Gaming products and services provider Light & Wonder (NASDAQ:LNW) reported Q4 FY2023 results beating Wall Street analysts' expectations , with revenue up 12.9% year on year to $770 million. It made a GAAP profit of $0.73 per share, improving from its profit of $0.32 per share in the same quarter last year.
Revenue: $770 million vs analyst estimates of $744.1 million (3.5% beat)
EPS: $0.73 vs analyst estimates of $0.41 (76.8% beat)
Free Cash Flow of $70 million, down 47.8% from the previous quarter
Gross Margin (GAAP): 69.5%, down from 84.5% in the same quarter last year
Market Capitalization: $8.54 billion
Matt Wilson, President and Chief Executive Officer of Light & Wonder, said, “2023 was a banner year for Light & Wonder. Our businesses delivered double-digit growth across the board throughout the year, enabled by strategic investments and strong execution. We consistently leverage a differentiated product strategy and plan to capitalize on the significant growth opportunities ahead of us. I am thrilled with the momentum we continue to see in the business, and with our winning mentality, experience, and talent in place, we are well-positioned to continue our growth trajectory. I want to congratulate our team on a successful year and know the best is yet to come”.
With names as crazy as Ultimate Fire Link Power 4 for its products, Light & Wonder (NASDAQ:LNW) is a gaming company supplying the casino industry with slot machines, table games, and digital games.
Casinos and Gaming
Casino and gaming companies that offer slot machines, Texas Hold ‘Em, Blackjack and the like can enjoy limited competition because gambling is a highly regulated industry. These companies can also enjoy healthy margins and profits-have you ever heard the phrase ‘the house always wins’? Regulation cuts both ways, however, and casino and gaming companies may face stroke-of-the-pen risk that suddenly limits what they do or where they can do it. Furthermore, digitization is changing the game, pun intended. Whether it’s online poker or sports betting on your smartphone, innovation is forcing casino and gaming companies to adapt to keep up with changing consumer preferences such as being able to wager anywhere on demand.
Sales Growth
A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. Light & Wonder's revenue declined over the last five years, dropping 2.9% annually.
Light & Wonder Total Revenue
Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Light & Wonder's annualized revenue growth of 16.1% over the last two years is a reversal from its five-year trend, suggesting some bright spots.
We can dig even further into the company's revenue dynamics by analyzing its most important segment, Gaming. Over the last two years, Light & Wonder's Gaming revenue (slot machines, casino games) averaged 19.5% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company's performance.
This quarter, Light & Wonder reported robust year-on-year revenue growth of 12.9%, and its $770 million of revenue exceeded Wall Street's estimates by 3.5%. Looking ahead, Wall Street expects sales to grow 7% over the next 12 months, a deceleration from this quarter.
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
While Light & Wonder posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, Light & Wonder's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer discretionary sector, averaging negative 5.3%.
Light & Wonder Free Cash Flow Margin
Light & Wonder's free cash flow came in at $70 million in Q4, equivalent to a 9.1% margin. This result was great for the business as it flipped from cash flow negative in the same quarter last year to cash flow positive this quarter.
Key Takeaways from Light & Wonder's Q4 Results
We were impressed by how significantly Light & Wonder blew past analysts' EPS expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates, driven by outperformance in its gaming segment ($496 million of revenue vs estimates of $470 million). On the other hand, its free cash flow fell short.
Light & Wonder noted its merger integration with SciPlay, an iGaming company it acquired in October 2023, is now complete. This is a good sign as it enables the company to achieve synergies faster.
Overall, we think this was a decent quarter. The stock is flat after reporting and currently trades at $97.57 per share.
