Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Scientific Games (NASDAQ:SGMS) had stabilized at a loss of roughly 7% by 3 p.m. today, after dropping by as much as 10% this morning. Investors have been fleeing the lottery specialist's stock after Scientific Games reported fourth-quarter earnings yesterday afternoon.
So what: Scientific Games' revenue of $565.8 million easily topped Wall Street's expectations for $477.7 million, and its loss of $0.55 per share was narrower than the $0.61-per-share loss analysts had expected. This beat masked deeper issues with the company's merger with Bally Technologies, which was responsible for much of the bottom-line shortfall.
The company's top line has grown substantially year-over-year, with fourth-quarter results up 41% from 2013 due to the contributions of recently acquired Bally Technologies. However, net losses have grown substantially, from a loss of $0.04 per share in the year-ago quarter to the latest quarter's $0.55 loss per share. The Bally deal resulted in an $0.89 loss per share for the fourth quarter as a result of various one-time charges. Full-year losses of $2.77 per share were far worse than 2013's full-year loss of $0.36 per share. Scientific Games has fallen into the red on a free cash flow basis as well, bleeding $91.8 million in the fourth quarter and $34.8 million for the full year, compared to 2013's fourth-quarter and full-year positive free cash flow of $22 million and $5.4 million, respectively.
Scientific Games also reported that while its primary installed unit base (comprising daily fee participation and premium units) grew by more than 14,000 units from the end of 2013 to the end of 2014, average daily revenue fell by more than $8 per unit, from $66.67 a year ago to $58.28 today. On the other hand, the company's per-unit sales price rose by nearly $900 year-over-year even as it managed to sell more than 2,200 more new units worldwide than it had in the fourth quarter of 2013.
Now what: Scientific Games has not been profitable on a per-share GAAP basis for a long time, and the Bally acquisition could keep its free cash flow depressed for some time as well. That acquisition bloated Scientific Games' debt load to $8.5 billion -- more than eight times its current market cap -- and that debt is expected to produce a whopping $652 million in interest expenses by the time it's paid down. In the quarterly earnings call, CEO Gavin Isaacs said only that free cash flow would see a "meaningful improvement" by the second half of 2013, without providing specifics on what that means.
Scientific Games has had a hard time producing "meaningful" profit for years, and despite its newly augmented position in the lottery gaming industry, it seems that profitability continues to remain out of reach. I'd stay on the sidelines until better financial news comes to light.