Scientific Games (SGMS) Up 6.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Scientific Games (SGMS). Shares have added about 6.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Scientific Games due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Scientific Games Incurs Q3 Loss on Lower Revenues

Scientific Games Corporation reported a loss of $1.23 per share for third-quarter 2020. The company had reported earnings of 15 cents per share in the year-ago quarter.

Revenues came in at $698 million, down 18.4% year over year. The decline primarily resulted from decline in Gaming revenues due to continued reduced operations of casino operators globally as a result of coronavirus-led business disruptions.

Notably, the Zacks Consensus Estimate for earnings and revenues was pegged at loss of 76 cents per share and $663 million, respectively.

Services revenues decreased 7.7% to $417 million. Product sales were down 51.4% to $124 million. Meanwhile, Instant product revenues came in at $157 million, up 6.1%.

Quarter Details

Gaming revenues (33.1% of revenues) decreased 49.1% year over year to $231 million. The company’s Gaming revenues were negatively impacted by COVID-19 disruptions that resulted in continued reduced operations of casino operators in various jurisdictions globally.

Notably, as of Nov 4, 90% of domestic casinos have reopened including New York commercial casinos (a large market that opened in mid-September).

Meanwhile, Lottery revenues (34.5% of revenues) increased 9.5% year over year to $241 million driven by domestic instant tickets and international product sales.

During the quarter, Scientific Games announced their latest lottery entertainment innovations with the new 7-11-21 LIVE! game, available to state lotteries in the United States.

Markedly, Lottery instant ticket sales are up over 20% for instant game retail sales in the most recent twelve-week period compared to the same period last year. During the quarter, the company launched its first advanced lottery self-service instant ticket vending technology with PlayCentral HD in Sachsenlotto Lottery located in Saxony, Germany.

SciPlay revenues (21.6% of revenues) climbed 30.2% year over year to $151 million driven by increased game health, attributable to game updates and features implemented during the quarter to maximize player engagement and the stay-at-home dynamic related to COVID-19.

Moreover, average revenue per daily active user (ARPDAU) increased 34% to 63 cents. Moreover, SciPlay mobile penetration increased 300 basis points (bps) to 87%.

Digital (10.7% of revenues) revenues rose 15.4% year over year to $75 million. Domestic iGaming revenues grew nearly 150% year over year driven primarily by strong growth in New Jersey.

During the quarter, Scientific Games announced new and extended partnerships with Hard Rock, Flutter and Wynn Resorts among others.

Consolidated adjusted EBITDA (AEBITDA) decreased 31.7% year over year to $235 million. AEBITDA margin, as a percentage of revenues, contracted 660 bps to 33.7% in the reported quarter.

Gaming AEBITDA decreased 65.9% year over year to $77 million while Lottery AEBITDA increased 10.1% from the year-ago quarter to $109 million. Further, Lottery AEBITDA margin expanded 400 basis points (bps) to 15.6%.

SciPlay AEBITDA surged 53.1% to $49 million. In addition, AEBITDA margin expanded 330 bps to 7%.

Further, Digital AEBITDA rose 47.1% from the year-ago quarter to $25 million. Digital AEBITDA margin expanded 160 bps to 3.6%.

Selling, general and administrative expenses decreased 3.6% year over year to $164 million. Moreover, research & development expenses declined 12.8% to $41 million.

Balance Sheet & Cash Flow

As of Sep 30, cash and cash equivalents were $1.04 billion compared with $790 million as of Jun 30, 2020.

Net debt was $8.47 billion as of Sep 30 compared with $8.52 billion as of Jun 30.

As of Sep 30, the company had $1.2 billion in available liquidity, which included SciPlay’s revolving credit facility.

On Oct 8, the company amended its credit agreement that extended the Covenant Relief Period under its revolving credit facility through the first quarter of 2022 and made a $100 million voluntary payment.

Net debt leverage ratio was 9.6 times as of Sep 30. Scientific Games aims at achieving net debt leverage of 6 times by the end of 2020 and 5.5 times in 2021.

Cash from operating activities was $140 million compared with the prior quarter’s $52 million. Free cash flow was $62 million compared with $5 million in the previous quarter.

Guidance

For 2020, the company now anticipates capital expenditure in the range of $210 million-$225 million.

Key Development in Q3

Scientific Games announced that a number of long-term institutional investors — including gaming industry investor Caledonia — have reached an agreement to acquire a 34.9% stake in Scientific Games from MacAndrews & Forbes Incorporated at a price of $28.00 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -69.06% due to these changes.

VGM Scores

Currently, Scientific Games has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Scientific Games has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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