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Why Is Scientific Games (SGMS) Down 37% Since Last Earnings Report?

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A month has gone by since the last earnings report for Scientific Games (SGMS - Free Report) . Shares have lost about 37% 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.

Scientific Games Q3 Results Hurt by Higher Restructuring Expense

Scientific Games reported third-quarter 2018 loss of $3.85 per share compared with the year-ago quarter’s loss of 66 cents.

Revenues increased 6.8% from the year-ago quarter to $821 million.

The Zacks Consensus Estimate for earnings and revenues was pegged at a loss of 18 cents and $825 million, respectively.

Quarter Details

Gaming Segment (54.6% of total revenues) revenues declined 1.5% year over year to $447.9 million. The company’s popular franchise James Bond underperformed in the reported quarter due to strict state approvals.

Gaming operations declined 9.5% due to an unfavorable $4.5 million impact from revenue recognition accounting, effective from 2018.

Gaming Systems and Gaming Machine Sales increased 12.4% and 2.5%, respectively. However, Table Products sales witnessed a decline of 3.2% from the year-ago period due to lower product sales in the quarter under review.

The increase in Gaming System revenues was due to ongoing system installations in Canada, along with an increase in hardware sales, primarily iVIEW4. Gaming machine average sales price increased 3% to $18,199, which was a positive.

Lottery Segment (25.2% of total revenues) revenues were up 1.9% from the prior-year quarter to $206.8 million. The company continues to benefit from higher denomination ticket sales and constant innovations, including the launch of SCiQ instant games lottery technology.

Revenues from Lottery Systems increased 7.6% due to domestic organic growth, while Instant products declined 0.5% from the year-ago quarter. Additionally, new lottery system installations in Maryland and Kansas and new investment in Keno in Pennsylvania increased revenues.

Social Segment (12.8% of total revenues) revenues increased 10.5% year over year to $105.1 million. Notably, revenues from daily active users in the third quarter increased significantly. Average daily revenue per daily active user increased by a penny from the year-ago quarter.

Moreover, 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 benefited the company.

Digital Segment (7.5% of revenues) revenues grew to $61.2 million compared with $16.3 million in the year-ago quarter, of which $46.5 million comes from NYX Gaming Group Limited.

In the quarter, Scientific Games entered into a partnership with Gaming Capital Group to distribute slot related products in the state of Oklahoma, which will enable the company to grow its market share. Additionally, the company also launched gaming content across 12 new client sites and signed eight new customers on the OGS platform.

Operational Details

Attributable earnings before interest, taxes, depreciation and amortization (AEBITDA) increased 8.9% from the year-ago period to $325.7 million. AEBITDA margin increased 80 basis points (bps) to 39.7%.

Gaming AEBITDA increased 5.1% year over year to $232.5 million. Gaming AEBITDA margin surged 330 bps to 51.9%.

Lottery AEBITDA increased 3.5% from the year-ago quarter to $92.3 million. Lottery AEBITDA margin increased 70 bps to 44.6%. Social AEBITDA increased 34.3% to $27 million and margin expanded 460 bps to 25.7%.

Digital AEBITDA surged 284% from the year-ago period to $11.9 million and margin increased 40 bps to 19.4%.

Selling, general and administrative (SG&A) increased 6.9% year over year to $169.7 million in the reported quarter. Research & development (R&D) expenses rose almost 3.6% to $49.5 million.

The company witnessed a significant increase in restructuring expenses to $338.7 million compared with $7.8 million in the year-ago quarter. This includes a $310 million charge related to the verdict in the Shuffle Tech legal matter.

As a result, the company incurred operating loss of $204.5 million against an operating income of $90.6 million in the year-ago quarter.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with cash and cash equivalents of $113.5 million compared with $118.6 million in the previous quarter. The company’s long-term debt remained almost stable at $8.73 billion compared with the previous quarter.

Cash flow from operations was $223.5 million compared with $109.5 million in the previous quarter. This increase was due to improvement in the company’s operating results and enhancement in the working capital.

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

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 10% due to these changes.

VGM Scores

Currently, Scientific Games has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision 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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