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Scientific Games (SGMS) Down 23.3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Scientific Games (SGMS - Free Report) . Shares have lost about 23.3% 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 drivers.

Recent Earnings

Scientific Games reported second-quarter 2018 loss of 6 cents per share, narrower than the year-ago quarter’s loss of 44 cents. The figure was in-line with Zacks Consensus Estimate.

Revenues increased 10.2% from the year-ago quarter to $844.7 million but fell short of the Zacks Consensus Estimate of $852.3 million.

Quarter Details

Gaming Segment (55.7% of total revenues) revenues increased 3% year over year to $470.7 million.

Strong growth in Gaming Systems and Table Products of 26% and 22%, respectively, was partially muted by a year-over-year decline of 10% in the Gaming Operations segment. Gaming Machines sales witnessed growth of 3% from the year-ago period.

The year-over-year growth in Gaming Systems revenues was driven by increased system installation in casinos based in Alberta and Ontario as well as a rise in hardware sales backed by shipment of new iVIEW4 player-interface display units.

Gaming Machines sales improved on the back of “strong replacement and new opening demand in the U.S. and Canada.” However, the impact was partially offset by lower international sales. During the quarter, replacement unit shipments in the United States and Canada increased 16% on a year-over-year basis to 4,388 units, driven by high adoption of the TwinStar cabinets.

The decline in Gaming Operations revenues includes the impact of “$6.5 million reduction from the new revenue recognition accounting.”

Lottery Segment (24.5% of total revenues) revenues were up 24% from the prior-year quarter to $207.1 million.

Revenues from Lottery Systems increased 12% while Instant products declined 1% from the year-ago quarter.

The company has sub-divided the earlier Interactive business segment into Social and Digital. The results of recently acquired NYX are integrated in the Digital segment.

Social Segment (11.8% of total revenues) revenues increased 9.4% year over year to $99.7 million on the back of the “growing popularity” of Bingo Showdown apps as well as the new MONOPOLY Slots themed social casino app launched recently.

Digital Segment (8%) revenues grew to $67.2 million, of which $50.6 million is associated with the acquisition of NYX.

Operational Details

Attributable earnings before interest, taxes, depreciation and amortization (AEBITDA) increased 18% from the year-ago period to $340.4 million driven by higher revenues, inclusion of NYX and increasing operating efficiency. AEBITDA margin contracted 80 basis points (bps) to 40.3%.

Gaming AEBITDA increased 4% year over year to $235.7 million. Gaming AEBITDA margin expanded 50 bps to 50.1%.

Lottery AEBITDA increased 4% from the year-ago quarter to $99.4 million. Lottery AEBITDA margin expanded 70 bps to 48% driven by higher revenues and a profitable revenue mix.

Social AEBITDA increased 15% to $25.2 million and margin expanded 130 bps to 25.3%.

Digital AEBITDA surged 389% from the year-ago period to $13.2 million but margin increased 240 bps to 19.6%.

Selling, general and administrative (SG&A) increased 19.2% year over year to $173.9 million in the reported quarter. Research & development (R&D) expenses rose almost 2.3% to $49.2 million.

As a result, the company reported operating income of $99.5 million, which declined 15.2% from the year-ago quarter. Operating margin contracted 200 bps to 11.8%.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with cash and cash equivalents of $118.6 million compared with $109.9 million in the previous quarter. The company’s long-term debt remained almost stable at $8.8 billion compared with the previous quarter.

Cash flow from operations was $102.5 million, compared with $29.9 million in the previous quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5% due to these changes.

VGM Scores

Currently, Scientific Games has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for momentum investors than those looking for value and growth.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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