Gaming products and services provider Light & Wonder (NASDAQ:LNW) announced better-than-expected results in Q2 CY2024, with revenue up 11.9% year on year to $818 million. It made a GAAP profit of $0.90 per share, improving from its loss of $0.01 per share in the same quarter last year.
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Light & Wonder (LNW) Q2 CY2024 Highlights:
- Revenue: $818 million vs analyst estimates of $797.3 million (2.6% beat)
- EPS: $0.90 vs analyst expectations of $1.06 (15.1% miss)
- Gross Margin (GAAP): 71.1%, down from 85% in the same quarter last year
- EBITDA Margin: 40.3%, up from 38.4% in the same quarter last year
- Free Cash Flow of $70 million, down 33.3% from the previous quarter
- Market Capitalization: $8.93 billion
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.
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.
Sales Growth
A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last five years, Light & Wonder's revenue declined by 1.9% per year. This shows demand was weak, a rough starting point for our analysis. 
Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Light & Wonder's annualized revenue growth of 15.6% over the last two years is above its five-year trend, suggesting some bright spots.
We can better understand the company's revenue dynamics by analyzing its three most important segments: Gaming, Social Gaming, and iGaming, which are 65.9%, 25.1%, and 9% of revenue. Over the last two years, Light & Wonder's revenues in all three segments increased. Its Gaming revenue (slot machines, casino games) averaged year-on-year growth of 16.5% while its Social Gaming (free-to-play games) and iGaming (digital games) revenues averaged 14.5% and 13%.
This quarter, Light & Wonder reported robust year-on-year revenue growth of 11.9%, and its $818 million of revenue exceeded Wall Street's estimates by 2.6%. Looking ahead, Wall Street expects sales to grow 7.9% over the next 12 months, a deceleration from this quarter.
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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.
Light & Wonder broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders. The divergence from its good operating margin stems from its capital-intensive business model, which requires Light & Wonder to make large cash investments in working capital and capital expenditures.
Light & Wonder's free cash flow clocked in at $70 million in Q2, equivalent to a 8.6% margin. This quarter's result was nice as its cash flow turned positive after being negative in the same quarter last year, but we wouldn't read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.
Key Takeaways from Light & Wonder's Q2 Results
It was good to see Light & Wonder beat analysts' revenue expectations this quarter. On the other hand, its EPS missed. This quarter featured some positives but overall could have been better. The stock remained flat at $100.51 immediately following the results.
Light & Wonder may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.