depreciation & amoritzation
(-) Increase in working capital
(-) Capital expenditures
Unlevered Free Cash Flow
Terminal value
Total Cash Flows
(-) Net debt
Equity value
Diluted share count
2016E
TOTAL
2017E
TOTAL
2018E
TOTAL
2019E
TOTAL
2020E
TOTAL
$1,602
7.5x
$12,078
($8,756)
$3,322
197.1
$16.85
$1,752
7.5x
$13,214
($8,554)
$4,659
197.1
$23.63
$1,826
7.5x
$13,767
($8,157)
$5,609
197.1
$28.45
$1,831
7.5x
$13,808
($7,664)
$6,145
197.1
$31.17
$1,850
7.5x
$13,952
($7,172)
$6,779
197.1
$34.39
$1,892
7.5x
$14,265
($6,653)
$7,612
197.1
$38.61
$976
361.1
37.0%
$1,124
416.1
37.0%
$1,210
447.6
37.0%
$1,215
449.7
37.0%
$1,234
456.7
37.0%
$1,276
472.1
37.0%
$615
636.0
$708
572.0
$762
564.0
$766
564.0
$778
564.0
$804
564.0
(467.0)
$784
(400.0)
$880
(400.0)
$926
(400.0)
$930
(400.0)
$942
$784
$880
$926
$930
$942
(400.0)
$968
13,226
$14,194
11,367.9
(6,652.9)
4,715
197.1
$23.92
56
August 17, 2015
Figure 43. International Game Technology PLC Summary Financial Model
Pro Forma Financial Model
$ in millions. FYE December.
1Q14A
MAR
2Q14A
JUN
3Q14A
SEP
4Q14A
DEC
Gaming operations
202.2
192.2
196.9
195.6
Product sales
145.0
118.0
148.0
113.0
68.8
71.8
75.1
North Am erica Gam ing & Interactive
% Year ov er Year Grow th
$416.0
$382.0
North Am erica Lottery
$282.0
International
Italy
2014A
TOTAL
1Q15A
MAR
2Q15A
JUN
3Q15E
SEP
4Q15E
DEC
2015E
TOTAL
2016E
TOTAL
787.0
176.4
164.0
173.3
174.9
688.6
695.7
524.0
83.0
116.0
72.0
95.0
366.0
439.8
79.4
295.0
80.6
73.0
78.2
81.6
313.5
$420.0
$388.0
$1,606.0
$340.0
(18.3%)
$353.0
(7.6%)
$323.4
(23.0%)
$351.6
(9.4%)
$1,368.0
(14.8%)
$1,476.9
8.0%
$237.0
$257.0
$244.0
$1,020.0
$273.0
(3.2%)
$270.0
13.9%
$259.6
1.0%
$251.3
3.0%
$1,053.9
3.3%
$1,075.0
2.0%
$252.0
$240.0
$272.0
$279.0
$1,043.0
$201.0
(20.2%)
$247.0
2.9%
$255.7
(6.0%)
$273.4
(2.0%)
$977.1
(6.3%)
$1,006.4
3.0%
$602.0
$552.0
$525.0
$510.0
$2,189.0
$453.0
(24.8%)
$432.0
(21.7%)
$414.8
(21.0%)
$408.0
(20.0%)
$1,707.8
(22.0%)
$1,755.5
2.8%
$1,552.0 $1,411.0 $1,474.0 $1,421.0
$5,858.0
$1,267.0 $1,302.0 $1,253.4 $1,284.3
(18.4%)
(7.7%)
(15.0%)
(9.6%)
$5,106.8
(12.8%)
$5,313.8
4.1%
Revenue
Interactive
TOTAL REVENUE
341.4
ADJUSTED EBITDA CALCULATION
Operating income
321.0
278.0
305.0
174.0
1,078.0
156.0
115.4
157.3
234.3
663.0
1,044.5
Depreciation
116.0
108.0
114.0
108.0
446.0
99.0
93.0
96.0
96.0
384.0
392.0
Amortization
49.0
51.0
51.0
49.0
200.0
43.0
119.0
45.0
45.0
252.0
180.0
3.0
5.0
51.0
59.0
30.0
32.0
30.0
33.0
31.0
30.0
127.0
27.0
27.0
27.0
Transaction expense, net
Other service revenue amort.
33.0
-
-
19.0
4.0
5.0
10.0
23.0
14.0
16.0
15.8
7.0
52.8
0.0
Stock compensation
10.0
3.0
15.0
21.0
49.0
7.0
5.0
6.0
6.0
24.0
28.0
4.0
15.0
2.0
43.0
$484.0
$541.0
$445.0
$2,025.0
7.0
$383.0
(31.0%)
-
0.0
-
4.0
22.0
19.0
108.0
-
$555.0
-
0.0
108.0
Restructuring costs
Adjusted EBITDA
0.0
27.0
92.0
Non-cash purchase price
Impairment loss
-
-
-
-
-
$426.4
(11.9%)
$377.1
(30.3%)
$415.3
(6.7%)
$1,601.8
(20.9%)
7.0
$1,752.5
9.4%
0.0
1,601.8
1,752.5
FREE CASH FLOW
Adjusted EBITDA
383.0
426.4
377.1
415.3
Interest expense, net
(88.9)
(114.9)
(110.3)
(109.1)
(423.2)
(434.8)
(11.6)
(19.0)
(50.3)
(80.9)
(244.7)
(400.0)
Tax expense, net
-
Maintenance capex
(83.5)
(83.5)
(150.0)
(150.0)
(467.0)
One-time cash charges
(30.0)
(51.0)
(30.0)
-
(111.0)
Free Cash Flow
0.0
$180.6
$165.4
$67.8
$106.0
$519.8
$673.0
Italy Lotto Renew al
-
-
-
(387.0)
(387.0)
(276.4)
Other project capex
-
-
-
-
0.0
Net borrow ing
-
-
-
-
0.0
$180.6
$165.4
$67.8
($281.0)
Free Cash Flow To Equity
0.0
(160.0)
$132.8
$236.6
Free Cash Flow Per Share (LTM)
$2.69
$3.41
Free Cash Flow Yield % (current price)
13.6%
17.3%
Free Cash Flow Yield % (target price)
11.2%
14.2%
CAPITALIZATION
Credit Facilities
Revolver
-
-
-
-
-
1,166.1
1,338.0
1,338.0
1,338.0
1,338.0
1,258.0
Term Loan
-
-
-
-
-
886.2
890.4
890.4
890.4
890.4
810.4
5.625% senior secured notes due 2020
-
-
-
-
-
600.0
600.0
600.0
600.0
600.0
600.0
-
-
-
-
-
1,500.0
1,500.0
1,500.0
1,500.0
1,500.0
1,500.0
-
-
-
-
-
1,100.0
1,100.0
1,100.0
1,100.0
1,100.0
1,100.0
4.125% EUR denom senior secured notes due 2020
-
-
-
-
-
779.9
779.9
779.9
779.9
779.9
779.9
4.750% EUR denom senior secured notes due 2023
-
-
-
-
-
947.1
947.1
947.1
947.1
947.1
947.1
5.50% IGT notes due 2020
-
-
-
-
-
300.0
124.9
124.9
124.9
124.9
124.9
5.35% IGT notes due 2023
-
-
-
-
-
500.0
61.4
61.4
61.4
61.4
61.4
7.50% notes due 2019
-
-
-
-
-
500.0
526.7
526.7
526.7
526.7
526.7
5.375% notes due 2018
-
-
-
-
-
541.4
546.6
546.6
546.6
546.6
546.6
3.500% notes due 2020
-
-
-
-
-
527.4
532.8
532.8
532.8
532.8
532.8
Capital securities
-
-
-
-
-
50.5
50.8
50.8
50.8
50.8
50.8
Other
-
-
-
-
-
1.6
0.2
0.2
0.2
0.2
0.2
$9,400
$8,999
$8,999
$8,999
$8,999
$8,839
Cash
267.0
557.1
570.1
243.1
243.1
284.6
Net Debt
LTM EBITDA
9,133
1,853
8,442
1,795
8,429
1,631
8,756
1,602
8,756
1,602
8,554
1,752
Total Debt/EBITDA
5.1x
5.0x
5.5x
5.6x
5.6x
5.0x
Net Debt/EBITDA
4.9x
4.7x
5.2x
5.5x
5.5x
4.9x
New Notes Issued for Acquisition
Legacy IGT Notes
Legacy GTECh Notes
TOTAL DEBT
$0
$0
$0
$0
$0
57
August 17, 2015
Scientific Games Corp.
We are initiating coverage of Scientific Games Corp. with a Hold rating and a $14 price
target, which assumes an 8.7x multiple on our 2016 Adjusted EBITDA (ex. JV EBITDA)
estimate of $1,097MM.
The recent consolidation of WMS, Bally, and SHFL under the SGMS umbrella gives the
combined company a broad set of complementary products and services to market and
a considerable opportunity to drive efficiency across the supply line. Management has
guided to $235MM of cost synergies related to its most recent acquisition (of Bally)
while also suggesting that some synergies remain from previous acquisitions. With the
release of its 2Q15 earnings, the company announced that it had pulled forward
expectations for its ability to achieve synergies. Although we are confident that the
SGMS team can achieve the identified cost synergies, we believe a challenging operating
environment will push out implementation or offset the benefits in the face of slower
demand on the traditional gaming front.
Leverage is our primary concern out of the gate. On a 2015 consolidated pro forma
basis, we estimate SGMS’s total leverage (excluding EBITDA from JVs) at roughly 8.6x.
Despite the high debt leverage, we peg interest coverage above 1.5x, which we expect
to improve as the company hits its synergy targets. While soft targets like cost synergies
have been accelerated, deleveraging has been slower to commence in the face of softer
performance by gaming operations, softness in the for sale segment of WMS, and
question marks around the timing video lottery operations in Greece. The instant ticket
business and interactive performance remain bright spots, but these are offset by other
challenges. In the end we are left with a show me story in a race to refinance the
companies considerable leverage position.
Figure 44. SGMS 2015E Revenue Mix
Figure 45. SGMS 2015E EBITDA Mix
Interactive,
$211
Interactive,
$69
Corporate,
($120)
Gaming Ops,
$777
Lottery, $792
Lottery, $358
Gaming, $853
Equipment
Sales, $532
Tables,
$170
Systems,
$293
58
August 17, 2015
Investment Case
THE RACE TO DELEVERAGE IN A RISING RATE ENVIRONMENT – THE NEAR
TERM OVERHANG
The clock is ticking in a race towards accelerated deleveraging. The setup is as follows.
Financing for the SGMS acquisition of BYI was considerably more expensive than
expected. Volatility in the high-yield markets late in 2014 left the company with little
option than to accept more expensive financing options than initially expected. Today,
nd
investors should be looking at November 22 , 2015, as it represents the expiration on
the one-year call premium for SGMS’s bank debt. Up until this point, SGMS must pay a
prepayment penalty on any refinancing of the bank debt. After this date, the company
can begin refinancing or prepaying at its discretion. Thus, the race is on to drive down
leverage, which will play an important role into SGMS’s ability to meaningfully refinance
its slug of $4.25B LIBOR+ 500 bank debt. Of course, there is another train coming, that is
the US Fed positioning to move rates higher in September of 2015. What this will do to
the bank debt and overall lending markets remains unclear, though one thing is clear,
borrowing costs will increase. A 100 bps reduction in bank debt borrowing cost would
equal $42MM in annual interest expense saving, before tax. Adding $42MM to SGMS
2016 estimated operating income would increase operating income by 12.7%, while
growing 2016 free cash flow by 7.7%. Achieving this would be a considerable milestone
for the company.
SHORT-TERM FCF UNDER PRESSURE, NEAR-TERM DEBT REDUCTION A RISK
Although we project annual free cash flow at more than $215MM for 2016 and beyond,
we see some pressure on 2015 FCF after minimal flow-through in 1H15. In the near
term, integration costs and working capital fluctuations could pressure FCF, which
would limit debt pay down in the near future. As a result, we are less optimistic about
an early and favorable refinancing of bank debt without more meaningful strides in
reducing leverage. Furthermore, SGMS is racing against the specter of rising rates,
making near-term deleveraging all the more important if the company hopes to
refinance while the getting is still good.
LEVERAGE AND DRIVE FOR FREE CASHFLOW PRESENTS A RISK TO CAPEX
Perhaps the greatest risk to SGMS is capital investment and development risk. As
independent operators, WMS, Bally, Shuffle, and SGMS all committed capex dollars to
their far more focused operations. WMS committed to development of its industryleading gaming ops and industry-leading premium cabinet design while Shuffle
developed its table games and shuffler business, and Bally focused on its systems
offerings and burgeoning recurring revenue business.
As a combined company—like all consolidated companies, especially heavily leveraged
operators—SGMS’s capital dollar allocations will have to at least cover the currently
higher cost of capital. From one perspective, all business lines should be stacked against
one another, with operations recording the greatest returns receiving the highest
investment. This presents the risk of underinvesting in the important corners of SGMS
operations and puts its bundling strategy at risk as well. Given the scenario we discuss
above around the race to refinance SGMS’s considerable amount of bank debt, it would
seem that SGMS would look to cover any shortcoming with reductions in capex. SGMS
has ambitious development goals over the coming next several quarters. Recently the
company released a new cabinet at ShuffleMaster. Indications suggest that the
company will launch a common platform at G2E this year, along with a flurry of new
59
August 17, 2015
gaming operations titles. All of which will require capex commitment. SGMS is guiding
to $300MM-$325MM in Capex spend in 2015, of which 10% or roughly $30MM is
related to the implementation of VLT’s in Greece.
2Q15 performance creates concerns; management looks to ease concerns – Show Me
Story Persists: While SGMS had a decent 2Q15 operationally, the response from
investors sending the shares down over 15% indicate there are real concerns. The
challenge here is that there isn’t much to provide investors with confidence beyond
reassurance from senior management. While product sales in the quarter came in at
6,805 units, it was below expectations. Furthermore, gaming operations had a decent
2Q15, but wasn’t able to offset softer performance from hardware sales or systems
pressures. Currency headwinds from foreign lottery operations offset better domestic
instant ticket trends. Looking into 3Q15, SGMS management insists that even if
revenues and earnings remain flat sequentially, they will see improvements in free cash
flow, as the benefits of synergies start to hit the bottom line. Additionally, expectations
are for SGMS systems business to really take hold in the 2H15. Furthermore, timing in
bond payments will see 3Q15 face softer financing costs, all of which should result in
greater free cash flow. Of course, the question remains, will it be enough.
PRODUCT SALES
Impacts of Recent Consolidation: What Does 1+1 Equal in the world of gaming
hardware sales? SGMS’s acquisition of Bally (including SHFL) and WMS represents
significant consolidation, as it is a combination of three of the largest gaming equipment
manufacturers in North America. As discussed in earlier in this report, the end result of
the merger will put SGSM hardware sales in line with IGT. As a result, the question
remains whether SGMS will be viewed as one slot provider or whether the Bally and
WMS subsidiaries will be viewed by customers and regulators as separate suppliers. This
is an important distinction. Representatives for SGMS indicated that for the upcoming
Oregon replacement program, they expect to receive allocations of games for both Bally
and WMS consistent with prior levels. The Bally allocation has been made, and the WMS
allocation is likely to come later in the year. It is our understanding that other
jurisdictions—including a province in Canada—have taken a different stance on the
merger, viewing SGMS as one supplier. This is relevant because many jurisdictions and
casino operators maintain a fixed number of suppliers, meaning that the consolidation
of Bally and WMS could open vendor programs to an additional supplier.
In the end, each jurisdiction and each casino operator will handle the merger differently.
In our view, it’s unrealistic to believe that all jurisdictions will continue to consider WMS
and Bally separate entities, as we have already seen evidence to the contrary. Although
the Oregon example indicates some preference to treat the SGMS business as two
separate suppliers, we believe this tendency will fade over time as the Bally and WMS
business is integrated.
Adding to the challenge is a look at SGMS by product category: In 2014, the SGMS
combined entities of BYI/WMS shipped a total of 21,490 machines, constituting about
31% of North American ship share. Since neither WMS nor Bally businesses do much in
the way of video poker, we estimate the manufacturers’ combined ship share for video
reel and mechanical steppers was to 40% in 2014. Given the proliferation of competitors
in the space, we wonder if a 40% ship share within any segment of hardware sales is
sustainable. This is especially the case in video reel. Thus, we believe that even in a
more buoyant market, the combined entity will struggle to exceed the pro forma level
of shipments it experienced in 2014, with shipments likely closer to the 18,000- to
60
August 17, 2015
20,000-unit range, slightly below the 2014 high-water mark. This is an important
dynamic for the marketplace, as it presents an opportunity for other manufacturers,
even in the face of challenged unit demand, to gain at least some floor share that could
slip through the cracks at SGMS.
Figure 46. SGMS Hardware Shipments
5,000
$17,000
$16,500
4,000
Post Bally Merger
$16,000
$15,500
3,000
$15,000
2,000
$14,500
$14,000
1,000
$13,500
-
$13,000
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
U.S. and Canadian new unit shipments
International new unit shipments
Average selling price (ASP)
Softness in 2Q15 unit shipment did little to minimize concerns around this dynamics.
Unit shipments in 2Q15 were 6,805, somewhat below expectations. Management
pointed to a couple of items as the reason for softness. First, concerns from operators
that SGMS wasn’t going to support the WMS brand going forward. A concern
management insists is completely unfounded. Second, indications that the competitive
pressures persisted in the quarter, namely from Aristocrat. Finally, they believe there
could be some pent up demand from operators waiting for the release of the new
ShuffleMaster cabinet, or even announcements from G2E in late September. While we
expect SGMS to benefit from the recently launched ShuffleMaster cabinet in 3Q15, we
believe it won’t be until after pre-G2E meetings that SGMS gets any meaningful lift in
their hardware order book. This as we believe it is at these meetings that customers will
be introduced to SGMS’s upcoming new hardware offerings and management will have
the opportunity to allay fears that SGMS will no longer support the WMS brand.
RISK TO SYSTEMS PLATFORM
The systems business was always a cornerstone of BYI’s overall business. With
significant upfront capex requirements and long development cycles, competition has
historically been limited. Further, operators are hesitant at best to make changes to
their casino systems out of fear of disruption or worse. The end result is a very sticky
business, though often very volatile. Today, more than 50% of systems revenue is from
maintenance and service fees, providing a stable base of cash flow and recurring
revenues.
1H15 systems performance hasn’t been as strong as historical performance, lending to
some of the concerns over the segment. Here again, management has expectations for
a stronger 2H15 and beyond, as investments into system implementations are expected
to take hold in 2H15. Our model does look for a considerable build in systems
61
August 17, 2015
contribution in 2H15. Longer-term, we do have concerns over the capex commitments
within this segment, given the lumpy nature of returns and what we view as being a
more stringent criteria for capex commitments firm wide going forward. Management is
optimistic about the opportunity for the systems business to recover in 2H15, but
doesn’t see the system business revisiting the loft peak levels it reach at Bally, prior to
its sale.
Our primary concern over the systems business is with the departure of Ramesh
Srinivasan. Anyone covering Bally’s knows that Mr. Srinivasan was central to the
systems business. The test will be how deep the bench strength is on the systems side.
Can the surviving entity support the sales and development of the systems business, or
will it lose priority for valuable capex dollars? We believe we are seeing the
reemergence of other systems operators, such as Aristocrat and, perhaps more notably,
Konami, which has achieved some recent victories in important regional markets.
GAMING OPERATIONS – A BRIGHT SPOT RELATIVE TO IGT
With the addition of Bally in late 4Q14, SGMS more than doubled its installed base of
WAP, premium, and daily fee units from about 9,000 to over 23,000. Like most
manufacturers, SGMS suffered at the hand of competition, but also market dynamics,
with 2Q15 down at 22,856 units. As expected, the inclusion of the new units reduced
the blended average daily yield from the low $70s to the mid to high $50s ($56.77 in
2Q15). A bright spot with yields in the 2Q15 was WMS, where legacy WAP hardware
saw a yield of $83.77, a record for this segment. Overall, the WAP, premium, and daily
fee revenue stream is expected to approximate $470MM in 2015, more than half of all
gaming operations revenue. The inclusion of Bally also nearly doubled the installed base
of other leased and participation units from 26,700 to over 45,000. The average daily
yield has risen modestly from around $12 to about $15. This segment is expected to
generate about $278MM of net revenue in 2015.
Figure 47. SGMS Installed Base
80,000
Installed Base
70,000
Bally Acquisition
69,421
68,975
68,088
45,867
45,898
45,232
23,554
23,077
22,856
4Q14
1Q15
2Q15
60,000
50,000
40,000
30,000
36,721
35,443
35,765
28,050
26,711
26,711
20,000
10,000
8,671
8,732
9,054
1Q14
2Q14
3Q14
WAP, premium and daily fee
Other leased units
62
August 17, 2015
Looking forward, we believe the gaming operations segment will face pressure to grow.
First, as IGT seems to be finding its footing, they will likely be less of a share donor going
forward. Second, there is little evidence to suggest the market is any less competitive
going forward, with expectations that Aristocrat is poised to launch another wave at this
year’s G2E. Finally, there is evidence to suggest that operators are generally less
enthused with sharing in the economics and the base of gaming operations installations
is unlikely to grow. We think that while SGMS has the best gaming operations business
in the sector, growing it will be a challenge. This is a challenge for SGMS, given that the
gaming operations are such a large part of their overall business today.
TABLE GAMES
The table products and services business acquired via Bally (and previously
ShuffleMaster) represents a relatively small component of the overall business. Our
2015 estimates assume that the table business contributes $170MM of net revenue,
about 10% of total gaming revenue and about 6.0% of overall consolidated net revenue.
This includes revenue from both product sales (shufflers), as well as services and
recurring revenue from leased shufflers, proprietary table games, and add-ons.
Although it is a small contributor of overall revenue, the table business is a largely
recurring revenue stream, with about 80% of the table business coming from service or
leased revenue. On the recurring revenue side, the installed base has been growing
modestly on a sequential-quarter basis and stands near 18,770 units. The average daily
fee on the installed base is about $20, which we expect to remain stable. So, although
the overall revenue contribution from tables is relatively small, its recurring revenue and
stability are important from a cash flow perspective. As discussed in this report, we
believe that ETGs are just getting started in North America. So while ETGs have found
their place in Asia, operators and regulators have struggled with them in North America.
We view this category as an important long-term growth segment for SGMS. We
believe the segment will see a considerable lift with the coming wave of new supply in
Macau and Asia, while also benefiting from improving demand in North America.
LOTTERY
Like IGT, SGMS’s lottery business represents a stable building block. There are few
businesses today that are as stable as the instant ticket lottery business and SGMS is the
dominant player within the instant ticket category globally. Though as discussed in this
report, instant tickets are disproportionately strong in North America, relative to other
segments of the lottery.
We model 2015 net lottery revenue at $792MM, or 29% of total revenue. Our 2015
attributable EBITDA forecast of $338MM for the lottery business represents a segment
margin of 42.7% and 32% of overall attributable EBITDA. For SGMS, instant ticket games
is the largest driver of revenue in the lottery segment, accounting for 66% of total
segment sales, followed by services, at 24%, and then product sales.
About 65% of SGMS’s instant ticket revenue is generated in the US. Its lottery services
revenue is relatively evenly split between the US and international markets, whereas
the smallest segment in lottery product sales is mostly an international business.
SGMS’s instant ticket business generates revenue under two primary contracts:
participation contracts, generally a relatively stable quarter-to-quarter revenue stream;
and price per unit contracts, which tend to have a little more quarterly volatility.
63
August 17, 2015
Looking forward, we are very favorable on the overall instant ticket business in North
America and globally. However, we do see some challenges for SGMS. First, we do
expect some modest but still heighted competition from the expansion of a third player
in the instant ticket business. Pollard Banknote has been openly vocal about its recently
expanded printing capacity and its intentions to grow its business in North America.
Today, Pollard benefits from its commanding position within the Michigan State lottery
along with its involvement within several cooperative agreements. We believe at the
very least, Pollard will be successful in expanding its production and moving up the food
chain within these cooperative agreements. To the extent the company represents risk
to important 2016 contracts, namely Massachusetts and Ohio. With all eyes likely on
Ohio given the experiences with Intralot in the market.
INTERACTIVE
The interactive segment generated $144MM of net revenue for SGMS in 2014, and we
see this growing considerably to over $200MM in 2015, though it is still a relatively
small contributor to the big picture. The segment is driven primarily by social gaming
revenue, which totaled $123MM in 2014. However, the quarterly run rate accelerated in
1Q15 with the addition of Bally’s Dragonplay for a full quarter. At present, the SGMS
interactive social gaming portfolio features about 2.3MM daily users and average
revenue per daily user of about $0.20. We see the greatest opportunity here in the
growth of yield and note that IGT’s DoubleDown yields nearly twice SGMS’s platforms.
Although we don’t believe SGMS will be able to close the gap entirely, we do expect the
company to grow average daily revenue per user to the mid-$0.20 range in the near
future.
Valuation
Anyone who follows the shares of SGMS knows the valuation is very sensitive to inputs
and assumptions given the high debt leverage. Given the level of sensitivity to various
inputs, our valuation approach was three fold, EV/EBITDA, sum-of-the-parts and
discounted cash flow. We evaluated various scenarios under all three valuation
methodologies to arrive at our price target of $14, which represents about an 8.7x
multiple on our 2016 Adjusted EBITDA (ex. JV EBITDA) estimate of $1,097MM and
roughly 8.3x our 2016 Attributable EBITDA (incl. JV EBITDA) estimate of $1,160MM.
64
August 17, 2015
Figure 48. Scientific Games Corp. Valuation
2015E
Dec-15
2016E
Dec-16
2017E
Dec-17
2018E
Dec-18
2019E
Dec-19
$299.1
8.0x
$2,393.0
$790.1
8.0x
$6,320.8
$852.6
8.0x
$6,821.1
$858.2
8.0x
$6,865.6
$857.5
8.0x
$6,860.0
$811.5
8.0x
$6,491.7
Lottery
Multiple
Total Value
$332.9
8.0x
$2,663.2
$338.4
9.0x
$3,045.5
$358.3
9.0x
$3,224.4
$350.7
9.0x
$3,156.5
$337.8
9.0x
$3,040.1
$334.1
9.0x
$3,006.9
Interactive
Multiple
Total Value
$8.9
8.5x
$75.7
$53.1
9.0x
$478.1
$68.8
9.0x
$618.8
$79.1
9.0x
$712.3
$80.3
9.0x
$722.3
$81.2
9.0x
$730.8
Corporate
Multiple
Total Value
($93.2)
8.0x
($745.6)
($128.1)
8.0x
($1,024.8)
($120.0)
8.0x
($960.0)
($120.0)
8.0x
($960.0)
($124.0)
8.0x
($992.0)
($140.0)
8.0x
($1,120.0)
($63.0)
9.0x
($567.0)
($63.0)
9.0x
($567.0)
($62.0)
9.0x
($558.0)
($62.0)
9.0x
($558.0)
($64.0)
9.0x
($576.0)
$547.7
8.0x
$4,386.3
($8,293.6)
($3,907.3)
84.6
($46.20)
$990.5
8.3x
$8,252.6
($8,216.5)
$36.1
85.8
$0.42
$1,096.7
8.3x
$9,137.3
($7,949.4)
$1,187.9
85.9
$13.83
$1,106.1
8.3x
$9,216.5
($7,688.1)
$1,528.4
85.9
$17.79
$1,089.5
8.3x
$9,072.4
($7,429.7)
$1,642.7
85.9
$19.12
$1,022.8
8.3x
$8,533.3
($7,221.3)
$1,312.0
85.9
$15.27
519.3
260.6
(114.7)
(207.1)
$458.1
990.5
0.0
(297.8)
(23.5)
$669.2
1,096.7
0.0
(300.0)
(11.4)
$785.3
1,106.1
0.0
(310.0)
(15.9)
$780.2
1,089.5
70.8
(300.0)
8.8
$869.2
669.2
785.3
780.2
869.2
1,022.8
86.9
(300.0)
7.1
$816.7
10,412.5
11,229.2
SUM OF THE PARTS
Gaming
Multiple
Total Value
EBITDA from JVs
Multiple
Total Value
Total Adjusted EBITDA
Blended Multiple
Net debt
Total equity value
Diluted share count
DISCOUNTED CASH FLOW
Adjusted EBITDA (ex. JVs)
Tax benefit (expense)
Capex
Change in net working capital
Unlevered Free Cash Flow
Terminal value
Total cash flows
TEV
Net debt
Equity value
Diluted share count
9,409.6
(8,216.5)
$1,193.1
85.9
$13.89
65
August 17, 2015
Figure 49. Scientific Games Corporation Summary Financial Model
1Q14A
Mar-14
2Q14A
Jun-14
3Q14A
Sep-14
4Q14A
Dec-14
Gaming Segment
Gaming operations
Product sales
Systems
Table products
Gaming revenues
% Year over Year Growth
93.1
67.2
3.1
44.1
$207.5
93.1
80.6
3.2
41.8
$218.7
96.1
68.3
0.0
45.8
$210.2
134.8
119.2
27.7
20.0
$301.7
417.1
335.3
34.0
151.7
$938.0
193.4
127.3
67.0
38.1
$425.8
105.2%
189.8
138.7
77.6
43.6
$449.7
105.7%
196.6
130.0
74.0
46.5
$447.1
112.7%
197.5
777.3
136.1
532.2
74.0
292.6
41.8
170.0
$449.4 $1,772.0
49.0%
88.9%
Lottery Segment
Instant games
Services
Product sales
Lottery revenues
126.2
50.1
17.6
$193.9
135.4
51.0
21.4
$207.8
134.0
48.2
30.5
$212.7
140.6
52.1
28.4
$221.1
536.2
201.4
97.9
$835.5
128.9
45.6
11.5
$186.0
(4.1% )
135.5
45.9
8.8
$190.2
(8.5% )
137.0
46.0
20.0
$203.0
(4.6% )
141.0
52.0
20.0
$213.0
(3.7% )
542.4
189.5
60.3
$792.2
(5.2% )
547.0
202.0
92.0
$841.0
6.2%
Interactive
Social gaming
Real money wagering
Interactive revenues
26.4
4.4
$30.8
28.3
3.9
$32.2
32.4
6.1
$38.5
36.4
6.6
$43.0
123.5
21.0
$144.5
40.9
6.0
$46.9
52.3%
44.5
7.1
$51.6
60.2%
49.7
6.1
$55.8
45.0%
49.9
6.3
$56.2
30.8%
185.1
25.5
$210.6
45.7%
215.0
24.9
$239.9
13.9%
$432.2
$458.7
$461.4
$565.8
$1,918.0
$658.7
52.4%
$691.5
50.8%
$706.0
53.0%
$718.6 $2,774.8
27.0%
44.7%
$2,877.8
3.7%
$59.4
$67.1
$67.2
$105.5
$299.1
$197.4
232.5%
46.4%
$200.0
198.3%
44.5%
$194.1
188.8%
43.4%
$198.6
88.3%
44.2%
$790.1
164.1%
44.6%
$852.6
7.9%
47.5%
$78.0
(3.0% )
41.9%
$82.6
0.0%
43.4%
$85.7
0.5%
42.2%
$92.0
8.8%
43.2%
$338.4
1.6%
42.7%
$358.3
5.9%
42.6%
$9.9
209.4%
21.1%
$13.3
0.0%
25.8%
$14.8
0.0%
26.5%
$15.1
75.9%
26.9%
$53.1
203.6%
25.2%
$68.8
29.4%
28.7%
($32.0)
26.0%
($128.1)
37.4%
($120.0)
(6.3% )
TOTAL REVENUES
ATTRIBUTABLE EBITDA
Gaming
% Margin
2014A
Dec-14
28.6%
30.7%
32.0%
35.0%
31.9%
Lottery
% Margin
$80.4
$82.6
$85.3
$84.6
$332.9
41.5%
39.7%
40.1%
38.3%
39.8%
Interactive
% Margin
$3.2
$5.7
$0.0
$8.6
$17.5
1Q15A
Mar-15
2Q15A
Jun-15
3Q15E
Sep-15
4Q15E
Dec-15
2015E
Dec-15
2016E
Dec-16
787.5
531.4
294.0
184.0
$1,796.9
1.4%
10.4%
17.7%
0.0%
20.0%
12.1%
Corporate
($20.2)
($23.3)
($24.3)
($25.4)
($93.2)
($33.2)
64.4%
($29.9)
28.3%
($33.0)
35.8%
ATTRIBUTABLE EBITDA
% Margin
LTM ATTRIBUTABLE EBITDA
$122.8
$132.1
$128.2
$173.3
$556.3
28.4%
$122.8
28.8%
$254.8
27.8%
$383.0
30.6%
$556.3
29.0%
$556.3
$252.1
105.3%
38.3%
$685.7
$266.0
101.4%
38.5%
$819.6
$261.6
104.1%
37.1%
$953.0
$273.8 $1,053.5
58.0%
89.4%
38.1%
38.0%
$1,053.5
$1,053.5
$1,159.7
10.1%
40.3%
$1,159.7
Attributable EBITDA
Less: EBITDA from Equity Investments
ADJUSTED EBITDA
LTM ADJUSTED EBITDA
$122.8
(22.8)
$100.0
$132.1
(14.2)
$117.9
$128.2
0.0
$128.2
$173.3
0.0
$173.3
$519.3
$556.3
(37.0)
$519.3
$519.3
$252.1
(16.8)
$235.3
$654.7
$266.0
(14.2)
$251.8
$788.6
$261.6
(15.0)
$246.6
$907.0
$273.8 $1,053.5
(17.0)
(63.0)
$256.8
$990.5
$990.5
$990.5
$1,159.7
(63.0)
$1,096.7
$1,096.7
Operating Income
% Margin
($12.1)
$3.6
($7.8)
($156.4)
($172.8)
(20.4% )
5.3%
(11.6% )
(148.2% )
(9.0% )
$18.1
(249.4% )
9.2%
($0.1)
(102.8% )
(0.1% )
$54.3
(797.8% )
28.0%
$65.8
(142.1% )
33.1%
$138.1
(180.0% )
5.0%
$337.0
143.9%
11.7%
Diluted EPS (GAAP)
LTM Diluted EPS (GAAP)
($0.53)
($0.86)
($0.82)
($0.55)
($2.77)
($0.53)
($1.39)
($2.22)
($2.77)
($2.77)
($1.01)
89.6%
($3.25)
($1.19)
38.6%
($3.58)
($0.56)
(32.3% )
($3.32)
($0.97)
75.3%
($3.73)
($3.73)
34.7%
($3.73)
($2.11)
(43.5% )
($2.11)
0.0
0.0
252.1
(118.7)
266.0
(186.7)
256.6
(118.4)
268.3
(186.4)
1,138.2
(607.7)
0.0
0.0
$0.0
0.0
$0.00
0.0%
(72.1)
34.0
$95.3
95.3
$1.12
10.6%
(70.7)
(36.3)
($27.7)
67.6
$0.79
5.1%
(75.0)
(16.7)
$46.5
114.1
$1.33
10.8%
(80.0)
(4.6)
($2.7)
111.5
$1.30
10.6%
1,043.0
(610.2)
0.0
(297.8)
(23.5)
$111.5
111.5
$1.30
10.6%
180.0
2,245.3
1,961.3
180.0
2,222.9
1,941.8
FREE CASH FLOW CALCULATION
Attributable EBITDA
Cash interest (expense), net
Cash tax expense
Capital expenditures
(Increase) decrease in working capital
Free Cash Flow
LTM FCF
LTM FCF / Share
LTM FCF Yield
CAPITALIZATION
Senior Secured Credit Facilities:
Revolver, variable interest due 2018
Term Loan B-1, variable interest due 2020
Term Loan B-2, variable interest due 2021
185.0
2,267.6
1,980.3
2018 Notes
2020 Notes
2021 Notes
Secured Notes
Unsecured Notes
Capital lease obligations, through 2019
Total Debt
Less: current maturities
Long term debt, net
Cash and cash equivalents
Net Debt
Total Debt / LTM Adjusted EBITDA
Net Debt / LTM Adjusted EBITDA
Book Value / Share
Share price (ending)
Market capitalization (ending)
Diluted share count
185.0
2,267.6
1,980.3
250.0
250.0
300.0
300.0
347.8
347.8
950.0
950.0
2,200.0
2,200.0
35.3
35.3
$8,516.0 $8,516.0
(50.6)
(50.6)
$8,465.4 $8,465.4
171.8
171.8
$8,293.6 $8,293.6
$13.73
$1,156
84.3
$11.12
$941
84.4
$10.77
$913
84.7
180.0
2,262.2
1,976.1
180.0
2,256.5
1,971.2
180.0
2,250.9
1,966.2
180.0
2,245.3
1,961.3
250.0
250.0
250.0
250.0
250.0
300.0
300.0
300.0
300.0
300.0
347.9
347.9
347.9
347.9
347.9
950.0
950.0
950.0
950.0
950.0
2,200.0 2,200.0 2,200.0 2,200.0 2,200.0
32.0
32.0
32.0
32.0
32.0
$8,498.2 $8,487.6 $8,477.0 $8,466.5 $8,466.5
(50.4)
(50.4)
(50.4)
(50.4)
(50.4)
$8,447.8 $8,437.2 $8,426.6 $8,416.1 $8,416.1
151.2
129.1
178.2
199.6
199.6
$8,296.6 $8,308.1 $8,248.4 $8,216.5 $8,216.5
(300.0)
(11.4)
$219.1
219.1
$2.55
20.8%
250.0
300.0
347.9
950.0
2,200.0
32.0
$8,424.6
(50.4)
$8,374.2
424.8
$7,949.4
16.3x
16.0x
16.3x
16.0x
12.9x
12.7x
10.7x
10.5x
9.3x
9.1x
8.5x
8.3x
8.5x
8.3x
7.6x
7.2x
$12.73
$1,083
84.9
$12.73
1,083.3
84.6
$10.47
$898
85.3
$15.54
$1,338
85.9
$12.24
$1,054
85.9
$12.24
$1,054
85.9
$12.24
1,053.9
85.8
$12.24
1,053.9
85.9
66
August 17, 2015
Important Disclosure
Analyst Certification
The analyst, Christopher Jones, primarily responsible for the preparation of this research report attests to the following: (1) that the views
and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part
of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
Ratings Definitions
Current Ratings Definition
Union Gaming Research and Union Gaming Securities Asia Limited uses a traditional ratings construct (Buy, Hold, and Sell) that is
underscored by percentage upside/downside from current trading levels along with dividend yields for total return. We exclude special
dividends and contemplate regular dividends only in our total return forecasts. These are absolute ratings, not relative or forced ratings.
We define a Buy rating as a company whose shares exhibit total return (appreciation and dividends) potential of at least 15% within the
next 12 months, and conversely a Sell rating as a company whose shares exhibit downside potential of at least 15% within the next 12
months. A Hold rating is reserved for companies whose shares exhibit total return potential between those parameters.
Buy – the total forecasted return is expected to be greater than 15% within the next 12 months
Hold – the total forecasted return is expected to be greater than or equal to 0% and less than or equal to 15%
Sell – whose shares exhibit downside potential of at least 15% within the next 12 months
Suspended – the company rating, target price and earnings estimates have been temporarily suspended.
Valuation and Risks
Ratings Distribution (as of 08/17/2015)
Coverage Universe
Ratings
Investment Banking Services / Past 12 Months
Count
Pct.
Rating
Count
Pct.
13
3
0
81%
19%
0%
BUY
HOLD
SELL
3
0
0
23%
0%
0%
BUY
HOLD
SELL
General Disclosures
Additional information is available upon request.
This report was prepared by Union Gaming Research, LLC. Union Gaming Research, LLC is a wholly owned subsidiary of Union Gaming
Group, LLC. Union Gaming Group, LLC also owns Union Gaming Advisors, LLC, a FINRA member firm, Union Gaming Securities Asia
Ltd., a licensed corporation with the Securities and Futures Commission (SFC) in Hong Kong and Union Gaming Analytics, LLC. Union
Gaming Advisors, LLC and Union Gaming Analytics, LLC do not produce research reports. All questions or comments concerning this
research report should be addressed to Union Gaming Research, LLC at (702) 866-0743.
Neither Union Gaming Advisors, LLC ("Advisors") nor its affiliates, analysts or employees own any securities of companies analyzed in the
research reports it distributes. Neither Union Gaming Advisors nor its affiliates or analysts serve as an officer, director or advisory board
member of any Subject Company. Advisors, its affiliates, analysts and employees may have received investment banking, non-investment
banking securities and non-securities service, related compensation from the subject company in the past 12 months. It further intends
to seek compensation for investment banking, non-investment banking securities and non-securities service, related activities in the next
three months. Accordingly, investors should be aware that the firm and its affiliates may have a conflict of interest that could affect the
objectivity of the reports it distributes. Advisors is not now nor has ever been a market maker.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges
via Bloomberg and Factset. Data is sourced from Union Gaming Research, Union Gaming Securities Asia Limited, and subject companies.
Union Gaming Research and Union Gaming Securities Asia Limited are not responsible for errors in prices provided by independent
sources. Data, analyses, and reports necessarily contain time-sensitive information, and no subscriber or client should rely on dated reports
or conclusions.
Investor clients and financial advisers should consider any report from Union Gaming as only a single factor in making any investment
decision.
67

Global Gaming Technology

Transcription

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