INSE - Inspired Entertainment Stock: Late Filing Uncertainty Adds To Risks

2024-01-19 17:19:09 ET

Summary

• Inspired Entertainment has yet to file its Q3 results, delayed since last November.
• Uncertainty regarding an accounting investigation and potential historical earnings revisions have pressured the stock.
• We expect the volatility in shares to continue.

Inspired Entertainment Inc ( INSE ) is sitting in limbo with the market awaiting the delayed release of its Q3 financials. Back in November, the company announced it was working to address accounting errors related to the capitalization of software development project costs. Further comments also suggested potential internal financial control weaknesses.

While a late filing or even revisions to historical earnings are not necessarily the end of the line for any company, the situation has been a headwind for the stock which is currently down more than -40% over the past year. The story in the first half of 2023 was mixed results with some margin pressures with attention now centered on what the final Q3 numbers will show.

The key date to watch is January 22 as the upcoming deadline to file with the other possibility being another extension up to May 7. This article covers the themes to watch with a near-term expectation for volatility to continue.

INSE Financials Recap

INSE last reported Q2 earnings in August which considers operating data for the period through June, now more than six months old. Q2 EPS of $0.18 represented a decline from $0.24 in the period last year and also came in below estimates.

Revenue in the quarter at $80.4 million climbed by 13% year-over-year, although this figure includes the addition of $4.4 million in "low margin gaming hardware sales" where the equipment is offered at near cost to secure longer-term recurring business on the digital content.

By this measure, the "adjusted revenue" covering the core business posted moderate growth of 7%, this metric explains some of the weakness in the stock even before the late filing announcement. Within that amount, gaming revenue was up 6% with the smaller "Interactive" segment representing a growth driver with a 28% sales increase.

That shifting mix of the business led to the adjusted EBITDA margin of 34%, down from 37% in Q2 2022. Higher SG&A as well as other expenses are also limiting the profitability.

Inspired ended the quarter with $42.1 million in cash against $302 million in total debt. A net leverage ratio considering an annualized run rate of adjusted EBITDA of around $105 million under 2x can be described as stable.

In terms of valuation, INSE has a current market cap of around $215 million or $475M at the enterprise level. Beyond a 0.8x price-to-sales multiple which we believe to be consistent with the company's distressed situation, any assessment of value will need a confirmation that the financial data is accurate.

What's Next For INSE?

Overall, looking back at the Q2 numbers, nothing stands out as alarming. Growth wasn't stellar but the backdrop of profitability supports some level of intrinsic value.

Management noted momentum from the launch of new products and the strength of the diversification between land-based casinos and digital venues while projecting a positive outlook during the earnings conference call .

The caveat here is that when thinking about the specific reason cited for the delayed Q3 filing being cost accounting, the implication is that the company underreported expenses which means earnings were likely overstated.

Beyond that assumption, it's purely speculation as to the size of any necessary adjustment or the timeframe covered. This could be a simple fix to restate a few quarters of transactions or it could represent a deeper write-off of material value.

On one hand, a quick resolution with the Q3 and eventually Q4 report emerging sooner rather than later would allow the group to move forward which could be a bullish catalyst for the stock. We know that Inspired Entertainment has recently onboarded a new interim CFO likely looking to set the record straight with a duty to shareholders.

The market getting some clarity on the situation would at least work to claw back some of the equity price decline specifically since the initial announcement where shares are down about 20% in the period since.

The other scenario would be for a more concerning reset of long-term growth expectations. Any indications of nefarious activity or sanctions by regulators would open a can of worms between lingering litigation and investor lawsuits.

Final Thoughts

While hoping for the best outcome, there's just too much uncertainty to even consider INSE as an investment at this point. The longer the waiting game proceeds, the higher the risks are for a bigger selloff in the stock. The expectation here is for volatility to continue.

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