In early May, the U.S. Securities and Exchange Commission (SEC) introduced proposed changes to eliminate the quarterly reporting requirement for publicly traded companies. Instead, companies would have the option to report semi-annually, marking a shift that could resonate significantly within the U.S. investment landscape.
Gaming stocks, categorized within the consumer discretionary sector, often exhibit more volatility compared to other industries like non-gaming hospitality. The seasonality common in gaming segments frequently affects share prices during quarterly reporting periods, potentially instigating a damaging cycle of volatility. Consequently, the impact of less stringent reporting rules on this issue is under scrutiny.
If the proposal is enacted, companies would no longer be obligated to file three quarterly reports via Form 10-Q but instead would submit one semi-annual report through a newly created Form 10-S. The deadline for these reports would fall 40 or 45 days after each semi-annual period, based on the company's filing status.
Additionally, the changes would revise the SEC’s Regulation S-X, which outlines requirements for financial filings, aligning it with the new reporting schedule while aiming to simplify existing financial statement expectations. A public comment period on the proposal is open until July 6, 2023. These adjustments are part of a broader initiative by the SEC to encourage companies to transition to public status and remain listed.
SEC Chair Paul Atkins stated, "Public companies have an obligation under the federal securities laws to provide information that is material to investors. 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."
Since the SEC began regulating public companies in 1934, there has been a notable evolution in reporting timelines. Initially lacking a formal schedule, the SEC implemented a semi-annual system in 1955 only to shift to quarterly reports in 1970, a system that has persisted for over five decades. Critics argue that the current quarterly structure pressures firms into making short-term decisions to satisfy investors and creates unnecessary excitement four times a year, often affecting share prices irrespective of genuine business performance. This is especially evident in the gaming industry, where cyclical trends conflict with the relentless requirement to impress stakeholders each quarter.
Sports betting serves as a prime example of the implications of this reporting structure. The most profitable times for sportsbooks coincide with the NFL and college football seasons, particularly in the fourth and first quarters. For casino operators, a similar pattern emerges, with activity slowing in spring and summer before rising again in fall. A sports betting firm with semi-annual reporting may have the leeway to withhold disclosures about slow starts to the football season for up to six months. Accordingly, this freedom may allow companies to disguise unsatisfactory performance during pivotal periods without immediate accountability.
Even during traditionally weaker periods, companies are subjected to intense scrutiny, with earnings reports often swaying stock prices in unpredictable ways. A study from UCLA and the University of Michigan in 2008 revealed that stocks with robust prior performance generally gained 1.5% in the week leading up to earnings announcements but subsequently lost about 1.8% the following week, without establishing a solid explanation based on information.
As these discussions continue, leading gaming stocks face considerable challenges. Currently, Flutter is down 62% year-on-year, DraftKings is down 33%, Las Vegas Sands has decreased by 25% in 2023, and Caesars, following a buyout, is up 25% this year but down 70% since 2021. Furthermore, Aristocrat is down 20%, and Sportradar has declined by 40% over the past year. While merely changing reporting frameworks may not resolve all these issues, analysts like Chad Beynon from Macquarie see potential benefits in enabling companies to adopt longer-term strategies with less quarterly pressure. Beynon remarked, "Currently, if you miss the [quarterly] numbers, analysts and investors might not give you a pass. 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 not run the business for quarterly results and have more time to focus on higher things."
The American Gaming Association and the Sports Betting Alliance chose not to comment on the proposal or its reception among their members.
A key aspect of this shift toward semi-annual reporting is its potential to make U.S. listings and initial public offerings (IPOs) more attractive. Beynon and the SEC emphasize the importance of this consideration, noting that several notable gaming companies, including Caesars, IGT/Everi, and PlayAGS, have recently been taken private through mergers and acquisitions, with scant interest in going public. SEC Chair Atkins indicated that the flexibility offered by a semi-annual reporting system "might reduce some of the burdens of being a public company and potentially influence a company’s decision to become or remain public." This broader initiative is referred to as the "Make IPOs Great Again" agenda.
As the comment period continues, the SEC has received over 1,900 submissions, with many expressing opposition to the proposal. Commenters like Wayne Thorp, CEO of the nonprofit BetterInvesting, pointed out that the SEC previously sought feedback on the topic in 2018. Despite a staff-hosted roundtable in 2019, no actions were taken following those discussions. Thorp argued that this year's proposal lacks justification regarding changes in the empirical or investor protection landscapes since the last review.
Beyond casinos and sports betting, suppliers could see advantages from fewer reporting cycles due to their reliance on gaming sectors. With longer research and development cycles, suppliers might experience reduced scrutiny under revised reporting frequencies. Daron Dorsey, CEO of the Association of Gaming Equipment Manufacturers, noted that while formal discussions about the proposal at AGEM have not yet occurred, the potential advantages merit consideration. He stated, "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. 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."
Some AGEM members already operate on international exchanges that utilize semi-annual reporting, such as Australia's ASX and Japan's TYO. For instance, PointsBet Holdings, a prominent Australian sports betting entity, shares its financial insights both quarterly and semi-annually. Similarly, The Star Entertainment Group, custodians of The Star Sydney casino, reports comprehensive earnings in semi-annual statements while providing updates on liquidity and cash flow quarterly. The AGEM Index, which tracks nine member stocks across various exchanges, currently stands at 1,578, reflecting a 9% decrease from the previous year. Dorsey reiterated that the SEC's proposed changes could render U.S. listings more appealing to international firms, noting, "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."
