Scientific Games (SG) released its preliminary second-quarter results last week, revealing a 9.3% decline in its gaming revenue and a 1.5% drop in its EBITDA (earnings before interested, taxes, depreciation and amortization). The year-on-year dips are not what industry analysts had expected, but most are remaining optimistic about the overall health of the gaming equipment company. Telsey Advisory Group is one supporter, but the brokerage has had to lower its forecasts for the full-year performance of SG.
SG’s unaudited financial report showed gaming revenue of $427 million and EBITDA of $335 million in the quarter. As a result, Telsey still believes the company will “outperform” this year, but said in a note yesterday that it needed to adjust the forecast “to reflect a more realistic view of equipment spending trends by casino operators.”
The brokerage’s analysts, Brian McGill and Alex Cummings, assert, “Our 2019 estimated EBITDA moves from U.S. $1.34 billion to U.S. $1.326 billion while our 2020 estimated EBITDA goes from U.S. $1.406 billion to U.S. $1.355 billion.”
Telsey also updated SG’s equipment turnover. Last year, it sold 16,185 slot machines, but the brokerage believes that it will only move 13,500 this year and says that prices will “remain flat to slightly negative.” The analysts add, “We expect tribal replacements to remain healthy but for corporate buyers to remain slow for the remainder of 2019. We also continue to assume modest growth in international slot sales in 2019.”
Part of the reason for the decrease could stem from the fact that many casinos are looking for way to cut costs and reducing slot machine participation expenses is one of the more attractive measures. This is going to continue to exert pressure on SG and its slots installed base, which is reported as 66,908. 50% of these are located in international markets.
The good news is that free cash flow is expected to remain high for the year. McGill and Cummings explain, “The outlook remains positive on a yield basis, given the stock price. We continue to believe the company will report strong cash flow in 2019… The company noted that it remains on schedule to achieve its target leverage of 5.5 times by the end of 2020 (currently at 6.5 times).”