Why Is Scientific Games (SGMS) Down 11% Since Last Earnings Report?

It has been about a month since the last earnings report for Scientific Games (SGMS). Shares have lost about 11% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Scientific Games Q2 Loss Widens Y/Y, Revenues Flat

Scientific Games Corporation reported second-quarter 2019 loss of 83 cents per share, much wider than the year-ago quarter’s loss of 6 cents.

The wider loss was primarily attributed to higher debt refinancing expenses and remeasurement of debt.

Revenues were $845 million, flat year over year. Growth in Lottery, SciPlay and Digital segments was fully offset by lower Gaming revenues.

Services revenues increased 4.3% to $457 million. Product sales declined 7.4% to $238 million. Instant products revenues were flat year over year.

Quarter Details

Gaming revenues (50.5% of revenues) declined 9% year over year to $427 million. The year-over-year decline was primarily attributed to fewer casino openings and system launches. Lower replacement sales also hurt top-line growth.

During the quarter, the company launched Twinstar Wave XL cabinet on a for-sale model with six themes and the entire library of content from Twinstar J43.

Lottery revenues (27.3% of revenues) were up 24% year over year to $231 million. The top line benefited from equipment sales as part of a recent 10-year sports betting contract in Turkey.

SciPlay revenues (14% of revenues) increased 18% year over year to $118 million. The segment benefited from increased monetization of paying players, with ARPDAU up 14% to 48 cents.

Digital (8.2% of revenues) revenues increased 3% year over year to $69 million. Notably, the digital casino platform processed more than $9 billion in total wagers in the reported quarter.

Operational Details

Consolidated adjusted EBITDA (AEBITDA) decreased 1.5% year over year to $335 million primarily due to lower Gaming revenues. AEBITDA margin stayed flat at 40%.

Gaming AEBITDA decreased 9% year over year to $215 million. However, Gaming AEBITDA margin was unchanged at 50%.

Lottery AEBITDA increased 12% from the year-ago quarter to $103 million. However, Lottery AEBITDA margin contracted 300 basis points (bps) to 45%.

SciPlay AEBITDA jumped 44% to $33 million. Moreover, AEBITDA margin expanded 500 bps to 28%.

However, Digital AEBITDA declined 8% from the year-ago quarter to $12 million. Digital AEBITDA margins contracted 200 bps on a year-over-year basis to 17%.

Selling, general and administrative expenses were unchanged at $174 million on a year-over-year basis. However, research & development expenses declined 6.1% to $46 million.

Balance Sheet & Cash Flow

As of Jun 30, 2019, cash and cash equivalents were $369 million compared with $1.21 billion as on Mar 31, 2019.

Net debt was $8.6 billion ($9 billion in face value of debt outstanding less $369 million of cash and cash equivalents) at the end of the second quarter. The company reduced debt by $155 million in the reported quarter.

Net debt leverage ratio decreased 0.5 times on a year-over-year basis to 6.5 times. Scientific Games targets net debt leverage of approximately 5.5 times by the end of 2020.

Cash from operating activities was $95 million compared with $167 million in the previous quarter. Free cash flow was $38 million compared with $96 million in the first quarter.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -83.33% due to these changes.

VGM Scores

At this time, Scientific Games has a poor Growth Score of F, a grade with the same score on the momentum front. 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 D. 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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