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Why Is Scientific Games (SGMS) Down 12% Since Last Earnings Report?

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It has been about a month since the last earnings report for Scientific Games (SGMS - Free Report) . Shares have lost about 12% 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.

Lottery, Social Segment Revenues Growth Aided Scientific Games

Scientific Games Corporation reported loss of 26 cents per share in first-quarter 2019, which was much narrower than the year-ago quarter’s loss of $2.24.

Revenues increased 3.1% from the year-ago quarter to $837 million. Robust performance of Lottery and Social segment drove the top line.

The Zacks Consensus Estimate for the top and the bottom lines was pegged at $833.8 million and loss of 6 cents, respectively.

Quarter Details

Gaming Segment (50.4% of total revenues) revenues declined 4.7% year over year to $422 million. Additionally, Gaming operations declined 5.6% to $152 million.

However, the company’s Jin Ji Bao Xi is witnessing increasing adoption as it was rolled out in more states of the United States. It is currently available in 16 states. Notably, the game is listed as one of the top 10 games on Scientific Games’ platform.

Gaming Systems revenues declined 1.3% year over year due to the absence of key site installs in Canada in the reported quarter. Additionally, Gaming Machine Sales declined 6.2% from the year-ago quarter and Table Products sales declined 3.2% from the year-ago period.

Notably, Gaming machine average sales price declined 3.3% primarily due to the “mix of games in the international markets.”

Lottery Segment (27.1% of total revenues) revenues were up 12.4% from the prior-year quarter to $227 million.

Revenues from Lottery Systems increased 67.3% year over year due to increase in hardware sales and new contract wins in the reported quarter. However, Instant Products revenues by geography declined 6.7% year over year.

Social Segment (14.1% of total revenues) revenues increased 21.6% year over year to $118 million due to higher monetization opportunities. Notably, average revenues from daily active users in the first quarter increased to 48 cents compared with 42 cents in the year-ago period. Moreover, average monthly active users increased from 8.1 million in the year-ago quarter to 8.4 million users.

Notably, the company’s social gaming business performed really well by outperforming its peers by more than 2X, per research firm Eilers & Krejcik.

Digital Segment (8.4% of revenues) revenues remained flat year over year at $70 million.

Notably, in this segment, Scientific Games is expanding its market launches and winning new business in sports and iGaming. Additionally, the company noted that its OpenBet platform processed about “240 million account transactions, error free, over the three day Grand National festival in the U.K.”

Scientific Games’ social gaming business, SciPlay began trading last week. The company, which received $301 million in proceeds from the initial public offering (IPO), will use the funds to pay off its debt.

Operational Details

Consolidated adjusted EBITDA (AEBITDA) increased 2.5% from the year-ago period to $328 million. AEBITDA margin contracted 20 basis points (bps) to 39.2%.

Gaming AEBITDA decreased 1% year over year to $215 million. However, Gaming AEBITDA margin increased to 51% from 49% in the year-ago period.

Lottery AEBITDA increased 11% from the year-ago quarter to $104 million. However, Lottery AEBITDA margin contracted 100 bps to 46%. Social AEBITDA increased 9% to $25 million. However, Social AEBITDA margin contracted 200 bps to 21%.

However, Digital AEBITDA declined 24% from the year-ago period to $13 million. Digital AEBITDA margins were 19% compared with 25% in the year-ago quarter %

Selling, general and administrative expenses increased 8.1% year over year to $186 million in the reported quarter. However, research & development expenses declined 9.3% to $49 million.

Balance Sheet & Cash Flow

Scientific Games exited the quarter with cash and cash equivalents of $1.21 billion compared with $168.2 million in the previous quarter. The company’s long-term debt was $8.94 billion compared with $8.99 billion in the fourth quarter.

Cash from operating activities was $167 million compared with $30 million in the year-ago period. Capital expenditure in the reported quarter was $67 million compared with $88 million in the year-ago period.

Free cash flow was $96 million as against a negative free cash flow of $63 million in the year-ago period. The improvement was due to better working capital, increased operating cash flows and reduced capital expenditures.

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 -80.64% due to these changes.

VGM Scores

Currently, Scientific Games has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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 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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