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Why Is Scientific Games (SGMS) Up 62.5% Since Last Earnings Report?

Zacks Equity Research
·5 min read

It has been about a month since the last earnings report for Scientific Games (SGMS). Shares have added about 62.5% 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 Posts Loss in Q1 on Lower Revenues

Scientific Games Corporation reported a loss of $1.69 per share for first-quarter 2020. The company had reported GAAP loss of 26 cents per share in the year-ago quarter.

Revenues came in at $725 million, down 13.4% year over year. The decline primarily resulted from decline in Gaming and Lottery revenues due to the impact of coronavirus-led lockdown on the company’s business.

Notably, the Zacks Consensus Estimate for loss and revenues was pegged at 16 cents per share and $781 million, respectively.

Services revenues decreased 8.1% to $422 million. Product sales were down 29.4% to $168 million. Instant product revenues were $135 million, down 3.6%.

Quarter Details

Gaming revenues (43.8% of revenues) decreased 24.6% year over year to $318 million. The company’s Gaming revenues were negatively impacted by COVID-19 disruptions that resulted in temporary closures of casino operations in jurisdictions globally.

Lottery revenues (25.2% of revenues) declined 6.6% year over year to $212 million on lower JV contributions related to the COVID-19 impact in Italy and Greece.

Meanwhile, SciPlay revenues (16.3% of revenues) remained flat year over year at $118 million. Nevertheless, ARPDAU increased 2.1% to 49 cents. Moreover, SciPlay mobile penetration increased 300 basis points (bps) to 85%.

Moreover, Digital (10.6% of revenues) revenues climbed 10% year over year to $77 million.

Consolidated adjusted EBITDA (AEBITDA) decreased 39% year over year to $200 million. AEBITDA margin, as a percentage of revenues, contracted from the year-ago quarter’s figure of 39.2% to 27.6% in the reported quarter.

Gaming AEBITDA decreased 55.3% year over year to $96 million. Additionally, Gaming AEBITDA margin, as a percentage of revenues, contracted from the year-ago quarter’s figure of 25.7% to 13.2% in the reported quarter.

Lottery AEBITDA decreased 25% from the year-ago quarter to $78 million. Further, Lottery AEBITDA margin contracted 170 basis points (bps) to 10.8%.

SciPlay AEBITDA jumped 40% to $35 million driven by lower marketing expense and the elimination of internal IP payments. In addition, AEBITDA margin expanded 180 bps to 4.8%.

Further, Digital AEBITDA surged 76.9% from the year-ago quarter to $23 million. Digital AEBITDA margin expanded 160 bps to 3.2%.

Selling, general and administrative expenses increased 6.5% year over year to $198 million. Moreover, research & development expenses increased 4.1% to $51 million.

Balance Sheet & Cash Flow

As of Mar 31, 2020, cash and cash equivalents were $334 million compared with $313 million as of Dec 31, 2019.

Net debt was $8.5 billion ($8.85 billion in face value of debt outstanding less $334 million of cash and cash equivalents) as of Mar 31.

As of Mar 31, 2020, the company had $967 million in available liquidity, which included SciPlay’s revolving credit facility.

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 7.1 times as of Mar 31. 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 $120 million compared with the prior quarter’s $153 million. Free cash flow was $56 million compared with $53 million in the previous quarter.

Contract Wins

Scientific Games was awarded key contracts for a lottery system in Iowa, technology in Germany, instant tickets in Connecticut and the SGEP program in South Carolina.

The company is now the primary supplier to the top 10 performing instant game lotteries in the world.

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, compared with $300 million-$330 million estimated in the previous quarter.

 

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -156.27% due to these changes.

VGM Scores

Currently, Scientific Games has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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. It's no surprise Scientific Games has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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