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Why Is Scientific Games (SGMS) Down 27% Since Last Earnings Report?

Zacks Equity Research
Booz Allen (BAH) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for Scientific Games (SGMS). Shares have lost about 27% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Scientific Games due for a breakout? 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 Q4 Earnings & Revenues Up Y/Y  

Scientific Games Corporation reported fourth-quarter 2018 earnings of $2.21 per share against the year-ago quarter’s loss of 48 cents.

Revenues increased 8% from the year-ago quarter to $885.7 million. Robust performance of Lottery and Social segment drove the top line.

The Zacks Consensus Estimate for earnings and revenues was pegged at 10 cents and $874 million, respectively.

Quarter Details

Gaming Segment (53.1% of total revenues) revenues declined 4.6% year over year to $469.8 million.

Gaming operations declined 11% to $151.4 million due to an unfavorable impact from revenue recognition accounting, effective from 2018.

While Gaming Systems revenues increased 10% year over year, Gaming Machine Sales declined 12% from the year-ago quarter. Table Products sales witnessed an increase of 20% from the year-ago period driven by robust demand for shufflers and table products. 

The increase in Gaming System revenues was due to ongoing system installations in Canada, along with an increase in hardware sales, primarily iVIEW4. Notably, Gaming machine average sales price declined 4%. Further, net sales of iVIEW 4 was recorded at 105,000 units till December 2018, including 17,000 in the fourth quarter.

Lottery Segment (26.1% of total revenues) revenues were up 6.2% from the prior-year quarter to $230.7 million. The company benefited from higher denomination ticket sales and constant innovations.

Revenues from Lottery Systems increased 22% due to domestic organic growth. Moreover, higher multi-state jackpot activity coupled with new lottery system installations in Kansas and new investment in Keno in Pennsylvania boosted revenues. Meanwhile, Instant Products stayed flat year over year.

Social Segment (12.8% of total revenues) revenues increased 19% year over year to $113.7 million. Notably, average daily revenues from daily active users in the fourth quarter increased significantly. Moreover, average monthly active users increased from 7.6 million in the year-ago quarter to 8.4 million users.

Further, the company benefited from “growing popularity” of Bingo Showdown apps as well as the new MONOPOLY Slots-themed social casino app launched recently. Significant growth in core apps including Jackpot Party Social Casino also aided the company.

Digital Segment (8.1% of revenues) revenues grew to $71.5 million compared with $17.8 million in the year-ago quarter, of which $51.7 million came from NYX Gaming Group Limited.

In the reported quarter, Scientific Games announced its multi-state lottery linked lottery game, DEAL OR NO DEAL in partnership with Endemol Shine Gaming. Further, the company launched multiple digital games with Norsk Tipping, Norway's national lottery operator and World Lottery Association member.

Full-Year Details

Total revenues in 2018 were $3.36 billion, up 9% year over year. Net loss per share came in at $3.87, wider than a loss of $2.72 per share in 2017.

Consolidated attributable earnings before interest, taxes, depreciation and amortization (AEBITDA) increased 9% year over year to $1.33 billion.

Operational Details

AEBITDA increased 6% from the year-ago period to $343.5 million. AEBITDA margin contracted 60 basis points (bps) to 38.8%.

Gaming AEBITDA decreased 2% year over year to $233.2 million. However, Gaming AEBITDA margin surged 130 bps to 49.6%. This increase in margin was driven by favorable product mix shift to higher margin table product and gaming systems.

Lottery AEBITDA increased 11% from the year-ago quarter to $105 million. Lottery AEBITDA margin increased 190 bps to 45.5%. Social AEBITDA increased 30% to $28.3 million and margin expanded 210 bps to 24.9%.

Digital AEBITDA surged 131% from the year-ago period to $11.8 million while margins declined from 28.7% in the year-ago quarter to 16.5%

Selling, general and administrative (SG&A) increased 8.3% year over year to $167.7 million in the reported quarter. Research & development (R&D) expenses rose almost 8.7% to $49.8 million.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with cash and cash equivalents of $168.2 million compared with $113.5 million in the previous quarter. The company’s long-term debt increased from $8.73 billion in the third quarter to $8.99 billion in the recently reported quarter.

Cash used in operating activities was $9.8 million against positive cash flow from operations of $223.5 million in the previous quarter due to a $151.5 million payment to resolve the Shuffle Tech legal matter and an unfavorable $49.5 million impact from the timing of interest payments.

Free cash flow was recorded at a negative $229.2 million compared to a positive free cash flow of $9.7 million in the year-ago period.  

Scientific Games targets an initial public offering (IPO) of a minority interest in its social gaming business in fiscal 2019 and the cash proceeds from the same will be used to repay the company’s debt.
 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a flat path over the past two months. The consensus estimate has shifted 366.67% due to these changes.

VGM Scores

Currently, Scientific Games has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 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

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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