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Why Is Scientific Games (SGMS) Up 30.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Scientific Games (SGMS). Shares have added about 30.6% 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 the most recent earnings report in order to get a better handle on the important drivers.

Scientific Games Incurs Q2 Loss on Lower Revenues

Scientific Games reported a loss of $2.15 per share for second-quarter 2020. The company had reported GAAP loss of 83 cents per share in the year-ago quarter.

Revenues came in at $539 million, down 36.2% year over year. The decline primarily resulted from decline in Gaming and Lottery revenues due to temporary closures of casino operations globally and a lower level of lottery ticket sales as a result of coronavirus-led lockdown.

Notably, the Zacks Consensus Estimate for earnings and revenues was pegged at loss of $1.89 per share and $463 million, respectively.

Services revenues decreased 28.9% to $322 million. Product sales were down 64.7% to $84 million. Instant product revenues were $133 million, down 11.3%.

Quarter Details

Gaming revenues (16.9% of revenues) decreased 78.7% year over year to $91 million. The company’s Gaming revenues were negatively impacted by COVID-19 disruptions that resulted in temporary closures of casino operations in jurisdictions globally. Notably, as of Jul 23, 85% of domestic casinos have reopened.

Lottery revenues (28.8% of revenues) declined 9.5% year over year to $209 million on lower lottery ticket sales related to the COVID-19 outbreak.

Meanwhile, SciPlay revenues (30.8% of revenues) climbed 40.7% year over year to $166 million driven by increased game health attributed to game updates and features implemented during the quarter to maximize player engagement and the stay-at-home dynamic related to COVID-19.

Moreover, ARPDAU increased 39.6% to 67 cents. Moreover, SciPlay mobile penetration increased 400 basis points (bps) to 87%.

Digital (13.5% of revenues) revenues rose 5.8% year over year to $73 million.

Consolidated adjusted EBITDA (AEBITDA) decreased 63.9% year over year to $121 million. AEBITDA margin, as a percentage of revenues, contracted from the year-ago quarter’s figure of 39.6% to 22.4% in the reported quarter.

Gaming AEBITDA decreased 114.4% year over year impacted by a $33 million Gaming segment charge related to receivables credit allowances and charges for inventory valuation.

Lottery AEBITDA decreased 5.8% from the year-ago quarter to $97 million. Further, Lottery AEBITDA margin expanded 580 basis points (bps) to 18%.

SciPlay AEBITDA surged 81.8% to $60 million. In addition, AEBITDA margin expanded 720 bps to 11.1%.

Further, Digital AEBITDA rose 66.7% from the year-ago quarter to $20 million. Digital AEBITDA margin expanded 230 bps to 3.7%.

Selling, general and administrative expenses decreased 13.2% year over year to $151 million. Moreover, research & development expenses declined 32.6% to $31 million.

Balance Sheet & Cash Flow

As of Jun 30, cash and cash equivalents were $790 million compared with $334 million as of Mar 31, 2020.

Net debt was $8.52 billion ($9.31 billion in face value of debt outstanding less $790 million of cash and cash equivalents) as of Jun 30.

As of Jun 30, the company had $943 million in available liquidity, which included SciPlay’s revolving credit facility.

In July, as a result of successfully completing a private offering of 2025 Notes and the redemption of the outstanding 2021 Notes, total liquidity increased more than $200 million subsequent to quarter-end.

On Apr 9, 2020, Scientific Games borrowed $480 million under SGI’s revolving credit facility, which was substantially the remaining availability thereunder.

Net debt leverage ratio was 8.6 times as of Jun 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 $52 million compared with the prior quarter’s $120 million. Free cash flow was $5 million compared with $56 million in the previous quarter.

Guidance

For 2020, the company now anticipates capital expenditure in the range of $210 million-$240 million due to capital liquidity-saving measures implemented as a result of COVID-19 disruptions.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 22.61% due to these changes.

VGM Scores

At this time, Scientific Games has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. 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 upward for the stock, and the magnitude of these revisions looks promising. 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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