Sciplay Corp (SCPL) 2022 Q4 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the SciPlay Fourth Quarter and Full Year 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I'd like to hand the conference over to your speaker today, Robert Weiner, Vice President, Investor Relations, SciPlay Corporation. Please go ahead.

Thank you, operator, and good morning, everyone. During today's call, we will discuss our fourth quarter and full year 2022 financial results and operating performance as well as our outlook for 2023, which will be followed by a question-and-answer period. With me today are Josh Wilson, CEO; and Daniel O'Quinn, Interim CFO.

Our call today will contain remarks and include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For more information regarding these risks and uncertainties, please refer to our earnings release issued yesterday and our filings with the SEC. We will also discuss certain non-GAAP financial measures, including key performance indicators, which are based on in-app purchases only.

A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings release as well as in the Investors section on our website. As a reminder, this conference call is being recorded. A replay of this webcast will be archived in the Investors section of our website at sciplay.com.

Now I am pleased to turn the call over to Josh.

Good morning, everyone. I'm very happy to be with you today. SciPlay is on a multiyear journey guided by our vision to spark the world's passion to play by providing the most engaging digital entertainment experiences. We know where we are going, and we are aligned on how we're going to get there. This resulted in record KPIs and propelled us to outpace the market in both the fourth quarter and full year.

I'm extremely proud of our team and what we have accomplished. Our strong execution and ability to adapt have enabled us to successfully navigate industry dynamics and achieve strong performance in 2022. We are innovative, agile and extremely motivated to win and focused on delivering amazing experiences for our players and maximize shareholder value.

Now for some key results. First, we delivered impressive top line results, growing revenue 18% in the fourth quarter and 11% for the full year. This was fueled by our industry-leading execution, our live ops and our data-driven product road map. We achieved this growth despite the challenging industry backdrop as our talented teams remained focused and continue to innovate. Second, we achieved a number of records, including growing our payers and our average monthly revenue per payer underscoring the quality of our earnings performance.

Third, we generated robust cash flow of $150 million for the full year. This demonstrates the high cash-generative nature of our business. And fourth, as of February 24, we have returned $41.7 million to our shareholders through our stock repurchase program. We are confident that our strong foundation, combined with multiple growth initiatives will drive us to post strong gains and outperform the market again.

Now let's take a closer look at Q4. We delivered strong fourth quarter performance demonstrated by our industry-leading results. With our evergreen franchises leading the way, we generated record revenue and attained multiple records in Q4. In Q4, our social casino gains grew 14% year-over-year, while the social casino industry is estimated to have declined by more than 3%. And we have achieved record KPIs, including payer conversion of 10.4% and ARPDAU of $0.87, which grew 18% year-over-year.

Based on Eilers & Krejcik, social casino game tracker report published in January of '23. SciPlay was cited as " Stand-out Performer of the Year" in the fourth quarter, estimated to achieve the fastest growth of the top 15 game developers, and we did just that.

Our Q4 performance was driven by our growth in payers, up 13% year-over-year and to provide longer-term perspective payers have grown by 42% since 2017. We now have the most payers in SciPlay's history. We have invested in our games, and we will continue to do so. As we execute on our product road maps to deliver the best possible entertainment to our players. The strength of our evergreen franchises and our differentiated go-to-market approach have fueled SciPlay success.

Here are just a handful of examples. Jackpot Party smashed our single-day revenue record and Q4 was a record quarter, capping a record year. The game is now listed by Eilers & Krejcik as the #1 U.S. ranked social casino game. Quick Hit Slots officially became the second $100 million revenue gain in SciPlay's portfolio. It is one of the fastest-growing games in social casino. Gold Fish Casino is gaining momentum from our reimagined features and new live ops strategy. And 88 Fortunes benefited by adding a new economy, content design and innovative features, which are driving increased player engagement.

As a result, SciPlay outperformed the entire social casino market in 2022. Let me repeat this. As a result, SciPlay outperformed the entire social casino market in 2022. Our accomplishments have been powered by a combination of innovation, capabilities and investments. We have a scalable platform, unparalleled technology and deep talent that form a runway for both current and long-term success.

In 2022, the SciPlay engine became one of our main drivers of success. We implemented and optimized it across our game portfolio. The SciPlay engine provides a wide range of optimizations and real-time solutions. The combined knowledge and expertise of our best-in-industry ad tech, data science and analytics team, have led us to develop an innovative UA solution that is aiding in our winning performance today. Our global analytics team developed and deployed algorithms the decipher and break down complex player behavior. Our Live Ops teams consistently develop and execute unsurpassed monetization strategies. These are driving industry-leading growth. Data science and analytics use together with player behaviors, enable us to drive conversion, retention and increased player engagement.

SciPlay continued to evolve our data-driven approach. We made several noticeable advancements that boost our ad tech capability by combining team learnings with multiple data sources, predictive analytics and valuable end game advertising strategies. We implemented predictive analytics tools and exclusive technology that focuses on revenue generation with custom-tailored user experiences by detecting player patterns that maximize their lifetime value. We employed integrated predictive player modeling to improve player behavioral insights and data quality. These strategies have driven improved insights on the players and drive higher returns.

Now let's turn to the future. As we propel into 2023, SciPlay has strong momentum with multiple growth drivers. We will continue to evolve, scale and grow our franchises. Our main growth drivers will be to increase our payer base their engagement time and the amount of money our players will set. In essence, the combination of our innovation capabilities and investments will enable us to continue closing the ARPDAU gap with our peers. Our robust data-driven product road maps are evolving our evergreen franchises. Our proprietary tech solutions provide valuable insights about our players, the features they want and the economies that drive them. We continue to evolve our franchises as we implement new events, features, and content accessible from Light & Wonder's extensive IP library. Our Live Ops teams create new engaging events for our players every day. These produce high monetization results and our recent launch direct-to-consumer platform, which allows us to deepen the relationship with our players to push higher LTVs, reduce acquisition costs and drive long-term margin expansion.

Our strong execution in '22 is continuing in 2023. SciPlay's success and ability to deliver consistent value cemented together by our team's expertise, our culture, our dedication and our passion to win. Our global team truly leveled up in '22. Thank you, SciPlayers around the world. We had an amazing year.

I'll close by saying I'm confident in our team's continued strong execution and the strength of SciPlay's business model and growth. We plan to outperform the overall social casino market and take share in 2023.

Now I'm pleased to turn the call over to Daniel.

Thanks, Josh. Good morning, everyone, and thank you for joining us today. 2022 was a great year for SciPlay with outstanding Q4 results. We carried out our plan presented in the beginning of last year and achieved our full year financial targets for both the top and bottom line. We invested in our core capabilities, and we reinforced our foundation for the future. Our teams were focused and agile, successfully navigating industry dynamics, while executing our product road maps. I couldn't be prouder of what our teams have accomplished. Their energy and innovation are unparalleled and they're the reason why we're able to achieve so many all-time records. Our success enabled us to make a competitive leap in social casino, significantly outgrowing the market.

Now for some key highlights. First, we delivered strong financial performance in Q4 and the full year, propelled by our evergreen franchises and our team's exceptional execution, SciPlay achieved several all-time records while innovating and adapting to a challenging market environment. Second, we had record ARPDAU and a record number of payers which we grew sequentially each quarter during the year, underscoring the momentum and quality of our earnings performance. Third, SciPlay continued to make key strategic investments and targeted segments of our business, including proprietary technologies and talent to further strengthen our long-term growth plans.

Fourth, SciPlay continued to be a high cash-generating business. We delivered robust operating cash flow of $150 million in 2022 and repurchased $42 million or roughly 70% under our share repurchase program through February 24.

Now let's get into some of the details. We generated strong fourth quarter revenue of $182 million an all-time record, up 18% year-over-year and 7% sequentially. Full year revenue of $671 million grew 11%, also setting an all-time record. Our social casino games grew 14% in the fourth quarter and 7% for the full year. This significantly outperformed the market that is estimated to decline 3% in both the fourth quarter and full year. We generated fourth quarter net income of $53 million or 29% margin and full year net income of $151 million.

Diluted earnings per share attributable to SciPlay was $0.32 for the fourth quarter and $0.91 for the full year. We grew our fourth quarter AEBITDA 24% to $59 million, while achieving a 32% AEBITDA margin, fueled by our strong top line results as we move past the marketing innovation spend in Q2 and Q3. AEBITDA of $187 million was up slightly for the year, while our AEBITDA margin of 28% was in line with our target. As we invested in our talent, the SciPlay engine, adtech and our DTC platform to drive long-term value. Since 2017, we've grown revenue at a 13% CAGR and profitability at a much faster pace with an AEBITDA CAGR of 22% over the same period.

Now let's turn to some key performance indicators for the fourth quarter, where we achieved a number of records. In the fourth quarter, we grew our payers 13% year-over-year to a record, and we saw increases in payers throughout the year. Our ability to consistently deliver great and engaging content enabled us to achieve near record average monthly revenue per paying user of approximately $99 in Q4 and $95 in the year. This marks our 11th consecutive quarter above $90. This all translated to a record ARPDAU of $0.87 in Q4, an increase of 18% year-over-year as we continue to close the gap with our peers.

We achieved a payer conversion rate of 10.4% in the fourth quarter and 9.6% in the full year also both all-time records. Our KPIs built throughout the year, underscoring the benefits of our key initiatives, robust product road map best-in-class Live Ops capabilities and our player loyalty. As an example, players who download a Jackpot Party before 2019 are more engaged and had higher retention during 2022. Like our long-term revenue and profitability growth, ARPDAU has grown at a 14% CAGR over the last 5 years, while our peer conversion rate grew to 13% CAGR over the same period.

Now let's turn to cash flow. We believe strong revenue growth faster growth in EBITDA, combined with strong cash flow are key drivers of shareholder value. The great thing is our business is highly efficient and cash generative. For 2022, we generated $150 million in operating cash flow, which included $24.5 million payment for the Washington State matter. We have minimal capital expenditures, enabling us to convert a high percentage of operating cash flow into free cash flow. We ended the year with strong liquidity of $330 million in cash and total liquidity of $480 million. We have the financial strength and flexibility to deploy excess capital to drive increasing shareholder value.

Now let me take some time to discuss capital allocation. We continue to see opportunities to invest organically in our business, and we will also consider targeted inorganic opportunities. And these include ARPDAU hires as well as small game developers, where we see an opportunity to enhance engagement and monetization with our best-in-class capabilities. We make these investments with the financial rigor and our eye on returns. We employ a data-driven approach to ensure that our investments are driving profitable growth and shareholder value. We also believe the combination of organic growth, strong cash flow generation is fundamental to enhancing shareholder value. Accordingly, our Board authorized a $60 million 2-year share repurchase program in 2022. To this date, we've repurchased 42 million or roughly 70% of the authorization in 10 months.

Let me close my comments today and speak about the opportunity we see ahead in 2023. We're well-positioned to continue to take share in social casino and deliver shareholder value. The marketing innovation campaigns we started in 2022 will continue into this year. From a seasonality standpoint, the campaign spend last year impacted Q2 and Q3. This year, most of the innovation spend will happen in the first quarter. The highly successful Jerry O'Connell campaign that ran for Quick Hit in January and February will be discussed in our Q1 call.

In summary, our global team of more than 800 SciPlayers is executing at a high level. We have a strong foundation for continued growth and were determined and highly motivated. We have the passion to win. Thank you. And now I'll turn the call over to the operator, and we'll take your questions.

(Operator Instructions) First question will be from Eric Sheridan Golden Sachs.

And thanks for all the detail in the prepared remarks. Josh, I want to come back to some of the comments you were making on user acquisition and the repositioning of the company and the platform from a marketing standpoint. Both idiosyncratically and what you've built, how much of the competitive advantage should we be thinking about in terms of the quantification, the ability to outgrow market or possibly outearn competitors from an ROI standpoint, that would be part one.

And then number two, away from what you can build internally, any update about the way you're thinking about broader marketing ROIs in the gaming sector. You've spent a lot of time experimenting and trying new avenues in the last 12, 18 months. So curious for an update there as we look out to '23 and beyond.

Yes. Thanks a lot, Eric. It's great to talk to you today. I could not be more proud about our UA team, our entire growth team as a whole. We knew coming into 2022 that it needed to be a major investment for us and we did that. We doubled down on our ad tech capabilities. We doubled down on how we are using data to create player profiles, our UA team and our retargeting team really just leveled up their game. And with that, built new tools that really are sustainable and keeping us ahead of everyone else.

We do continue to believe that we will outperform others in our returns, mainly for two reasons because the way that our philosophy is on spending money, it's about getting the most value for every dollar. We're not tracing installs. We're not chasing [MAU], we are chasing value for the shareholder. And since our entire team thinks this way, we've been able to get these returns. But it's not just the UA side, it's also the games themselves. Our games through the implementation of the SciPlay engine, some of the reorganizations we did and just more heightened focus on running the live games. We've been able to significantly increase our LTV across almost our entire portfolio in '22, and it continues to look really, really good in '23.

So the way I think -- I tend to hit that last question was about ROI. This is honestly how we think of everything we do. Everything we do is an ROI. So whether or not it's how we look at how we spend money, how we look at how we spend time, it is what can we do to maximize the play experience of every user we bring into our ecosystem and what can we do to keep them playing and being entertained by us instead of wanting to go anywhere else. And if the results of '22 show anything, I think we're doing a really good job.

Next question will be from Drew Crum from Stifel.

So Dan, you addressed in your prepared remarks some of the investments and timing around marketing campaigns in 2023. What does that translate to in terms of your expectations for adjusted EBITDA margin relative to where you ended up for 2022. So that's the first question. And then maybe for Josh, the paying users have historically ticked higher in 4Q versus 3Q, the metric looks like it slipped a little bit this past quarter on a sequential basis. Anything noteworthy there? And typically, you see sequential growth in paying users for 1Q over 4Q. Should we anticipate a similar seasonal trend line for the early part of '23?

Thanks for the question, Drew. Yes, in the guidance that we give, like I said before, Q2 and Q3 is when we had kind of the most of our marketing innovation. We've learned a lot after we started this campaign in 2022. And that's the reason we kind of went in to 2023 with the Jerry O'Connell campaign. We're going to have some ongoing spend throughout 2023. But just from a guidance standpoint, we want to make sure that we have everybody informed that Q1 margins will come down from Q4 to Q1 and then scale as we move throughout the year.

Yes. Thanks, Daniel. And I'm going to piggyback on. A lot of this is we're really back into what seasonality looks like for mobile video games. For a couple of years, COVID kind of threw us off a little bit. But really, what traditionally it always looked like is kind of there again. UA returns are the highest and the cost -- most cost effective in the first quarter, as Daniel said. So we're also spending a little bit more in UA and then also the innovation campaign, which Daniel talked about. We would expect Q2 and Q3 to come down slightly and then we all know that in Q4, marketing costs just become a little bit more expensive.

So to Daniel's point, Q1, we will step down, but we will continue stepping up as a whole in order to get to where we end up for the full year margin. For paying users, it's interesting because in the past, I would say Q4 has always been the year where we ramped them up, but we ramped them up consistently all year. And the reason we were able to ramp them up consistently all year is once we created a payer, we were able to maintain them and keep them in the game continuing to spend over time. So the reason we didn't have as large of a step-up as far as individual payers in Q4 was not because the game didn't run well, it's because we had already been converting at such a high percentage all year.

The one thing that did happen in Q4 is we were able to really focus on the wallets of the individuals continuing to build and so we have the payers, we were able to grow the payers, but at the same time, the payers as a whole became more valuable as individuals. Now to your point, yes, Q1 ends up with more payers most of the time because of the increased UA, we see more people coming into the game. The more people that are coming in are very valuable users, and this is why we increased the UA. Normally, what we will see is a little come down in the average monthly revenue per payer. This is just because it's compared to fourth quarter, which is very, very seasonality all of the holidays that are in there.

But I'm extremely pleased that if we went back and look at February of this year, we're actually at a very similar daily run rate to that we were in December of '22. This ends up being really, really encouraging for us because, as you know, December is basically our seasonality month of the year because about half of the month ends up being holidays. So could not be more proud of how our games and how our teams are performing right now.

Next question will be from Matthew Thornton of Truist.

I guess, first one building off the prior question around UA, I guess, Josh, any just broader commentary about how UA, the UA environment is trending 4Q into 1Q. Any green shoots? Or is it still kind of touch and go here. And relatedly, I guess, how do you think about the time in which you start to maybe shift focus from payer conversion and monetization for ARPDAU to dipping your toe back into again, maybe widening the top of funnel, widening MAUs widening DAUs? I'm kind of thinking about how you think about that from a timing perspective when that might happen, how that might happen? And then I've got one follow-up.

Okay. Excellent. Thanks, Matthew. It's good talking to you. UA. So the way I would think about UA right now is the Q1 UA is performing extremely well compared to Q4 but it normally does. But the more encouraging is Q1 looks very, very good to Q3 because that's a better comp than what it would have done to just Q4. We have seen really good returns, which has enabled our growth team to continue to elevate the spend in but we feel very confident we're going to see those returns throughout the year.

As far as the macro environment on UA goes, we do continue to have struggles with IDFA. We're still hoping at some point that they are going to make some type of shift and open up the entire bucket again the way it used to be on that platform. But as everyone knows, Apple has not announced anything as of now. But with the tools that we have been building and the strength of our game right now, it has enabled us to continue to increase our spend on Apple in order to push in order to push more users in.

We've also learned so much from our innovation campaign last year, where we were able to test different buckets and by testing these different buckets, we were able to find a diverse group of users that enabled us to act on the innovation campaign that Daniel talked about here in Q1. This innovation like spoiler, this innovation campaign is showing us really great results. We aren't going to dig into the KPIs for that until our next earnings call, but I could not be more proud of how our team went innovate, innovate, innovated and then found something that's going to be meaningful for the company.

I don't think we're ever going to get away from being a payer conversion company because ultimately, every dollar we ever spend is about ROI. So for us, we were just talking the other day that we're converting 3-year payers -- sorry, 3-year non-payers at 0.5% a day. Like we're looking -- once we have you in our ecosystem and get you in there, it's about how do we turn you into a valuable payer for the company itself. And this is how we're going to close that ARPDAU gap that we've talked about so many times.

I do think that we're looking at ways of increasing our MAU potential throughout the year and over the next coming years. Most likely it won't be through our core franchises today. It will be through finding new avenues of places where we can bring in users at a significantly cheaper price but still keep some retention there. So we get the total SciPlay network to grow, but then also gives us the ability to cross-promote where needed. And I think you said you had a follow-up, Matthew?

Yes. One quick follow-up. And actually, I think you provided a good transition there. You didn't talk about some of the titles in the pipeline. So I'm curious how we should think about those. I think Solitaire was in monetization test. I'm kind of curious how those have performed and how to think about that title. And then sell spinner, I think it was approaching soft launch, if I'm not mistaken. So again, any early findings there? Any update on how to think about full launch timing on those titles?

Yes. Thanks, Matthew. So I think the reason that you didn't hear them in the actual script itself is we want to make it very, very clear to everyone that our main focus is our core franchises right now. These are what are driving the growth. These are what are driving the new payers. This is what is the core foundation of the company. Now with -- we still are looking at new games, new revenue sources, new ways of bringing to expanding the portfolio.

[SPA] is in the second round of what we call now monetization testing, which is basically marketing testing. It takes a while because we've got to wait until we get 30-day baked cohorts. So until -- you basically wait a month until the end, hoping to have a little bit more information and clarity on that one, probably in Q2. I will admit, we've seen some ups and downs with it because marketing to new games has been challenging, especially ones that are a little bit more IAP focused.

Spell spinner continues to push. We did go through. We did the MVP test. We did the technical test. From a technology side, we feel really great about the game. Now we're doing the marketability test as far as making sure that the simple core loop is going to be sustainable and build long-term traffic, hoping to have a little bit more information on that sometime in March. And then based on what we find out there, we'll go back and say, okay, we're ready to take the next step, which is we soft launch or we go back and say, "Okay, we need to make tweaks to that simple core loop.

The thing we will promise you is we're not going to launch a game just to launch a game. We want to make sure that if we're taking a game to market that it is something that has long-term sustainability, and has the ability to be something that's additive to the entire SciPlay portfolio, but also delivers amazing player experience. So we haven't taken our eye off it by any means. It's just not the main focus of the company, but we are still trying to get those over the finish line.

Next question will be from David Karnovsky, JPMorgan.

I just wanted to see if there's any additional commentary you had on Alictus in Q4. And then you've noted in the past, you reoriented the studio to be kind of Android first. I guess, in that context, how you're thinking about risk of GID deprecation and what that could mean for scaling the hyper-casual games and pipeline?

Okay. Yes. Thanks, David. Well, I don't know fi we have it right here. Alictus is still going. It is a super what's our talented team, and we continue to be more and more impressed with them the more and more we're integrating the two companies. They released Burger Shop 3D, which did -- sorry, Fade Master 3D, which was very, very successful in Q4 of this year. We also saw more of a mix into the Google revenue as we've made the technical changes there needed in order to get more sustainability. Now we do have some more that we need to continue cleaning up there. At the same time, the studio has taken a small step backwards and said, "Hey, what can we do in order to find a little bit more retention out of the games than we see out of just pure casual games. So they came up with an amazing plan with the leadership of the studio there.

Call it, kind of there's some hyper game simple core loops that are very, very evergreen in nature that are always in the Top 100, and they're really focusing around them. And we're really -- we're hoping to see the fruits of this coming in, call it, Q2, early Q3. So can't wait to share more information. But while that's happening, we also have amazing assets from the acquisition, the ad tech technology that they've built that just allows them to automate their waterfalls and get the highest ECPMs. We're already starting to integrate that technology. We're starting to work together as two companies or as one company when we start talking about finding new users, bringing new users into our ecosystem, and just purely around building great games.

So the integration has been fantastic. As far as the Google changes, our team has been working with Google hand-in-hand, especially our growth team, which is located in Israel and one of -- basically Google's Marketing Hub is really in Israel, and they've been able to be ahead of the curve for the changes that are coming. Overall, we'll say we're not very worried mainly because Google is not deprecating its ability to do marketing. It is just creating privacy -- call it, privacy challenges for third parties. But majority of the money spent on Google is through them. So we're not expecting any major changes there. And we expect this not to impact Alictus or the broader SciPlay business at all in '23.

Our next question will be from Aaron Lee of Macquarie.

Congrats on the outperformance and the momentum. I wanted to talk about the content. Given the cross-platform Light & Wonder, strategy has been in place for a while now. Curious, are you seeing anything different just in terms of the velocity of slot content or innovation around that content?

Yes. Thanks a lot, Aaron. So we've been -- I mean, we've been working together since I think, call it, May, June of last year. It's really when we started pulling our road maps together and really becoming one brain when it comes to thinking about slot machines. And this has caused not only the innovation but it has also caused the quality of road maps to continue improving across all of social. Light & Wonder has made some amazing investments bringing in some like very, very top talent as Matt talked about yesterday and the output that is coming and the ideas that are coming from them, but then also the combined group has just leveled up the content that we're able to give to our players.

Now we're not quite at the point where we're seeing the speed of the content improved yet, that is still coming. But what we're seeing is much more data being passed between the two companies that are helping us make better decisions every day, not only on the SciPlay side, but the Light & Wonder side. And this type of data is going to help us and help our monetization teams continue providing not only best-in-class monetization but best-in-class content to all of our users.

Great. That's awesome. And then maybe I want to touch on the comment you made earlier about being able to convert 3-year non-payers. Just curious how were you able to do that? Is it a function of more of your games or some of the predictive analytics you were talking about?

Yes. So I would say it's a quality of everything. So our games are really -- they're ecosystems that evolve over time. And just because the ecosystem as it sits today, is not one that this player is willing to pay in. If we're able to maintain them in that ecosystem, eventually, we release a feature that causes or drives them to increase their play. And in order to increase their play, they need to purchase more time. And this is where we're seeing the largest conversions come from is when we're adding some type of new feature or some type of new engagement loop inside of the game that is causing that behavior.

And then on top of that, the more and more we get, let's call it, educated on our player behaviors, especially now that we're combining our learnings from our ad tech side with our data science teams and our analytics team. We're really getting more and more fine-tuned about what each individual player is looking for inside of the game and our live ops monetization teams are really doing a fantastic job of adjusting the player behavior that is putting them in the situation where they need to buy in order to get through the meta and the game.

So at the end of the day, it's the quality of the people that are working for SciPlay that are making all of this happen.

Our next question will be from Matthew Cost, Morgan Stanley.

I have two. On the market, the broader market, are we in a sort of early stage of a recovery in terms of consumers' willingness to spend money on in-app purchases in the mobile gaming market broadly. Are you seeing any evidence that maybe like the worst of kind of like the COVID hangover and the IDFA hangover are now totally behind us? And you mentioned that you expect to outgrow the market this year. Do you have an expectation for what the market will grow this year? That's the first question.

The second is just should we expect kind of like the run rate for next year for marketing spend to be similar to the fourth quarter, which was a little bit lower than the middle of the year?

Yes. Okay. So I'll kind of start -- we're going to kind of balance between a couple of us here probably to answer all these. But I'll go ahead and I'll start with the market recovery. It's interesting because I really wouldn't say that it's a market recovery or a market change. I would say the whole dynamics of everything started to shift at the back half of '21, and it kind of went into '22 and different companies adapted and changed to it at different rates.

But I think this is kind of the new norm until Apple does whatever it will do with IDFA. So for us, we were one of the first companies that were able to understand that IDFA was going to have a large impact on our current business and have a large impact on how we're able to bring in new players. So what did we do? We took a step back and said we need to do everything different. And we said we need to focus on the payers and players that we have in our games today. This needs to be our main focus. And this is where the SciPlay engine was born, and this really helped drive a lot of our 2022.

At the same time, we understood that, okay, UA is something that has to continue, but the market has shifted so much that we need to think about it different. And this is where the investments we made in our ASO team, our growth team, our ad tech team and they redefined how we look at spending money. And then redefined it for the market that is at that point, not the market that used to be. And because of that, this is why we were able to take a step ahead of everyone else. Now I do believe the mobile market as a whole will continue to adapt to this new environment and then we'll continue to move forward for that reason. But even all the way through 2022, we had multiple in the industry that did really, really well.

It was just most companies didn't have multiple games doing well at once like we did. And so we did see glimmers of hopes as far as that goes. Daniel, do you want to ...

Yes. In terms of the market, we look at kind of what Eilers puts out there. They have the market kind of flat to down. What we're seeing as we kind of move throughout 2023, we're continuing to see momentum and really feel like we believe that we could definitely outpace these estimates that they have for the year.

And I think when you're thinking about marketing spend, I wouldn't look at Q4 into Q1 and say this is what the run rate is because Q4 is normally a lower marketing spend for us. because of the challenges that are there. But what I would say is I would expect year-over-year the total marketing spend to be very similar from '22 into '23.

Next question will be from Ryan Sigdahl, Craig-Hallum Capital Group.

Curious on expectations for, I guess, throughout the year on DTC, kind of how you think about the investment needed there and then how that potentially ramps throughout the year in the fundamentals?

Yes, DTC, we are so excited. We actually did some of our first, let's call it, market testing or kind of sub testing over the last couple of weeks. And we're starting to see throughput for it. We now are going to take a step back, go through everything, reanalyze, make sure that everything worked exactly the way we thought it should, make sure that the player experience once they get back into the overall game continues to work well. I do -- I would say that I think we would have thought right now that we would be a little bit further than we are right now with DTC, mainly because it took a little bit longer than we originally thought to get our payment processor over the line. But that is all now done.

And like I said, we're into actual market testing. So what I would kind of expect from here, we're going to spend a little bit of time analyzing but we're going to run our second major test probably somewhere a mid-March-ish. Then we're going to evaluate that again, assuming both of those are good, then we're going to start -- I'd say it's crawling. Since we're really talking about the people who are spending and behaving very, very healthy in our games right now. I'd rather have them spending where they are, then lose them. So we're going to slowly start moving people. So the way I would probably say it is you're going to see some movement in '23, but it's going to be very small because we're about 3 months behind where we originally planned on being.

Great. Then just on the marketing innovation campaign. Curious the decision to move that into Q1 and if there is potential to add more of those throughout the year or if that's kind of a set plan at this point that will only be Q1? And then secondly, do you have any learnings or ROIC or any user metrics from the spend that you made in Q3 of this year?

Oh, you mean last year. Yes. So let me -- so, innovation. So the major reason it is right now is when we were going back and looking through when to do it, the media cost is at its lowest in Q1, and we were able to get -- since it's still innovation, our next bite of the apple without having to overspend to do it. And we're very, very happy we did. Yes, we are evaluating it, especially as we have points where -- it is performing as well as some of our UA is performing. And now we've kind of looked at this as well, it's about getting the right users in at the right COGS. And so as we have more opportunities, if the ROI is where it is, we will continue to invest in it.

We don't have any set right now, but we're a dynamic business that can change anything on any given day. So we just evaluate as we go. Last year, we ran, I'd call three major campaigns, we ran the NASCAR campaign, the America's Got Talent Campaign and then the Wendy Williams one. Each one of us taught us different things. NASCAR taught us that in the immediacy of an event, you start seeing reaction right away. You also know that you get branding from it. AGT taught us that the branding does make a difference, but having a super large market but not tailored to your customers. may not work as well. And then Wendy Williams, what we learned is having an everyday action or everyday communication with the players really changes their engagement and changes their affinity for the brand and you get great returns, but learned on being at 4:00 p.m. every day is a downside.

So we took all of these learnings, and this is what all the changes that went into the Jerry O'Connell and is a large reason why our growth team, Noga, Tomer, Yaron, those -- that entire team put together this entire plan. And I do believe it will become a new staple of how we bring new customers into our gaming.

Next question will be from Omar Dessouky, Bank of America.

Josh. So thanks for mentioning that, I guess, you guys are sort of assuming that the market will be flat to down in 2023. I wanted to know whether that would assume a recession in 2023 or what the macroeconomic assumptions around that are? That's the first question.

And then the second question, as part of the same first question I have is what is your hypothesis on the average -- of how the average spend per payer would trend versus '22 if your payers average real incomes were to fall in a recessionary scenario. So for example, if payers real incomes were to be down year-on-year, would you expect that they would be -- the average revenue per payer would be down as well in 2023? And then I have a follow-up question on advertising.

Okay. Thanks, Omar. So let's start with the market one. So if you look at Eilers & Krejcik, they've come out and said that they're expecting the market to be flat for this year. But the major reason that we're assuming the market is flat for this year, is because we're assuming IDFA has no fix to it in 2023. I think it's less to do with the macro environment is why and more to do with the user acquisition is more challenged. Now with that said, things were more challenged last year. We had a lot of games do really well in the larger scale, whether or not it's either capital or social casino. We had majority of our portfolio performed very well last year. And we expect to see that going into next year. As we look at the broader economics of people and what happens I think we kind of look at it as twofold.

Like one, the average person in our game are making $5 and $10 purchases throughout a course of a week or a month. And it's not the type of expenditures that I expect to see get pulled out from people. I would imagine that the $10,000 vacation, $5,000 vacation, $20,000 car, those are going to be where they save money. Entertainment costs at this net magnitude normally isn't the thing that is brought back.

But what we are doing as a company and because of we have so much access to not only data but hourly data and since we have so many games in the portfolio, what we're able to do is we're able to look at these trends across multiple games at once. And one thing that we did at the beginning of this year was kick off a kind of like a global macro team inside of SciPlay and our entire role inside of this is to look for things that are happening in multiple games all at once.

So if we see multiple games at once, all of a sudden slowing down a number of times people purchase per week or if we see, to your point, average revenue per payer or transaction move, we're going to get this information in the course of a couple of days, where a lot of people are going to have to wait months and months to understand it. And because we're going to get this information, we're going to be able to not only make the business shifts that we need to, but we're able -- we're also able to make the game and entertainment shifts that we need to. So right now, we feel very confident that we're going to perform very well into '23 and as I mentioned earlier, February for us, as a run rate was the same as December. And that's actually something that's not normal because December has a 2 weeks' worth of holidays that sit in it every year.

Okay, thank you for the comprehensive response. So maybe my second question is in terms of advertising, have you extended the window against which you buy on the LTV curve. So for example, if, let's say, 2 years ago, you were buying and spending user acquisition, against, I don't know, a 90-day or 120-day LTV target. Have you moved out to, let's say, I don't know, 180 days or something like that. How has your thinking as to which part of the LTV curve you buy against shifted or changed over the last 6 months?

Yes. So over the last 6 months, we've made no change. I don't -- if you remember at the beginning of last year, because of the increased LTVs, we did announce that we were moving our LTV, our window from 6 months to 9 months. We held through that all of last year. And honestly, we continue to get stronger and stronger paybacks from it. We really measure our people and our games and our payers and our games by years. Jackpot Party, which all this game in our portfolio, the people it brought back in 2000 -- or sorry, install the game in 2012 actually spent more money in 2022 than they did in 2012.

So we think of the LTV really as a true, true lifetime. The payback, as far as I'm concerned, is more about making sure that we hedge our bet in case there's any type of market movement that happens or any type of platform movement that happens. But we feel very, very confident right now that we're going to outperform the 9 months. And to be honest, we constantly evaluate whether or not it makes sense to go from 9 to 12. We're not there today. We're going to continue where we are today but we're also expecting to see the great returns we do that we're currently getting.

(Operator Instructions) Our next question will be from Ben Soff of Deutsche Bank.

When I look at the drivers of growth in social casino this year, it was -- monthly paying users were up quite a bit, and then the revenue per paying user was about flat. And I'm just curious how you think of those two levers heading into 2023. And if you think it will be similar or more balanced between the two?

Yes. So I'll be honest, my preference is I would always rather grow MPU and leave average monthly revenue per paying user flat. Why is that? Because if I'm growing MPU, I'm adding more payers into the portfolio and by adding more payers into the portfolio and diversifying my revenue risk and giving ourselves a better chance of being sustained longer. So I definitely say payers is first and foremost.

If you actually looked at the scale of the portfolio from your side, it looks flat because it averages out. But actually, our higher-end payers continue to increase how much the spending. We're just bringing so many more new payers in that the average is staying very flat over time.

Got it. That's helpful. And then it's still early, but just curious what your takes are on the potential for alternative app stores and what that might mean for your business longer term?

Yes. So I mean, first and foremost, we'll call it, for us, the DTC is the #1 thing that we're looking to. I know it's not quite an app store, but it ends up being our own platform at the end of the day where we get to be the payment provider and also get to own the communication with the player, which gives us just a deeper relationship with them. We are constantly evaluating every new app store that comes out. I would say the learnings I've had over time is it's -- you don't want to be first to a new app store in today's world, but you don't want to be last.

So we're evaluating them on a weekly basis and anyone that we see start gaining any momentum early on, then we pivot over the development team in order to get on there as soon as we possibly can. But we just -- new app stores are not new to being talked about. There just hasn't really been any that have like taking a big share from either Google or Apple at this point. So it's more of just watching and evaluating but being ready.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Josh Wilson for closing remarks.

Thank you. We believe our 2022 performance and our plans and beyond reinforce our commitments to spark the world's passion to play, our players are our #1 priority. We are laser-focused on them with the most engaging digital experience that we can give them, and we look forward to reporting to you in just like 60 days. Have an amazing day, everyone, and we will talk to you soon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.