Sciplay Corp (SCPL) 2020 Q4 法說會逐字稿

Good day, and welcome to the SciPlay Fourth Quarter 2020 Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to James Bombassei. Please go ahead, sir.

Thank you, operator. During today's call, we will discuss our fourth quarter and year ended 2020 results and operating performance, followed by a question-and-answer period. With me this afternoon are Josh Wilson and Mike Cody.

Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statement involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this afternoon, the materials linked to this call posted on our website and our filings with the SEC.

We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press materials as well as the Investors section on our website.

As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website at sciplay.com. Also, supplemental reference slides will be posted to our Investor Relations website. These slides are meant to facilitate your review of our company's results and be used as a reference document following the call.

I will now turn the call over to Josh.

Thanks, Jim. Good afternoon, everyone, and thanks for joining us. 2020 was really a great year for us at SciPlay. Our strong execution drove record results. We grew annual revenue by 25%, outperforming the market, and increased our AEBITDA by 54% to $189 million. Our core business remains healthy, and we continue to strengthen our evergreen franchises with new features and content that are driving player engagement.

While we are pleased with this year's results, we see additional opportunity to continue growing our core business while making a firm commitment to diversify our revenue base into the $20 billion casual market. We generated record operating cash flow this year with $193 million, which enables us several avenues to further expand into adjacent genres.

Our financial success in 2020 is part of the track record of delivering sustainable growth and margin expansion. If you look at our growth from 2017 to 2020, we grew revenue at a 17% CAGR and AEBITDA at a 40% CAGR, with strong margin expansions. The basis of this growth was our payer-focused and live op strategy. To that end, we achieved records across all key player metrics in 2020, further strengthening our evergreen social casino franchises.

In addition to our financial success, we closed on our acquisition of Come2Play, who were named the top social casino company by Eilers & Krejcik, brought on some of the industry's best talent, and we're able to give back to our host communities with programs like Play Apart Together and partners like Toys for Tots and Direct Relief. I attribute the success to our amazing team. Around the world, they responded to a new challenging environment like champions. As we shifted to an entirely remote operation, they didn't miss a beat and executed and delivered on our live op strategy with new features driving payer conversion and monetization.

As a result, our core evergreen games are healthy, growing and driving revenue with key metrics exceeding pre-COVID levels. You may recall, we made an investment in tax stability and quality late Q4 2019 and into Q1 2020, leaving our games in a good position when stay-at-home orders began.

Additionally, we consistently update our evergreen franchises with new features and new content to keep them fresh and engaging. Similar to trying a game for the first time, a returning player can have a whole new game feel and experience, but within the comfort of a game they already enjoy. To add further color and for some of our new listeners on the call, a franchise like Jackpot Party has more than 250 slot titles within the game. And the slot title roster is frequently updated with hit titles rotating in and out of the game. The ongoing efforts to keep improving these games is the foundation of our organic game pipeline strategy. This approach has led Jackpot Party, our oldest and largest game which increased revenue by 33% in 2020.

In previous quarters, we've discussed an effort to invest in certain game teams in order to increase development throughput by replicating the team's structure of Jackpot Party. We created a more dedicated focus on live ops, long-term features and tech quality by adding key team members. I am happy to say this effort is providing tangible success.

First, Gold Fish experienced its highest-ever revenue quarter in Q4. The team added several new daily events, including a collectible item feature called Greedy Grouper. These new live op features resulted in longer session times, increases in spend, higher average bets, more payers and more payer transactions. For those of you who aren't avid Gold Fish players, I'd encourage you to go check it out yourself.

Second, we recently tech launched a new version of Quick Hit Slots, which includes a more comprehensive meta game and increased live ops capabilities. We will discuss further details of this effort in upcoming calls as we are currently expecting this new and improved version to be launched worldwide by Q3.

And something I am really excited about is our push to expand our presence in the casual genre. Our expertise in data analytics, user acquisition and live ops, homed-in social casino games with a simple core loop mechanics translate well to the casual genre. We recently beta launched Solitaire Pet Adventures with the full launch on track for Q2.

Our strategy revolves around moving into genres with similar characteristics and demographics of social casino, where we can apply our strengths to fuel growth. We've had success with this strategy already with our casual game Bingo Showdown. As you know, Bingo is not a slot game, but it does have a similar game play or a simple core loop game dynamic.

As we execute the strategy, we will continue to add depth to our talent base, providing a path to build out a new casual pipeline. To that end, we will be starting a new game studio that will be focused on delivering a new casual game in the second half of 2022. Currently, we refer to this game as Project X. And as we progress, we will provide updates and details on future earnings calls. Our casual pipeline is enabled by the strong cash flows of our core social casino business, which provides the opportunity to concurrently explore M&A opportunities and organic new game development.

Now I'll turn the call over to Mike Cody to walk you through the financial information in more detail. Mike?

Thanks, Josh. Echoing Josh's comments, 2020 was a great year on a number of fronts. Focusing in on the fourth quarter, we generated $147.1 million in revenue, which was 30% higher than the prior year and above the estimated 26% market growth. Net income increased to $31 million versus $28.6 million in the prior year, including a $6.1 million increase in share-based compensation. AEBITDA increased 40% from $32.1 million in Q4 2019 to $45 million in Q4 2020. For the full year, we achieved our highest revenue and AEBITDA ever at $582.2 million and $188.7 million, respectively.

We achieved very strong results in essentially all financial metrics in the fourth quarter, and broadly speaking, the business remains very healthy. While the stay-at-home dynamic has dissipated from its peak in Q2, our social casino games focused on payers has been rewarded as key KPIs remain above pre-COVID levels.

For example, ARPDAU in the fourth quarter grew approximately 26% year-over-year to $0.63 from $0.50. Average monthly revenue per paying user increased 4% to $91.40. And payer conversion reached a quarterly record of 7.8%. To sum it up, our engine works as we are seeing our payers grow and they are spending more.

On the expense side, we continue to target user acquisition spend to breakeven at 6 months. Our ever-improving engine drives efficiencies, and we lowered sales and marketing expense as a percent of revenue to 22.9%, down 480 basis points from the prior year.

As we launch Solitaire Pets Adventure and expand our pipeline, we do expect to see an increase in our sales and marketing spend, both in dollars and as a percent of revenue. The level of spend will ultimately be determined by the returns as we grow DAU, but we currently plan to spend $6 million to $7 million on user acquisition for Solitaire Pets Adventure in 2021. The spend will start small and ramp throughout the year.

Our business continues to be highly cash generative, which provides us with the resources to pursue our revenue diversification strategy. In 2020, we generated $193.4 million in cash provided by operating activities. This represents an increase of $100.4 million or over 100% from the prior year. We ended the year with $268.9 million in cash and cash equivalents, which was an increase of nearly $160 million from year-end 2019. At year-end, our available liquidity, including our undrawn revolver, was $418.9 million.

Looking ahead, for the full year 2021, we expect to exceed social casino market growth of 4.5% for Eilers & Krejcik estimates. A couple of additional notes for the year ahead. First, as a reminder, from a seasonality standpoint, the second quarter 2020 benefited the most from the COVID stay-at-home dynamic, and as such, will be a difficult comp. And second, from a margin perspective, we will start putting the aforementioned marketing muscle behind Solitaire Pets Adventure beginning in the second quarter, and our research and development line item will include a new game team. We currently plan to invest $3 million to $4 million into this new game team in 2021. We expect these investments to have a high return and expand our position in the casual market. While this will cause variability in the interim, we reiterate our long-term margin target of 35% in the coming years as the business continues to scale.

We believe our foundation in social casino with our portfolio of established overviewing games built on high-quality casino floor content is unmatched. Coupled with our highly talented team and engine that powers our growth, we are positioned perfectly to continue to scale and expand further into new genres.

With that, we are happy to take any questions. Operator?

(Operator Instructions) And the first question will come from Alexia Quadrani with JPMorgan.

Just a couple of questions, if I may. The first one, kind of a bigger picture question on the social casino space, in general. We're seeing a fair amount of companies coming public in this space, and I'm wondering if that changes the competitive landscape for SciPlay at all. And maybe you can comment on how you see SciPlay positioned now versus the time of the IPO a couple of years ago.

And then my follow-up question is really just on M&A. In terms of acquisitions, sort of, really, how are you looking to as the next area for the development after Come2Play? And maybe you can elaborate a bit on how you plan on further expanding the IP you already own.

Okay. Alexia, this is Mike Cody. It's interesting. You're right. There's a lot of companies that have gone public recently, and I believe 7 of the top 10 social casino companies are now public. From our perspective, we actually view this as a positive thing. It has more people telling the same story that we're telling. They're reinforcing the message [about ever being] games. And so we don't see a downside to this. We've been competing against these companies for years. So from a competition standpoint, really no difference.

On the M&A front, certainly, we looked at Come2Play first. It's a casual game. For us going forward, as we're looking further into casual, we focused on casual games as well as social casino. We're looking across the size spectrum in terms of small companies, even smaller than Come2Play. And we may look at acquihires to larger, much more transformational acquisitions as well.

Got another question on IP. Can you clarify your question on IP? I want to make sure I get the right answer to that one.

Just to elaborate, you gave us some detail, but maybe you can elaborate further on how you're looking to expand the IP you already own.

Okay. So in terms of the SGIP, I think, is that what you're referring to?

Yes, yes.

Okay. So as you know, we have the rights, the perpetual exclusive for the first 3 years post our IPO. Our plan at this point is to use that IP pretty much exclusively in the games that we have today. As we expand into casual, that IP has a little bit less value. That's really more social casino-based IP. And so we'll continue to add that into the games. Josh mentioned, I believe, over 250 titles in Jackpot Party. So we're always rotating those titles in. And we want to make sure that we have a long runway of IP to continue to use in the future. And with over 1,500 titles, we believe we have that.

The next question will come from Matt Thornton with Truist Securities.

Maybe first, maybe for Josh, on Bingo -- excuse me, on the Solitaire title, how would you have us think about the size of that opportunity? Is Bingo Showdown a good proxy in terms of what the opportunity could look like there?

And just secondly, maybe for Mike, you talked about the 35% margin target. Can you remind us -- I think that was a 5-year target when you guys came public, so that would make it somewhere around like 2024. I just want to make sure that I had that right.

Thanks a lot, Matthew. So great question on the Solitaire. I think the better way to look at it is instead of trying to compare Solitaire Pet Adventure to Bingo, I would more compare it to other Solitaire games that are currently in the market. The major difference between our particular game and theirs is the difference between Klondike solitaire compared to Tri Peaks or Spider.

There are a couple of really good comps out there with like Grand Harvest, Tri Peaks. Both of them are doing very similar meta games around a simple core loop solitaire game. And we believe this is the potential that our game has once we're able to ramp it in the market.

And then on AEBITDA, we did reiterate our 35% long-term target. We still believe that's valid. However -- or I should say, within social casino, we are marching towards that 35%. No issues there. However, we have mentioned some investments we're going to be making in 2021 in the social or in the casual space.

So as you think about 2021 margins, I think you look at Q4 '20 as a good proxy for the year. It was 30.6%. We would anticipate being somewhere in that range for the near term, but then continuing our March towards 35% as we scale.

The next question will come from Matthew Cost with Morgan Stanley.

Two, if I could. So it looks like payers were actually up sequentially in 4Q and just below where they were in 2Q. So it seems like payers, that number looks really strong even as you got 6-plus months beyond kind of the peak of the COVID impact in 2Q. I'm just wondering kind of what were the drivers there and then how are you seeing those payers behave as we start to move into '21 out of that holiday period.

And then the second one was just on Project X. I was wondering if you could tell us a little bit more about that studio and how you're balancing decisions about when to start new studios and invest internally versus do stuff inorganically.

Okay. Thanks a lot, Matthew. So from the payers point of view, 100%. If you remember in past earning calls, we spoke about how we made our investments in technology in Q4 of '19, Q1 of '20 and really got all of our games healthy, which allowed us to 100% focus on live ops and new features. We saw the fruits of that labor through 2, 3 and 4 of last year, with some huge features released from both Jackpot Party and Gold Fish.

Gold Fish, which is, if you remember, the second of our Project All-Star -- sorry, it was the second of our Project All-Star, where we were able to build out the team and then also update not only the technology, but the foundation of the game. The game was running at full speed going into Q4 of this year, where it had all-time records across revenue and payers. We believe this is the new baseline for the core business going forward. And so we continue to expect to grow from there over time.

From the Project X standpoint, it's kind of a twofold. So the first fold was, as we were doing all of the investments in our current organic games, we focused all new talent onto those games. As we felt better and better about the future, we started looking at how do we expand the studios into more talent in order to build out.

As far as like what direction we go from there, it's really going to be based on probably 1 of 2 things. What simple core loop logic we already have on hand today, whether or not that's something in the solitaire world or maybe even the bingo world. Or what type of talent we are able to bring in from the design standpoint or a technology standpoint to open up more avenues.

But I think at the end of the day, the one thing we're very excited about is we feel extremely confident that we can take these simple core loops, plug them into our monetization UA and live ops engines and get the social casino-type monetization that we are seeing across our portfolio.

And one point of clarification back on Josh's first part of the answer. Project All-Star is our internal name for adding development throughput and copying the structure of Jackpot Party to other teams, just in case you weren't on our call last time.

Thank you, Mike.

The next question will come from Drew Crum with Stifel.

Okay. So it looks like Jackpot Party represented more than 50% of your revenue last year. Can you talk about what your expectations are for that game this year? And then separately, any trends, learnings you're willing to share, what you've seen during testing of Solitaire Pet as you move closer to that ramp -- or that launch rather?

So for the Jackpot Party, I'll start by saying we could not be more excited with the year that we had in 2020. It made us extremely more confident that our decision to copy that team structure and copy that technology road map will make us more successful in the future. We have the same expectations for Jackpot Party. We expect it to continue being a market leader and continuing to outperform market growth as we have one of the most talented teams in the world running the game on a day-to-day basis.

So from the -- sorry about that. From the learnings of [spot], at this point, we are in technical launch of it. So we don't have engagement metrics on it that we would use. But what I would say right now is from a technology standpoint, the game is as solid as we could hope it would be and is beating all of the benchmarks that we had set forward. And we do not believe that the soft launch will be delayed, which we still have coming in Q2 of this year.

The next question will come from Chad Beynon with Macquarie.

Congrats on the results. Mike, you were kind enough to mention that for 2021, you plan to exceed Eilers estimate. I was wondering if you could help a little bit on a seasonality basis. Just kind of looking back over the past couple of years, the seasonality was obviously different than what we saw in 2021. So could you maybe help us a little bit just think about what that should look like from a rank order standpoint, obviously, benefiting from Solitaire and some of the live ops that you'll see in the back half?

Yes, absolutely. So obviously, pre-COVID, seasonality, you're right, was very different. Typically, you would go Q4, Q1, Q2, Q3, roughly about the same. And so obviously, Q2 was much larger last year. We don't expect to repeat that. And in our prepared remarks, we also mentioned that it will be a tough comp. So if you're stack ranking again for next year, we would expect to be back-end-weighted with Solitaire Pet Adventure launching, with the new Quick Hit coming out, things of that nature.

So probably, again, Q4, it would be interesting to see how, again, Q3 and Q2 do versus Q1. But I think we expect to see some sequential growth in all quarters.

Okay. Appreciate that. And then any updated views on Apple's changes to IDFA and how that will impact the outlook?

Yes. As of today, we are very confident that it will not have any negative impact to our outlook. We have been preparing this change now going on 9 months. We believe we're ready for the changes that are going to happen with the IDFA and also the changes with the SKAdNetwork. But like I said, we believe we have everything in place that when they make that change official and it goes live, we will continue to be able to efficiently run our marketing spend as we have been doing for the last few years.

And if you think about how our games cohorts have been built over the years, a lot of our monetization comes from payers who have been in the game for many years, including -- again, like Jackpot Party has more than 50% of its revenue coming from players within the game since 2017 or prior. Obviously, no one (inaudible) with them.

The next question will come from Ryan Sigdahl with Craig-Hallum Capital Group.

Just curious on the decision to start a new game studio to develop casual games, Project X versus using Come2Play or even existing SciPlay studios.

Okay. So Ryan, I mean, technically, we may use the Come2Play studio or one of our existing studios. So I think the way that we would think about it is we may build out in Austin, Cedar Falls or Tel Aviv. We may utilize the development center in Kiev. I think the part that we look at it is what we are saying is we're going to internally have resources that are -- from our SciPlay team or we're bringing someone on external, and we're going to build out from the beginning ownership of not only the design document, but the technology and then all the way through the launch phase. But it may end up in any of the location, which we will talk about it in later calls.

Got it. That's helpful. Then you talked about quarterly cadence on revenue. Just thinking on margins, it sounds like costs for Project X as well as UA for Solitaire Pets were ramped throughout the year. So is it fair to assume kind of sequential declines in EBITDA margin throughout the year?

Well, it really depends again on our sales and marketing spend and how we're seeing returns there. So you will see fluctuations in a core business. I don't think it's going to be materially different by quarter, again, using Q4 '20 as a proxy.

Your last question will come from Mike Ng with Goldman Sachs.

SciPlay has a lot of cash building up after some strong cash flow generation, particularly this year. I was just wondering if you could talk a little bit about your M&A strategy. How aggressively are you guys seeking to roll up another studio after the Come2Play acquisition?

Yes. Thanks a lot, Mike. So it's hard to say. So there are a lot of companies that are out there. The companies that are out there, some of them are very promising and have not only amazing growths, but amazing balance sheets out there. I do think that we want to continue focusing on companies that fit our core process going forward. So something in that simple casual field that has a simple core loop that we can plug our engine into and help them grow faster than they were. So 1 plus 1 equals more than 1 -- or more than 2.

And then on top of that, making sure that we're finding companies that fit SciPlay's culture. So we have built a culture of not only wanting to won -- win, but wanting to win together and making sure that any other company that we bring in plugs in not only in the number side but also plugs in on the culture side as a whole. I think we will continue to be extremely active in looking and evaluating every option that is out there. But I do believe that it has to check those first 2 boxes in order for it to be something that we would proceed on.

This concludes our question-and-answer session. I would like to turn the conference back over to Josh Wilson for any closing remarks. Please go ahead, sir.

Thanks for joining, everyone, today. We really appreciate your support. We are truly excited for 2021 as we continue to grow organically and continuing to expand our presence in the casual segment. We look forward to updating you on our continued progress during the first quarter call. Thank you, and have a great day.

Thanks, everyone, for joining us on the call. We'll be available after the call for questions.

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