Scientific Games (SGMS) Down 83% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Scientific Games (SGMS). Shares have lost about 83% 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 drivers.

Scientific Games Posts Loss in Q4 on Lower Revenues

Scientific Games reported a loss of 46 cents per share in fourth-quarter 2019. The company had reported GAAP earnings of $2.21 per share in the year-ago quarter.

Moreover, revenues came in at $863 million, down 2.6% year over year. The decline primarily resulted from reduced Gaming revenues due to fewer system launches in Canada and lower machine unit sales.

Notably, the Zacks Consensus Estimate for earnings and revenues was pegged at 22 cents per share and $894 million, respectively.

Services revenues decreased 2.6% to $451 million. Product sales were down 3.7% to $263 million. Instant product revenues were $149 million, down 0.7%.

Quarter Details

Gaming revenues (51.6% of revenues) decreased 5.3% year over year to $445 million.

Lottery revenues (27% of revenues) were up 0.9% year over year to $233 million. Increased sales of the company’s hardware solutions, primarily in international markets, drove the top line.

SciPlay revenues (13.1% of revenues) also declined 0.9% year over year to $113 million. Nevertheless, ARPDAU increased 9% to $0.50. Moreover, SciPlay mobile penetration increased 300 basis points (bps) to 84%.

Digital (8.3% of revenues) revenues climbed 1.4% year over year to $72 million.

Consolidated adjusted EBITDA (AEBITDA) increased 4.4% year over year to $328 million. AEBITDA margin contracted 70 bps to 38%.

Gaming AEBITDA decreased 10.3% year over year to $209 million. Additionally, the Gaming AEBITDA margin shrank 260 bps to 47%.

Lottery AEBITDA decreased 6.7% from the year-ago quarter to $98 million. Further, Lottery AEBITDA margin contracted 340 bps to 42.1%.

SciPlay AEBITDA jumped 33.3% to $32 million. In addition, AEBITDA margin expanded 730 bps to 28.3%.

Further, Digital AEBITDA surged 75% from the year-ago quarter to $21 million. Digital AEBITDA margin expanded from the year-ago quarter’s figure of 16.9% to 29.2% in the reported quarter.

Selling, general and administrative expenses declined 5.5% year over year to $172 million. Moreover, research & development expenses fell 8% to $46 million.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash and cash equivalents were $313 million compared with $363 million as of Sep 30, 2019.

Net debt was $8.6 billion ($8.9 billion in face value of debt outstanding less $313 million of cash and cash equivalents), as of Dec 31.

In November 2019, Scientific Games completed an offering, which comprised $700 million of 7.000% senior unsecured notes due 2028 and $500 million of 7.250% senior unsecured notes due 2029.

The net proceeds of the offering together with cash in hand and borrowings under the company’s credit facility were used to redeem the remaining $1.2 billion of 10.000% 2022 senior unsecured notes and all $244 million of the outstanding 2020 senior subordinated notes, and to pay accrued and unpaid interest thereon plus related premiums, fees and costs.

Net debt leverage ratio was 6.4 times, as of Dec 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 $153 million compared with the prior quarter’s $141 million. Free cash flow was $56 million compared with $53 million in the previous quarter.

Contract Wins

Scientific Games was selected by FanDuel, a leader in the nascent U.S. sports betting market, as its supplier of sportsbook technology and content in the reported quarter.

The company was also awarded a seven-year iLottery contract in Pennsylvania following the most commercially successful iLottery launch in North America.

Moreover, Scientific games recently signed extensions with William Hill and GVC.

Guidance

For 2020, Scientific Games expects capital expenditures between $300 million and $330 million based on existing contractual obligations, planned investments and contemplated successful contract renewals.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted -78.57% due to these changes.

VGM Scores

At this time, Scientific Games has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, 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

Scientific Games has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.