Inspired (INSE)

Gaming company Inspired (NASDAQ:INSE) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 4.3% year on year to $60.4 million. Its non-GAAP profit of $0.13 per share was significantly above analysts’ consensus estimates.

Company Overview

Specializing in digital casino gaming, Inspired (NASDAQ:INSE) is a provider of gaming hardware, virtual sports platforms, and server-based gaming systems.

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).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Inspired grew its sales at a 11.5% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Inspired’s recent performance shows its demand has slowed as its annualized revenue growth of 1.9% over the last two years was below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its three most important segments: Gaming, Leisure, and Virtual Sports, which are 35.9%, 14.4%, and 29.6% of revenue. Over the last two years, Inspired’s Gaming revenue (land-based casino games) averaged 4.3% year-on-year growth while its Leisure (gaming terminals and amusement machines) and Virtual Sports (digital gaming and sports betting) revenues averaged declines of 1.8% and 5.3%.

This quarter, Inspired missed Wall Street’s estimates and reported a rather uninspiring 4.3% year-on-year revenue decline, generating $60.4 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.1% over the next 12 months, similar to its two-year rate. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

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’s operating margin has been trending up over the last 12 months and averaged 11.1% over the last two years. Its profitability was higher than the broader consumer discretionary sector, showing it did a decent job managing its expenses.

This quarter, Inspired generated an operating profit margin of 2.6%, up 4.9 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Inspired’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, Inspired reported EPS at $0.13, up from negative $0.02 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

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.

Inspired has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.5%, lousy for a consumer discretionary business.

Inspired’s free cash flow clocked in at $14.2 million in Q1, equivalent to a 23.5% margin. 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.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Inspired hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 21.7%, impressive for a consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Inspired’s has increased over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Inspired reported $39 million of cash and $360.5 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 $104.9 million of EBITDA over the last 12 months, we view Inspired’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $29.8 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Inspired blew past analysts’ EPS expectations this quarter. On the other hand, its revenue and EBITDA fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $7.45 immediately after reporting.

Updated: May 16, 2025 at 10:07 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Inspired.

Inspired has some positive attributes, but it isn’t one of our picks. Although its revenue growth was uninspiring over the last five years and analysts expect growth to slow over the next 12 months, its market-beating ROIC suggests it has been a well-managed company historically. Investors should tread carefully with this one, however, as Inspired’s low free cash flow margins give it little breathing room.

Inspired’s EV-to-EBITDA ratio based on the next 12 months is 2.2x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $12 on the company (compared to the current share price of $8.28).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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