Investors flocked to Scientific Games shares Monday after the gaming and lottery supply giant produced a stronger than expected earnings report and an announcement to refinance some of its debt load.
After closing at $26.85 last Friday, the company’s share price rose as high as $34.55 in the afternoon – a boost of nearly 29 percent.
The investor confidence comes on the heels of a strong second quarter in which the company reported a 5 percent year-over-year increase in revenue to $766 million and a net loss of $39 million – a 25 percent improvement over the prior year quarter. EBITDA checked in at $315 million – up nearly 13 percent year-over-year and topping the consensus Wall Street estimate of $292 million.
“Second quarter results represent our seventh quarter of consecutive year-over-year growth, including $169 million of cash flow from operating activities, as a result of ongoing improvements in our gaming, lottery and interactive operations,” said Kevin Sheehan, Chief Executive Officer of Scientific Games.
Sheehan also emphasized that the company revenue growth was complemented by a 270 basis point improvement in attributable EBITDA margin due to cost savings and business process improvements across the enterprise.
“Our momentum is building, and we have significant opportunities for further improvement,” he said, highlighting the current Gamescape cabinets, a new Simpsons game to be released later in the third quarter and a future pipeline with Seinfeld and James Bond-themed games.
Also fueling the share price boost was an announcement by the company that it intends to refinance a portion of its $8.2 billion debt to lower interest expenses, extend maturity dates and reduce its overall cost of capital. It also announced that it had improved its net debt leverage ratio to 6.8 times attributable EBITDA at the end of June 2017.
Revenue growth for the quarter was concentrated primarily in the gaming segment, which grew $30 million year-over-year, while the lottery segment was stable despite a tough comparison.
Gaming table products revenues grew 15 percent to $48 million – boosted by the acquisition of DEQ in January 2017, gaming systems increased 13 percent to $67 million and gaming product sales were up 6 percent to $163 million.
Even though there were no new casino openings during the quarter, the company was able to sequentially increase from the first quarter its total installed base by 1,191 to 48,645.
Lottery revenues were down 1 percent to $202 million and in line with Wall Street estimates.
Scientific Games’s Interactive division remained its smallest but fastest growing segment, posting 28 percent revenue growth to $107 million and topping the $101 million consensus estimate. Social gaming B2C revenues were up 32 percent to $91 million for the quarter, a jump that the company attributed to strong performance at its Jackpot Party Social Casino and the introduction and acquisition of other applications.
“Our interactive business continues to shine,” said Sheehan. “In the first half of 2017, our social B2C business generated more revenue than in all of 2015.”
Analysts on Wall Street reckoned that they expect the company’s momentum to continue given sustained growth in gaming markets and the receptiveness of capital markets to assist in refinancing debt and thereby reducing leverage.
“The company presents the opportunity with a highly leveraged equity in a positive operating environment where each inch of progress results in a foot of equity value,” wrote David Katz, an analyst with the Telsey Group, in a note.
“SGMS has more going for it than the positive operating environment, as its new games are performing well and management has managed costs aggressively, which is generating stronger progress than we expected,” he continued.
Steven M. Wieczynski, an analyst with Stifel, wrote that he was maintaining a “Hold” rating on the company’s stock:
“In order to develop a more constructive stance on the shares, we would like to see more consistent improvement in demand for North American replacement units and signs of stabilization in the [Wide Area Progressives] installed base,” he wrote.
