Why investors are spooked at the new Scientific Games CEO

Why investors are spooked at the new Scientific Games CEO

Wednesday, August 10, 2016 Posted by Andy McCarron
Gavin Isaacs' decision to step down at Scientific Games has caused some ructions

It’s not often a share price falls when a company announces results that beat the expectations of the analysts. But such was the fate of Scientific Games on Friday last week when the news that its chief executive Gavin Isaacs was stepping down sent the share price crashing 16% on the day.

One news report went as far to suggest that Isaacs represented for some a “cult-like” figure who had steered the great merger which led to both Bally Technologies and WMS getting swept up into a gaming behemoth which stretches across lottery, gaming and online services.

What spooked investors wasn’t just the news that Isaacs would be stepping down. Rather it was the inexperience (at least as far as gaming goes) of his successor Kevin Sheehan who joins the firm after a seven-year stint at the helm of cruise holiday firm Norwegian Cruise Liners.

If it seems unfair to welcome a new boss with a double-digit share price fall at the news of their appointment, it is also to an extent understandable. The gambling industry is famously insular particularly when it comes to their leaders.

Back on this side of the Atlantic, William Hill – currently the subject of a bid from a consortium of Rank and 888 – is currently leaderless and much of the chatter surrounding who should succeed the now departed James Henderson has centred on the likelihood that he will be replaced by someone from outside the industry.

Scientific Games will have been well aware of the prejudices that face outsiders in gaming and its press release went a long way to try to reassure investors (though given the share price reaction it was clearly not reassurance enough).

In announcing Isaacs’ departure, the company was keen to point out that he would still be with the company, moving from an operational role to a more strategic position as vice chairman. The press release then went into great detail about Sheehan’s past achievements, including his part in Norwegian IPO in 2013.

The company also pointed out that much of the heavy lifting of integrating the various businesses had been completed, and indeed, the results displayed signs of the work that has been done to weld the three elements of the combined operation together.

Total second-quarter revenues were up 5% year-n-year to $729.2m with the interactive division the standout performer, raising its revenues by 62% on the back of the company’s burgeoning social casino interests including its leading Jackpot Party offering. Sequentially, the social segment helped raised interactive revenues by 15% to $83.4m. The rising revenues fed through to adjusted EBITDA for the division, up 37% to $18.2m.

The gaming segment continued to suffer from the lacklustre replacement cycle with total revenues falling slightly to $441.9m from $449.7m. The company said a decline in the installed base of WAP, premium and daily-fee participation gaming machines had been offset somewhat by an increase in lower-margin participation and leased games, and particularly an increase in placements of electronic table games. The benefits on the completed integration, however, saw adjusted EBUTDA for the gaming segment up very slightly to $201.3m despite the revenue fall.

The lottery business saw total revenues rise $13.7m to $203.9m despite taking a $6,6m hit on the expiration of a contract to supply validation services to the China Sports Lottery. A bright spot in the lottery business was the 11% rise in instant games revenue to $150.9m, helped by a 17% rise in US sales.

Scientific Games’ financial director Michael Quarteri pointed out that the company had manged to continue reducing its debt load by $79.8m in the second quarter. “Since closing on the Bally acquisition in 2014, our total debt has been reduced by more than $250 million,” he added.

In his valedictory statement as chief executive, Isaacs said the value of its diverse revenue streams was clear from the results. “Our interactive division is on fire, gaming machine sales were strong, and the lottery segment's instant games revenue turned in an exceptional performance,” he said. “We remain focused on driving innovation and fiscal discipline to support future cash flow growth to create meaningful and sustained long-term shareholder value."

Totally Gaming says: The value of a decent chief executive has been demonstrated once again after the events surrounding the announcement of the Isaacs succession plans. The strength of the business will likely mean that the shares will recover over time – they were up over 3% on Tuesday this week – and certainly the new boss has a lot to work with including, as Isaacs pointed out in his comments, the social games unit which like others in that sub-sector is flying.

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