Gaming company Inspired Entertainment (NASDAQ:INSE) reported Q4 CY2023 results beating Wall Street analysts' expectations, with revenue up 3.3% year on year to $81.2 million. It made a GAAP loss of $0 per share, down from its profit of $0.11 per share in the same quarter last year.
Inspired Entertainment (INSE) Q4 CY2023 Highlights:
- Revenue: $81.2 million vs analyst estimates of $73.15 million (11% beat)
- EPS: $0 vs analyst estimates of $0.11 (-$0.11 miss)
- Gross Margin (GAAP): 64.3%, down from 65.4% in the same quarter last year
- Free Cash Flow was -$2.5 million compared to -$13.3 million in the previous quarter
- Market Capitalization: $250.9 million
Specializing in digital casino gaming, Inspired Entertainment (NASDAQ:INSE) is a provider of gaming hardware, virtual sports platforms, and server-based gaming systems.
The company was founded to create advanced digital games with engaging user experiences and realistic graphics. Its products include physical machines like interactive gaming terminals that are placed on casino floors as well as online games.
Inspired generates revenue through the sale and leasing of gaming systems to operators along with service fees. Its customers include casino operators and online casinos.
Gaming Solutions
Gaming solution companies operate in a dynamic and evolving market, and the digital transformation of the gaming industry presents significant opportunities for innovation and growth, whether it be immersive slot machine terminals or mobile sports betting. However, the gaming solution industry is not without its challenges. Regulatory compliance is a crucial consideration as companies must navigate a complex and often fragmented regulatory landscape across different jurisdictions. Changes in regulations can impact product offerings, operational practices, and market access, requiring companies to maintain flexibility and adaptability in their business strategies. Additionally, the competitive nature of the industry necessitates continuous investment in research and development to stay ahead of competitors and meet evolving consumer demands.
Competitors in the gaming technology and entertainment sector include Everi (NYSE:EVRI), PlayAGS (NYSE:AGS), and Light & Wonder (NASDAQ:LNW).Sales Growth
A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. Inspired Entertainment's annualized revenue growth rate of 22% over the last five years was impressive for a consumer discretionary business. 
Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Inspired Entertainment's healthy annualized revenue growth of 24.4% over the last two years is above its five-year trend, suggesting its brand resonates with consumers.
We can dig even further into the company's revenue dynamics by analyzing its most important segment, Gaming. Over the last two years, Inspired Entertainment's Gaming revenue (slot machines, iGaming) averaged 40.2% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company's performance.
This quarter, Inspired Entertainment reported reasonable year-on-year revenue growth of 3.3%, and its $81.2 million of revenue topped Wall Street's estimates by 11%. Looking ahead, Wall Street expects revenue to decline 7.5% over the next 12 months, a deceleration from this quarter.
Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Inspired Entertainment has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer discretionary business, producing an average operating margin of 14.4%.
In Q4, Inspired Entertainment generated an operating profit margin of 11.5%, down 4.3 percentage points year on year.
Over the next 12 months, Wall Street expects Inspired Entertainment to become more profitable. Analysts are expecting the company’s LTM operating margin of 12.4% to rise to 16.9%.EPS
We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable. 
Over the last five years, Inspired Entertainment cut its earnings losses and improved its EPS by 16.6% each year. This performance, however, is worse than its 22% annualized revenue growth over the same period. Let's dig into why.
A five-year view shows Inspired Entertainment has diluted its shareholders, growing its share count by 39.1%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.In Q4, Inspired Entertainment reported EPS at $0, down from $0.11 in the same quarter last year. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects Inspired Entertainment to grow its earnings. Analysts are projecting its LTM EPS of $0.25 to climb by 165% to $0.66.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Over the last two years, Inspired Entertainment broke even from a free cash flow perspective, subpar for a consumer discretionary business.
Inspired Entertainment burned through $2.5 million of cash in Q4, equivalent to a negative 3.1% margin, increasing its cash burn by 76.6% year on year. Over the next year, analysts predict Inspired Entertainment's cash profitability will improve. Their consensus estimates imply its LTM free cash flow margin of 0.3% will increase to 14.5%.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Although Inspired Entertainment has shown solid business quality lately, it historically did a subpar job investing in profitable business initiatives. Its five-year average return on invested capital was 10.8%, somewhat low compared to the best consumer discretionary companies that pump out 25%+.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Inspired Entertainment's ROIC has significantly increased. The company's rising ROIC is a good sign and could suggest its competitive advantage or profitable business opportunities are expanding.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
Inspired Entertainment reported $40 million of cash and $319.4 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.
With $101.5 million of EBITDA over the last 12 months, we view Inspired Entertainment's 2.8x net-debt-to-EBITDA ratio as safe. We also see its $27.7 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.
Key Takeaways from Inspired Entertainment's Q4 Results
We were impressed by how significantly Inspired Entertainment blew past analysts' revenue expectations this quarter, led by strong performance in its Gaming segment. On the other hand, its EPS and operating margin fell short of Wall Street's estimates. Overall, this was a mixed quarter for Inspired Entertainment, but the market is rewarding the company for its top-line performance. The stock is up 5.3% after reporting and currently trades at $10.07 per share.
Is Now The Time?
When considering an investment in Inspired Entertainment, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We think Inspired Entertainment is a solid business. First off, its revenue growth has been good over the last five years. And while its cash burn raises the question of whether it can sustainably maintain growth, its projected EPS for the next year implies the company's fundamentals will improve. On top of that, its EPS growth over the last five years has exceeded its peer group average.
There are definitely things to like about Inspired Entertainment, and looking at the consumer discretionary landscape right now, it seems to be trading at a pretty interesting price.
Wall Street analysts covering the company had a one-year price target of $14.75 per share right before these results (compared to the current share price of $10.07), implying they saw upside in buying Inspired Entertainment in the short term.
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