Inspired Entertainment: Still Struggling To Break Out (NASDAQ:INSE)

The eSports team is frustrated that they lost a match in a tournament

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Inspired Entertainment, Inc. (NASDAQ:INSE), a business-to-business gaming technology company that supplies products and services to gaming operators around the world, is facing some significant headwinds, and with costs rising outside of the Control of the company, it’s been doing pretty well.

Results from each segment varied, with some performing well and others weighing on the company’s performance due to rising costs. Those costs aren’t likely to go away for the next two to three quarters, so those challenges will likely remain, although the company said it believes it can resolve these issues in the near term.

If it succeeds, INSE could surprise on the upside in the coming quarters.

In this article, we look at some of the numbers from the most recent earnings report, how the segments have performed, and what’s set to happen over the next year or so.

Latest numbers

In the third quarter, INSE posted revenue of $74.9 million, down 3.48 percent year-on-year, but beating estimates by $2.91 million.

Earnings per share for the period were $10.2 million, or $0.35 per share, an increase of $0.08.

Adjusted EBITDA was $27.8 million for the quarter, down 8 percent year-over-year.

The Adjusted EBITDA margin shrank to 37 percent in the third quarter of 2022 from 39 percent a year earlier in the same period. This was mainly attributed to supply chain issues and cost inflation in the Holiday Parks business.

Another bright spot for the company is that it continues to generate decent cash flow, which grew sequentially from $31.8 million to $37.4 million during the period, despite the difficult economic environment in which it operates . CapEx at the end of the period was $9.3 million, bringing the total for the year to $31 million, which is already ahead of the average full-year CapEx of approximately $30 million that the company reported in has spent in the past.

Cash fell to $37.4 million for the quarter, a decrease of $10.4 million from $47.8 million at the beginning of the quarter. INSE owes $257.1 million in debt.

Performance by segment

Virtual Sports and Interactive

The Virtual Sports segment generated record revenue of $14.6 million in the third quarter, up 39 percent year over year. Online virtual sports revenue more than doubled year-on-year for the same period.

Interactive’s revenue was $5.7 million, down 6 percent from the third quarter of 2021. Most of the revenue in this segment came from the North American market, particularly Pennsylvania, where there was an increase in operators and game title launches during the quarter.

play and leisure

Gaming revenue was $24.1 million, down 12 percent year-on-year. In the quarter, the company had released just 6 games versus 22 in the first half. Now that the holiday season is here, management announced that the number of games released will increase. That, in turn, should drive more gaming revenue in the fourth quarter.

Leisure revenue fell 9 percent to $30.5 million. Leisure is INSE’s biggest challenge as margins shrink coupled with inflated energy and utility costs. With newly signed renewals and/or deals with Betfred, Bourne, Butlins and Marston’s this is likely to improve in the coming months.

price movement

While INSE has made some good moves and positioned itself for long-term growth, it continues to struggle to break out as it trades less today than 5 years ago when it was trading above $13.00 per share in mid-2017 as of the end of the third quarter, before the stock price fell off a cliff to below $5.00 per share in May 2018.

It remained on a roller-coaster ride from there until late 2019, when concerns about the potential pandemic (then) caused the stock price to plummet below $2.00 per share.

It then started a nice upward move to its 52-week high of $15.81 in February 2022, but came under pressure again, falling below $8.00 per share in July 2022 and was traded in a range of just under 9, $00 per share traded at around $10.50 per share before breaking out on November 8, 2022 in response to its earnings report, presumably in response to improving its earnings per share.

Looking at this move from about $1.00 per share, I’m not convinced that the company has the catalysts to boost its stock price.

Conclusion

Considering the numbers and the company’s performance, along with its long term debt, cash on hand and cash flow, I see them as somewhat of a counterbalance to each other and for that reason I think the company will go to trading level in 2023 and possibly at one gradual uptrend if some of its recent deals perform well.

My thesis is that INSE needs to pursue the North American market more aggressively if it wants to break its 5-year trading cap in the mid-$14 range.

While it may take some time, if it gains market share in the North American market, it could be a decent long-term play in the sector it competes in.

That being said, I don’t see as many growth opportunities that will have a significant impact on the company’s performance except on an incremental basis.

As for the fourth quarters of 2022 and 2023, the company will continue to face inflationary pressures, and with modest catalysts in its pipeline, I think it’s likely to trade in a consolidated manner until some of the costs are mitigated and more growth drivers are added to its product and service offerings of the company, which will help it gain momentum.

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