Why a change to semiannual reporting could help gaming stocks?

In early May, the US Securities and Exchange Commission proposed new rule changes that would eliminate the quarterly reporting requirement for publicly traded companies and instead offer the option of semi-annual reporting, a small but potentially significant change to the US investment landscape.

As a consumer discretionary industry, gaming stocks are often seen as a volatile relative to other industries, including non-gaming hospitality. The seasonality of many of the industry’s sectors also tends to impact share prices during quarterly periods, which can create a kind of volatility feedback loop. The question is whether looser reporting rules would help those issues in a meaningful way.

If approved, the proposal would eliminate the current requirement of three quarterly reports through Form 10-Q and instead allow for one semi-annual report through a new form, Form 10-S. The filing deadline for the half-year reports would be either 40 or 45 days from the end of the semi-annual period of the fiscal year, depending on filer status.

Additionally, the rule changes would amend the SEC’s Regulation S-X, which governs the form and content of financial filings, to reflect the new reporting schedule and “simplify the existing financial statement requirements”, the agency said. A public comment period regarding the proposal runs through 6 July. The changes are part of an overall push by the agency to incentivise companies to go and stay public.

“Public companies have an obligation under the federal securities laws to provide information that is material to investors,” SEC Chair Paul Atkins said in a statement. “Yet, the rigidity of the SEC’s rules has prevented companies and their investors from determining for themselves the interim reporting frequency that best serves their business needs and investors. Today’s proposed amendments, if ultimately adopted, would provide companies with increased regulatory flexibility in this regard.”

Long history with quarterly system

Public US companies have been regulated by the SEC since 1934. From then until 1955, there was no formal reporting schedule, but that year a semi-annual schedule was implemented. Then in 1970, the SEC switched to the quarterly system that has been in place since.

After 50-plus years, the quarterly reporting system has become entrenched in the US investing and financial ethos. Two big downsides of this, detractors argue, is that it forces companies to make shorter-term decisions to appease investors, and that it creates unnecessary hype and hubbub four times a year that often affects share prices, even if it isn’t warranted from a business perspective.

The gaming industry is not immune from these ills, and the cyclical nature of certain sectors often conflicts with the constant need to impress analysts and investors.

Implications for top sports betting companies

In US sports betting, for example, Q4 and Q1 and the busiest times, coinciding with NFL and college football seasons and the start of March Madness. That schedule is largely the same for casino operators as travel slows during the spring and summer and picks up again in the fall.

In terms of seasonality, a sports betting company that reports on a semi-annual basis could wait six months before disclosing a slow start to the football season. The first two months of the NFL season typically represent the most vigorous periods for sportsbooks when it comes to customer acquisition and retention, promotional activity and the rollout of new products. For companies that fail to meet targets in the fall, the proposed standards give them an opportunity to conceal the results for several additional months.

Yet even during the established lean periods, companies must go under the microscope while markets dissect earnings and every other piece of disclosed information. It is well known that earnings reports almost always move share prices, often in unpredictable ways.

According to a 2008 study from UCLA and the University of Michigan, authors found that the stocks with the best prior 12-month performance were gaining about 1.5% in the week leading up to earnings reports, then losing about 1.8% in the week afterward. The study failed to establish “evidence for an information-based explanation”.

Many top stocks lagging

In the midst of the proposal, many of the gaming industry’s biggest stocks are underperforming for various reasons. These include:

• Flutter, down 62% in the last year
• DraftKings, down 33% in the last year
• Las Vegas Sands, down 25% year-to-date
• Caesars, up 25% this year following a buyout but down 70% since 2021
• Aristocrat, down 20% in the last year
• Sportradar, down 40% in the last year

A change in reporting alone is not a cure-all for the various headwinds that have contributed to the declines. But it could help companies think longer-term and make more ambitious moves with less quarterly pressure, according to Macquarie’s senior gaming analyst Chad Beynon.

“Currently, if you miss the [quarterly] numbers, analysts and investors might not give you a pass,” Beynon told iGB. “If you had six months, it definitely smooths things out…You always hear about salespeople giving extra deals like in the last month of the quarter or the last few weeks of the month. So if you move to semi-annual, that would get cut in half. I think that would permit companies to: (A, not run the business for quarterly results, and then (B, just have more time to kind of focus on higher things.”

Both the American Gaming Association and the Sports Betting Alliance declined to comment on the proposal and whether it has garnered interest from their respective members.

Could semi-annual reporting spark IPOs?

The idea that semi-annual reporting makes US listings and initial public offerings more appealing is a factor that both Beynon and the SEC say should not be ignored. In recent years, there have been a number of sizeable gaming companies taken private through M&A, including Caesars, IGT/Everi and PlayAGS. There has been much less interest in taking gaming companies public, comparatively, outside of speculation surrounding Fanatics Betting and Gaming.

Atkins said in his statement that the flexibility offered by the semi-annual system “might reduce some of the burdens of being a public company and potentially influence a company’s decision to become or remain public”. The name for his overall push to incentivise new listings is dubbed the “Make IPOs Great Again” agenda.

More than 1,900 comments have been submitted through the agency portal with about two weeks left until the cutoff. Many are against the proposal – some commenters, like Wayne Thorp, CEO of nonprofit BetterInvesting, noted that the SEC already solicited comments on the topic back in 2018, during US President Donald Trump’s first term. SEC staff ultimately hosted a roundtable on the idea in 2019 but did not act.

Thorp asserted that this year’s proposal “does not explain what has changed in the empirical or investor protection landscape since 2018 to justify revisiting the question on different terms now”.

The supplier perspective

Outside of casinos and sports betting, suppliers are another group that might stand to benefit from fewer reporting cycles. Their business is inherently reliant to a large degree on those other sectors, and suppliers’ long research and development cycles might be subject to less scrutiny under the new system.

Daron Dorsey, CEO of the Association of Gaming Equipment Manufacturers, told iGB that while AGEM hasn’t had formal discussions on the proposal as of yet, the potential benefits are worth considering. He noted that anytime operations can become more efficient and less dictated by regulatory requirements, those opportunities “are welcomed among the supplier community, if they’re publicly traded”.

“If you’re able to take a longer view, it tells a better picture, both from an operational perspective and for analysts looking at those,” Dorsey said. “Because then things are a little less choppy and a little less lumpy, and there can be better analysis or better strategic decisions based on that.”

Reporting trends abroad

Several of AGEM’s members trade on non-US exchanges that already feature semi-annual reporting, like Australia’s ASX and Japan’s TYO. PointsBet Holdings, a leading Australian sports betting company, reports its financials on both a quarterly and semi-annual basis.

The Star Entertainment Group, owners of The Star Sydney casino, discloses full earnings in its semiannual reports. At the same time, The Star provides updates on liquidity, cash flow and operational data in quarterly updates.

The AGEM Index, a monthly index that tracks nine member stocks across multiple exchanges, is currently at 1,578, down 9% from this point a year ago. Dorsey agreed with the idea that the SEC’s changes might make US listings more attractive to global companies.

“When [companies] are looking for places they might wish to go, whether it’s relisting or doing an IPO or something like that, that’s something that is of consequence or of note in that evaluation,” he said.

Jess Marquez

Jess has covered the global gaming industry since 2022. A native of Reno, Nevada, he’d like to note that it’s Ne-va-da, not Ne-VAH-da.