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Orchestrating Success

Kevin Sheehan rounds out the team at Scientific Games to continue the company’s amazing run of success

Orchestrating Success

By just about any measurement, Scientific Games is soaring.

Growth is prevalent—consistent—in all three divisions created through the mega-mergers earlier this decade of game suppliers Bally Technologies, WMS and Shuffle Master with the pioneering worldwide lottery supplier Scientific Games Corporation. And, supplemented by the recent acquisition of NYX Gaming Group, Scientific Games is now a leader in digital gaming and sports betting.

This rocket flight of Scientific Games had its real takeoff on August 5, 2016, when Kevin M. Sheehan took over as chief executive officer and president of the newly merged Scientific Games.

Sheehan wasn’t a gaming-industry veteran, but he had demonstrated time and again in former executive positions that he knew how to marshal available expertise and assets to maximize a company’s fortunes. He had achieved success in turning the fortunes around for Norwegian Cruise Lines as its CEO, which followed other successes at Cendant Corporation, the founding of Spanish-language television network Telemundo, and a number of other milestones.

At Scientific Games, Sheehan inherited a stable of leading gaming brands, systems and services that are the envy of the industry. But he recognized that the key to restoring investor confidence—in a post-recession supplier sector that had fallen on hard times—was to first cure the hangover that invariably follows large M&A activity. That is to say, debt.

When Sheehan arrived, the multiple acquisitions had left Scientific Games with debt that hovered around eight times EBITDA. Less than a year and a half later, it is around 6.7 times and still falling.

Scientific Games’ stock price, over the same period, has risen six-fold, and its bonds went from selling at a discount to selling at a premium.

Sheehan will be the first to deflect credit for this surge to the pros in charge of the divisions—he likes to call himself the “orchestra leader.” He used his tried and true formula at Scientific Games—taking a business with a stable, reliable recurring revenue source, and using those revenues to pay down debt, exploiting strong global brands and, along the way, making timely acquisitions like NYX Gaming Group to create new revenue streams.

“As long as we can show (investors) we’re making progress, the stock will perform,” Sheehan says of the company’s soaring stock price. “It’s all about doing a little bit better every day, every quarter, every year. When you look at the stock price, a lot of it is the leverage on the balance sheet, and being able to show performance—and then the performance leads to more confidence with the bond community. The bond prices trade up, and then all of a sudden, you’re able to go and refinance.”

With every refinance, of course, comes savings on interest payments, and subsequently, more cash flow to pay down debt—and to nurture and improve the legacy businesses.

“It’s almost like the same game book has played out in everything I’ve done,” Sheehan says. “Culture is the key element—getting people to understand what the opportunity is, and getting them all working on the same game book.”

Scientific Games’ game book, of course, was already extensive when Sheehan arrived, allowing him to begin with a stable of strong brands. “We have a wonderful legacy in each of those businesses,” Sheehan says, likening the Bally, WMS and Shuffle Master brands to the legendary brands he managed earlier in his career—from NCL, Prestige and Oceana Cruises to holdings at Cendant that included the Avis and Budget car rental companies and 12 hotel brands, from Wyndham to Ramada to Days Inn.

“The one thing I learned from my boss, (Cendant founder) Henry Silverman, was, ‘respect the brands,’” says Sheehan. “We never, ever marketed Cendant, but we marketed the heck out of all of the brands.

“But having said that, the other factor critically important to me is that we do understand that we work for Scientific Games, and we’re all part of a great cause.”

Scientific Games has in fact “respected the brands” during the first years of the merged company, maintaining the look and feel of Bally and WMS slots while producing new products utilizing technologies of both legacy companies. “I know that certain people come into a casino for a WMS game, and if they don’t get that experience, they’re not going to be happy,” Sheehan says.

He adds that respecting the brands means the company can utilize those brands across divisions and game styles to take the entire company forward.

“When you have great products like some of the Asian games, 88 Fortunes and Duo Fu Duo Cai, you utilize them across business segments,” says Sheehan. “We’re doing social and lottery game versions of those. We’ve got a Monopoly game we’re about to roll out on the lottery and social side. We’ve got the Willy Wonka Golden Ticket on the lottery side, which also has been a big success on the gaming side.

“We’re trying to leverage brands as smartly as possible, and I think we’re turning the corner on doing that more opportunistically.”

The NYX Fit

Beyond leveraging content across all channels, enhancing customer quality and innovating products and services, Sheehan has set the stage for future success with a string of recent acquisitions. This year alone, Scientific Games acquired DEQ’s EZ Baccarat, the world’s leading baccarat brand, Lapis Software Associates for lottery retail management, Red7, a U.K.-based mobile design group, and Spicerack Media’s “Bingo Showdown” social game.

But most significant may be the recently completed acquisition of NYX Gaming Group, which, combined with Scientific Games B2B interactive business, “will create a leader in iGaming, iLottery and sports betting,” Sheehan says.

Matt Davey, the prior CEO of NYX, will lead the newly combined business unit. Sheehan says one of Scientific Games’ priorities is to work with Davey and the NYX team to merge their vast content libraries, expand their customer distribution base and expand digital platforms to offer gaming and lottery customers new products—including sports betting in regulated markets.

“We’re going to morph into the new platforms,” Sheehan says. “The beauty of NYX is that it’s an all-digital platform. Sports will be an important part of that, but so will real-money gaming. (Former NYX subsidiary) OpenBet, of course, is the world’s No. 1 sports betting platform, so we’re going to be able to benefit if/when markets become regulated.

“But it really plants a flag for Scientific Games to say, ‘We are fully embracing and leading innovation in digital gaming,’ regardless of whether it’s sports or entertainment.”

The addition of NYX will fuel a relaunch of the company’s interactive digital business as Scientific Games Digital, reflecting the division’s expanded capabilities and setting the stage for future growth. “The NYX transaction is a strong strategic fit and financially compelling, as it will be cash accretive in 2018,” Sheehan says.

Loading for the Future

Sheehan says the company is beginning its “next phase of growth,” with Scientific Games Digital adding new dimensions to a remarkable collection of brands and content, designed with a particular eye on creating entertainment tailored to the end user—the casino customer—as well as the casinos themselves.

“We’re B2B2C, and also B2G2C,” Sheehan says. “So, we have two core customers. Our center is the player, but also our business or government customer. For both of those, we have to provide solutions.” For players, those solutions will be the experiences they have with Scientific Games products.

“The experiential economy is here. How players and customers and audiences live into stories has hit an all-time high. So, our brands, whether they are franchises we bring in from the outside, like James Bond or Monopoly, or brands we have developed ourselves, like Gold Fish or Jackpot Party, the common theme is they have fan followings —it is our job to always connect with fans, provide experiences across all of our business units, and allow them to engage and have fun.”

Bond, James Bond

The combination of proprietary and licensed brands has always been a strength of Scientific Games, but the company staged a coup with last year’s announcement it had secured rights to develop slots based on the legendary James Bond movie franchise.

Last fall, Scientific Games launched the first three titles in the Bond series, which includes rights to 24 Bond movies and all Bond actors. At the Global Gaming Expo, the new Bond slot machines were positioned in Scientific Games’ booth around a real Aston Martin sports car, the iconic brand of the Bond character’s fully equipped spy cars.

The first game in the Bond series is a game themed around the 2006 Bond film Casino Royale, starring Daniel Craig. The Casino Royale slot is on the new Gamefield 2.0 cabinet, which features a horizontal 43-inch portrait monitor for the base game flowing up to a vertical 43-inch top-box display.

Also on display was Goldfinger on the J43 with iReels cabinet. In the high-denomination, wide-area progressive space, the company launched Diamonds Are Forever, depicting the seventh Bond film.

“I think James Bond is the Holy Grail for gaming,” says Sheehan. “It’s very unusual to find a property that has an on-ramp for every age. After 24 films, there are clear on-ramps for a 60-year-old player, a 40-year-old player, a 25-year-old player.

“You’ve got this unique property which, first of all, is male and female, which is very unusual. And then, the meaning of the property itself is about glamour, about adventure, and is often tied to gaming—Casino Royale basically shows up in every movie. So, you have this beautiful connection, and you play that out in creating the player experience, whether it’s across slots, social, lottery, or even future gaming opportunities.

“Across the spectrum of all of our lines, we’re looking at what is the art of the possible. We’ve been very focused on how we build something that makes our customers happy, but we also need to get all those customers and guests excited about playing and experiencing innovative new games. We are committed to leading the industry. We have signed on the James Bond franchise, and we are engaging Applied Minds, a digital art and entertainment development firm—founded by two former Walt Disney Imagineers— to create the unimaginable, and think out of the box.”

Sheehan says his philosophy in developing the Bond franchise is to produce games that “are exhilarating, will draw people into the category and make our customers more profitable.” He says it’s something he learned while on the board of the Dave & Buster’s bistro-and-arcade franchise. “I would go into the arcade in Dave & Buster’s, and everybody’s screaming and yelling and having fun,” he recalls, “and there is an opportunity to bring that thrill and excitement back to the casino floor.

“We’ve got all these cool people walking through the casino, going to dinner, and the nightclubs, and to the entertainment venues. We believe our James Bond brand, and the immersive experiences we can create with Applied Minds, have the power to create the Dave & Buster experience for a younger demographic on the casino floor.”

Sheehan says this kind of innovation is what to expect from Scientific Games in the near future. “We’ve got our eye on the next generation. We’ve got to be careful, but I would say if we don’t make a couple of mistakes, that would be a mistake in itself. We’re not going to achieve great success without making a couple of mistakes along the way, but I’m pushing everyone to be open to making mistakes, so we can push the envelope. There’s a lot of excitement there.

“You look at the casino space, especially in a place like Vegas, where it’s morphed into more of an entertainment venue, and it’s got these big, massive floors. If we can come up with an offering that makes that space more productive, more exciting and brings more people to the casino, that’s a win-win for everybody.”

Sheehan says that “win-win” will be achieved by his leadership team “and dedicated employees focusing on innovation and success, delivering our financial commitments, successfully integrating NYX and using the James Bond experience to create the most immersive, thrilling experiences in the industry. I think that gives us a winning edge and a bit of a multiple pick-up in the marketplace.

“There’s a lot of smart people behind this company,” Sheehan says, going back to his original conductor analogy: “I’m just the orchestra leader.”

That orchestra is just beginning a new movement.—Frank Legato


Setting Sail
How Scientific Games emerged from a flat market to become one of gaming’s hottest companies

Kevin Sheehan, CEO, Scientific Games

So, what do you say about a stock rising nearly six-fold in a little over a year after a new CEO has taken over?

Wow! is probably the first response.

The second is to ask, “How did he do that?’

The answer can probably be reduced to an essential: keeping the promise to reduce the financial risk of very high debt while starting to show the growth synergies that were the strategic rationale of all the mergers that created that debt.

Timing helped. Kevin Sheehan arrived at Scientific Games when gaming supplier stocks were low and investor sentiment gloomy.

In the summer of 2016, the slot machine leasing business was basically flat, the North American replacement cycle for game sales remained disappointing years after the Great Recession had caused casino companies to cut spending on slots, and small competitors were eating into the market shares of post-merger giants Sci Games and IGT. And, while leaders of those companies pointed to their broad product lines and innovations, investors had heard that before.

Investor sentiment has vastly improved since then, and stock prices show it. IGT is up around 25 percent and Aristocrat more than 50 percent. Everi has had its own rocket ride, soaring more than four times. But nothing matches Sci Games.

In a way, Scientific Games owes some thanks to its rival, and sometime lottery ally, IGT, for starting to turn investor sentiment around. IGT held an analyst day in which the company pointed out that, volatility of the slots business aside, two-thirds of their revenues came from lotteries, and that lotteries provide recurring revenues locked up by long-term contracts.

Analysts saw the light and began to report about the protection that lotteries presented to the overall company. And, of course, what is true for IGT is true for Scientific Games, which gets about a third of its business from lotteries.

Sentiment further improved as casino companies finally have begun modernizing their slot floors, as evidenced by the improving replacement cycle.

Meanwhile, Sheehan took actions that convinced many investors that he would turn Sci Games around just as he had Norwegian Cruise Lines in an earlier CEO stint.

The biggest albatross for Sci Games was debt that weighed in at eight times EBITDA in a supplier sector that historically had little or no debt, and in a broader world where four times is often considered acceptable.

Scientific Games has attacked the issue, reducing debt and, more importantly, growing EBITDA so that the debt-to-EBITDA ratio has fallen to 6.7 times. Plus, the company has refinanced big portions of its debt and will do more this year. That has the double benefit of cutting interest expenses, resulting in yet higher profitability, and putting off the dates that debts mature, meaning Sci Games buys time to further grow its way into a safe debt level.

So, improving the balance sheet lessens a weight and a risk, but businesses prosper by growing, and Sci Games has demonstrated it can combine cost and debt reduction with growth.

Take third-quarter results, the most recent reporting period.

Sci Games grew every business segment: Gaming EBITDA jumped 5.4 percent, lottery 15.4 percent and interactive 70.5 percent.

Margins also improved in every segment, increasing a combined 1.2 points to 38.9 percent for the overall company.

Further, the growth came for the right reasons. Products like the Pro Wave slot format and TwinStar J43 cabinet drove sales. Replacement sales jumped 30 percent. Average sale price hit a record $17,643. Leasing, called gaming operations, grew over the previous quarter for the first time in three years.

And that’s just the gaming business. Lotteries continue to grow with revenues up 2.8 percent and EBITDA a whopping 15.4 percent.

For those who think interactive is the future, Sci Games rocked in the quarter with revenues up 30.8 percent to $111.4 million, representing a significant 14.5 percent of revenue, and EBITDA that rose 70.5 percent to $23.2 million. Revenue per active daily user on social casino zoomed 45 percent to 45 cents.

Finally, Sci Games has made these gains while continuing to make acquisitions that invest in the future.

The most important recent purchase is NYX Gaming, a fast-growing online gaming company that provides both gaming and sports betting platforms.

If sports betting is legalized in the U.S. and allowed online, Sci Games will have positioned itself to exploit a significant new market.—by Frank Fantini

Frank Legato is editor of Global Gaming Business magazine. He has been writing on gaming topics since 1984, when he launched and served as editor of Casino Gaming magazine. Legato, a nationally recognized expert on slot machines, has served as editor and reporter for a variety of gaming publications, including Public Gaming, IGWB, Casino Journal, Casino Player, Strictly Slots and Atlantic City Insider. He has an B.A. in journalism and an M.A. in communications from Duquesne University in Pittsburgh, PA. He is the author of the books, How To Win Millions Playing Slot Machines... Or Lose Trying, and Atlantic City: In Living Color.  

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