LNW - Light & Wonder: Transformation's Over - Let's See What You Got

Summary

• Light & Wonder is close to completing a total overhaul of the business, making it leaner and meaner.
• With the transformation largely over, the company now has to prove it can deliver the goods from a stronger base.
• If the company can maintain momentum, it could surprise to the upside in the quarters ahead.

Light & Wonder, Inc. ( LNW ) is coming out of a period of almost complete transformation of the business, from the management team to divesting of certain assets in order to streamline the company and focus on the remaining units of the company.

Included in those changes was strengthening the balance sheet of the company in order to lay a solid foundation for sustainable growth.

Now that most of the transformation is over, the company now must prove to investors it has the ability to develop quality products that have the capacity to generate long-term growth for the company. Based upon its quarterly results, it appears to be on the way to achieve those results.

In this article we'll look at the latest earnings results, including divestitures, shoring up its balance sheet, and how some of the business units have been performing.

Latest earnings

Third quarter revenue was $648 million, up 20 percent from the $539 million in revenue in the third quarter of 2021. All lines of business contributed to its growth, although iGaming results included an unfavorable impact from FX.

Net income in the quarter was $20 million, down from the $100 million last year in the same reporting period. That was largely attributed to "a $181 million income tax benefit as a result of the partial reversal of our valuation allowance on deferred taxes."

Adjusted EBITDA was $235 million, up 16 percent over last year in the same quarter, led by growth in the Gaming unit of the company.

Total margins were up 100 basis points sequentially, led by a 200-basis point improvement in Gaming.

Free cash flow was down $420 million as a result of $465 million in taxes paid in relationship to selling off its Lottery business.

The balance sheet improved its net debt leverage to 3.1x from the peak of 10.5x at the end of 2020. By reduction of debt, it also lowered interest expenses by $52 million, or 43 percent in the third quarter.

Much of the improvement of its balance comes from selling its Lottery and Sports Betting businesses, which generated a total of $6.6 billion, which allowed the company to aggressively pay down its debt obligations, cutting it by $4.8 billion or 55 percent. At the end of the third quarter the company held $2.7 billion in debt.

In my view, these were the most important steps the company took. This sets it up to take advantage of its growing product lines while improving earnings, margin and cash flow. That in turn will allow it to allocate even more capital to R&D, which is the long-term bread-and-butter of the gaming industry.

Finally, LNW bought back $241 million or 4.4 million of its shares in the quarter, representing over 30 percent of its authorized total of $750 million over a period of three years.

Performance by segment

Revenue from its Gaming division in the quarter reached $419 million, up 24 percent from the third quarter of 2021. That was led by 47 percent growth in its Gaming machine sales. Its Gaming operations also performed well, led by record "North America premium installed base units and continued elevated average daily revenue per unit." It has grown for nine quarters in a row.

Adjusted EBITDA from gaming was $202 million, an increase of 17 percent year-over-year.

Its SciPlay had a good quarter, with revenue climbing to $171 million, up 17 percent from last year's third quarter. Growth there was attributed primarily to its social casino business, which gained market share in the reporting period. There was also a contribution from its acquisition of Alictus. Pay conversion rates in the quarter remained at an all-time high, improving over the prior quarter to a record 9.7 percent. At the same time, ARPDAU was up 16 percent to a record $0.80.

Revenue from its iGaming unit was also up, coming in at $58 million for the quarter, up 9 percent from last year in the same quarter. Most of that was the result of its performance in the U.S. market.

As mentioned earlier, there was a negative impact of FX on the unit, resulting in an impact of $5 million on the company. Without the FX headwind, iGaming revenue would have been 10 percentage points higher, according to management. Adjusted EBITDA for iGaming in the quarter was $20 million, was up 11 percent year-over year. Margin in the quarter was flat based upon investment in growth initiatives.

The major takeaway from the performance of the units of the company is that it has at this time, been able to generate momentum in its three segments, and if it's able to continue to do so, over time its share price will reflect it.

Share price comments

In looking at the share price movement of LNW over the last three years, it collapsed to a low of approximately $4.00 per share on March 16, 2020, whereby afterwards it began a prolonged upward move culminating in it reaching about $90.00 per share on October 25, 2021.

From that time, it has been on a downward trajectory, falling to a little over $40.00 per share on September 23, 2022. Since that time, it has once again began moving up, reaching almost $58 per share on November 2, 2022, before pulling back to trade in the mid $53s as I write.

Over the last six months, the stock has been trading choppy, moving in a range of about $41.00 per share to $58 per share.

The significance there is, based upon the price movement during that time, it may be closer to a top and ready to correct once again.

Conclusion

With the release of its latest earnings report, LNW may have found more support on the floor of its share price, meaning it may trade a little tighter, and possibly a little higher than the range it has been trading in year-to-date.

Now that it has vastly improved its balance sheet by selling off some of its assets, it is now primed to make a move from a much stronger foundation than in the past.

With all its business lines showing growth and the company willing to continue to spend on R&D in order to develop products that will drive future growth, I think the company could be ready to make a decent upward move. It could, as mentioned, have a short-term pullback, but either way, over the long term if it's able to prove its current products and services have the potential for sustainable long-term growth, it's definitely worth seriously taking a position.

It also should be kept in mind that much of the gaming sector has been out of favor under the current high interest rate environment, and as inflation pulls back, along with interest rates, further out it'll be a strong tailwind for LNW.

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