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GTECH ANNOUNCES RECORD EARNINGS PER SHARE
Company Reports Fiscal Year 2004 Second Quarter Results; Revises Fiscal Year 2004 Estimates Upward
(West Greenwich, Rhode Island -- September 12, 2003) GTECH Holdings Corporation (NYSE:GTK) today announced second quarter earnings for fiscal year 2004 ended August 23, 2003.
"We enjoyed another strong quarter," said GTECH President and CEO W. Bruce Turner. "Global same store sales grew by a healthy seven percent and we experienced solid jackpot activity. The growth in service revenues, combined with operational efficiencies in our business, enabled us to deliver service margins in excess of forty percent, and we generated earnings per share significantly higher than our expectations."
Commenting on the quarter, GTECH Senior Vice President and Chief Financial Officer Jaymin B. Patel said, "We are delighted with the continued improvement in the underlying performance of the business, particularly with the substantial increase in service revenues. The strength of our core business, combined with the exciting opportunities that PolCard and Interlott offer, give us confidence that we can continue to increase profitability and generate strong returns for our shareholders."
Operating Results
Revenues for the second quarter of fiscal 2004 totaled $277.2 million, up 25.5% over the $221.0 million of revenues in the second quarter of fiscal 2003. Net income was $48.5 million, or $0.74 per diluted share, up 26.9% over net income of $38.2 million, or $0.66 per diluted share, for the same period last year.
Revenues for the first six months of fiscal 2004 were $516.8 million, up 14.2% over revenues of $452.4 million in the first six months of fiscal 2003. Net income was $89.5 million, or $1.43 per diluted share, up substantially over net income of $67.2 million, or $1.14 per diluted share, for the same period last year.
Second Quarter
Service revenues were $238.0 million in the quarter, up 12.5% over the $211.6 million of service revenues in the same quarter last year, driven by the continued strength of same store sales, strong jackpot activity, favorable exchange rates, and the acquisition of PolCard.
Product sales in the second quarter of fiscal 2004 were $39.2 million, up substantially over the $9.4 million recorded in the second quarter of fiscal 2003, primarily driven by the sale of GTECH's new interactive, web-based software application, ES Interactive, to the Company's customer in the United Kingdom.
Service margins improved to 44.2% in the second quarter of fiscal 2004 from 40% in the prior year quarter. Fiscal 2004 second quarter service margins benefited from lower depreciation associated with existing contracts and improved operating efficiencies, combined with the impact of higher jackpot activity.
Operating expenses in the second quarter of fiscal 2004 were $41.2 million, up $11.1 million compared to the $30.1 million of operating expenses incurred in the second quarter of fiscal 2003. This increase was driven by $6.9 million of increased spending on research and development as the Company continues its efforts to accelerate the development and deployment of industry-leading products into the marketplace and to execute against its commercial services strategy. In addition, selling, general, and administrative expense was up $4.2 million, primarily driven by business development activities in Poland and Mexico, increased marketing expenses primarily associated with trade shows and conferences, and the consolidation of PolCard.
Year to Date
Service revenues were $461.6 million in the first six months of fiscal 2004, up 6% over the $435.3 million of service revenues in the same period last year, primarily due to worldwide same store sales growth.
Product sales in the first six months of fiscal 2004 were $55.3 million, compared to $17.0 million recorded in the first six months of fiscal 2003, again, primarily driven by the sale of ES Interactive to GTECH's customer in the United Kingdom.
Service margins improved to 43.8% compared to 37.1% in the first six months of fiscal 2003, primarily driven by lower depreciation associated with existing contracts and the absence of certain consulting costs incurred during the first six months of the prior year.
Operating expenses in the first six months of fiscal 2004 were $79.8 million, up $20.3 million compared to the $59.5 million of operating expenses incurred during the first six months of fiscal 2003. This increase was driven by $14.8 million of increased spending on research and development and $5.5 million of increased selling, general, and administrative expense for the reasons outlined above.
Cash Flow and Investments
During the first six months of fiscal 2004, GTECH generated $170.5 million of cash from operations, which, along with cash on hand, was principally used to fund investing activities totaling $204.8 million, including the acquisition of PolCard. At the end of the fiscal 2004 second quarter, the Company had no borrowings under its $300 million credit facility.
During the fiscal 2004 second quarter, GTECH paid its first quarterly cash dividend of $0.17 per share to shareholders of record as of July 15, 2003, for a total of $9.9 million.
Financial Outlook
The Company revised earnings guidance for the fiscal year ending February 28, 2004.
GTECH expects service revenue growth in the range of 7% to 8%, and product sales to be in the range of $120 million to $130 million. The Company expects service margins in the range of 41% to 43% for the current fiscal year and product margins in the range of 32% to 34%.
Based on this outlook, the Company now expects earnings per share for fiscal 2004 to be in the range of $2.65 to $2.75 on a fully-diluted basis, compared with earnings per share of $2.43 reported in fiscal 2003. This is an upward revision of the previously announced $2.55 to $2.65 per share. In addition, in conjunction with the consolidation of the partnership that owns GTECH's headquarters facilities, in compliance with FASB Interpretation Number 46 (FIN 46) "Consolidation of Variable Interest Entities," the Company expects to report a one-time, non-cash, pre-tax gain in the amount of $0.05 per diluted share. Including the impact of this cumulative effect of accounting change, the Company expects to report earnings per share in the range of $2.70 to $2.80 on a fully diluted basis. Current diluted share estimates for the year are at 65 million shares.
For the third quarter of fiscal 2004, ending November 22, 2003, GTECH expects service revenue growth in the range of 8% to 10%, and product sales in the range of $40 million to $45 million. The Company expects service margins in the range of 40% to 42%, and product margins in the range of 36% to 38%. Accordingly, GTECH expects diluted earnings per share to be in the range of $0.55 to $0.60 per share for the quarter, after considering the impact of its convertible debentures of approximately $0.06 per share. This compares to $0.57 reported in the same period last year. Including the one-time gain relating to the adoption of FIN 46 referenced above, the Company expects to report diluted earnings per share in the range of $0.60 to $0.65 per share.
The third quarter outlook assumes a full quarter of revenues from PolCard and approximately two months of revenues from the pending acquisition of Interlott, scheduled to be completed on September 18, 2003.
Second Quarter Highlights
In the second quarter of fiscal 2004, GTECH continued to execute against its growth strategy by signing new contracts and contract extensions both domestically and abroad.
The Company was awarded a new five-year integrated services contract by the Wisconsin Lottery to provide a fully integrated online and instant ticket gaming system, and IP-based wireless telecommunications network.
The Michigan Lottery signed a three-year contract extension with GTECH and exercised an option in its existing contract with GTECH for Club Keno®. Additionally, GTECH extended its relationship with lottery customers in New Zealand, Sweden, Turkey, and with the Idaho Department of Fish and Game.
GTECH also entered into a five-year agreement with The National Lotteries Control Board and The Betting Levy Board in Trinidad and Tobago to provide a complete video lottery solution, including a central system, video lottery terminals (VLTs), and communications network.
After the close of the second quarter, GTECH strengthened its market leadership in the core lottery business when the Company was named the successful vendor to provide online lottery equipment and services to the Florida Lottery under a multi-year integrated services contract, following a competitive procurement. Also after the close of the quarter, GTECH signed an agreement with the Texas Lottery to provide 1,000 Altura® Self Service Terminals (SSTs) and 8,000 LED messaging displays; and a two-year extension agreement with its customer, Dansk Tipstjeneste, in Denmark.
"These wins demonstrate GTECH's continued technical strength and financial soundness to compete in today's dynamic and highly competitive lottery industry," continued Mr. Turner. "In fact, Florida is the fourth consecutive jurisdiction to validate the strength of our technology offerings, by giving GTECH the highest technical score of all bidders. Scheduled to begin in February 2005, the Florida Lottery contract serves to secure future revenues for GTECH in fiscal 2006 and beyond."
Other Business Developments
In the second quarter, GTECH successfully completed the acquisition of PolCard S.A., the leading credit and debit card merchant transaction acquirer and processor company in Poland.
Also in the quarter, GTECH completed the final agreement and negotiations of a 20-year Master Contract with the Rhode Island Lottery that allows GTECH the right to be the exclusive provider of online, instant-ticket, and video lottery central systems and services. In addition, the Company will work with the Rhode Island Lottery to introduce a number of other government and commercial transaction services. As previously reported, the Company plans to relocate it headquarters facility to Providence, Rhode Island. A key component of the overall deal was a tax stabilization agreement for the Company's proposed World Headquarters in downtown Providence. The Providence City Council passed this agreement in early July.
Certain statements contained in this press release are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, without limitation, statements relating to the prospects and financial outlook for the Company, which reflect management assumptions regarding: (i) the future prospects for and stability of the lottery industry and other businesses in which the Company is engaged or expects to be engaged, (ii) the future operating and financial performance of the Company (including, without limitation, expected future growth in revenues, profit margins and earnings per share), and (iii) the ability of the Company to retain existing business and to obtain and retain new business. Such forward looking statements reflect management's assessment based on information currently available, but are not guarantees and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in the forward looking statements.
These risks and uncertainties include, but are not limited to, those set forth above, in the Company's subsequent press releases and on reports by the Company on Forms 10-K, 10-Q and 8-K, and other reports and filings with the Securities and Exchange Commission, as well as risks and uncertainties respecting: (i) the potential impact of extensive and evolving government regulations upon the Company's business; (ii) the ability of the Company to continue to retain and extend its existing contracts and win new contracts; (iii) the possibility of slower than expected growth or declines in sales of lottery goods and services by the Company or the Company's customers; (iv) exposure to foreign currency fluctuations; (v) risks and uncertainties inherent in doing business in foreign jurisdictions; (vi) the relatively large percentage of the Company's revenues attributable to a relatively small number of the Company's customers; (vii) the possibility of significant fluctuation of quarterly operating results; (viii) the intensity of competition in the lottery industry; (ix) the possibility of substantial penalties under and/or termination of the Company's contracts; (x) the ability of the Company to respond to technological change and to satisfy the future technological demands of its customers; (xi) opposition to expansion of lottery and gaming; (xii) the Company's ability to attract and retain key employees; and (xiii) the possibility of adverse determinations in pending legal proceedings.
GTECH, a leading global information technology company with $1 billion in revenues and approximately 4,600 people in 43 countries, provides software, networks, and professional services that power high-performance, transaction processing solutions. The Company's core market is the lottery industry, with a growing presence in financial services transaction processing. For more information about the Company, please visit GTECH's website at http://www.gtech.com.
Consolidated statement of operations to follow:
Second Quarter Income Statement
Year-To-Date Income Statement
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
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