Sciplay Corp (SCPL) 2020 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the SciPlay 2020 Second Quarter Investor Conference Call. (Operator Instructions) Please note, today's event is being recorded.

Now let me turn the call over to Trent Kruse, Senior Vice President of Investor Relations for SciPlay. Mr. Kruse, you may begin.

Thank you, operator, and good afternoon, everyone. During today's call, we will discuss our second quarter 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 statements 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 relating to this call posted on our website and our filings with the SEC. We also will discuss certain non-GAAP financial measures. 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 press 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 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. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call.

I will now turn the call over to Josh. Josh?

Thanks, Trent. Good afternoon, everyone, and thanks for joining us.

I am so proud of our team for producing record results in the second quarter. We delivered significant and compelling enhancements to economies, game quality and live ops across our portfolio that allowed us to truly capitalize on the surge we have seen in player demand as well as new features such as island hopping in Gold Fish and tournament of champions in Jackpot Party. As a result, we generated record quarterly revenue of $166 million, up 40% from last year, and our AEBITDA increased 80% to $60 million, also a quarterly record. ARPDAU increased 40% to $0.67; average monthly revenue per payer increased 24% to $101.13; payer conversion grew 80 basis points to 6.8%; and we saw our mobile penetration increase 4 points to 87%. All of these KPIs represent record levels and demonstrate the incredible position all of our games are in.

Looking at our portfolio of games, we saw Gold Fish drive outstanding results and also saw strong growth from Jackpot Party, Quick Hit and MONOPOLY. We are very confident we have strength and momentum in all of our games that will enable us to outpace industry growth in 2020.

In addition to these amazing results, we also acquired casual game developer Come2Play during the second quarter. We are extremely excited to welcome the Come2Play team to SciPlay as this is a perfect match when it comes to both product and culture. Adding a new genre of evergreen casual games and incredibly talented team to our portfolio immediately expands our market beyond social casino apps and enables us to leverage our unique technology and strategies to drive player engagement and grow revenue. We believe with our support and expertise in user acquisition, analytics and live ops, we will be able to work together to drive significant growth in the Come2Play titles.

As mentioned, one of our core strategies has been to bring the best content and supercharge it with our support. A great example of this was our last acquisition, SpiceRack, which brought the popular bingo game, Bingo Showdown, into our portfolio in 2017. We drove incredible results following the acquisition by more than tripling the game's revenue. We plan to utilize the same success model to bring Come2Play into our portfolio.

On the international front, we continue to run UA testing with MONOPOLY and have expanded to multiple countries. We have undertaken app store optimization efforts to attract organic installs and have seen some success. We will continue to experiment with varying levels of spend and monitor monetization results of both paid and organic installs versus our more traditional markets. Other games will begin to implement similar technology solutions to lessen international player friction in the future.

We are also excited about implementation of updated organizational structure across our game teams. The incredible success of Jackpot Party and the key learnings we have developed from that team design have led us to decisions to implement the same structure across all of our games. With this new team alignment, we will have dedicated teams surrounding live ops, feature implementation and tech and quality improvement. We believe this enhanced team design will allow us to deliver a more seamless player experience, faster updates and deeper meta game experience for all of our players.

And finally, we continue to actively support several exciting M&A possibilities, which will allow us to further broaden our portfolio and leverage our significant capabilities around data-driven user acquisition, engagement and monetization to continue to drive growth.

To wrap up, our team is eager to execute our winning strategy, explore new growth opportunities, keep improving our games and drive enhanced results. We continue to believe we are in very early stages of a multiyear revenue growth and earnings expansion cycle at SciPlay, and we couldn't be more excited by our future prospects and opportunities.

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

Thanks, Josh.

In the second quarter, we generated record revenue of $165.6 million, our AEBITDA increased nearly 80% to $59.6 million. The growth was driven by strong trends throughout our portfolio of games, the benefit of the stay-at-home dynamic and the operating leverage in our business model.

Net income was up over 86% to $48.8 million versus $26.2 million in the prior year. Net income margin increased 730 basis points to 29.5%.

Sales and marketing expense of $35.1 million represented 21.2% of revenue, which was down 260 basis points from the prior quarter. The $35.1 million represents our largest dollar spend in a quarter. And with CPIs down and the strong revenue growth we saw in the quarter, we saw significant leverage in our UA spend. We continue to expect some variability in spending as a percent of revenue from quarter-to-quarter, and we will look to continue to leverage our portfolio approach to spend into the games and channels where we see opportunities for the highest returns.

We generated $52 million in cash provided by operating activities, an increase of $34 million or over 189% from the prior year. We ended the quarter with $156.1 million in cash, which was an increase of $23.5 million from the first quarter. This includes $26.7 million combined for our acquisition of Come2Play and our annual tax receivable agreement and related payments. The Come2Play acquisition closed on June 22.

At quarter end, our available liquidity, including our undrawn revolver, was $306.1 million. We achieved very strong results in essentially all financial metrics driven by record KPIs in the second quarter, which led to our top line growth far outpacing the market growth rate. We are well positioned from a financial perspective to continue to grow our existing portfolio of games given our large library of proven IP and strong feature road maps as well as entering new game categories with the addition of Come2Play. As previously stated, we expect to achieve market growth for the back half of the year.

With that, we're happy to take your questions.

(Operator Instructions) And our first question comes from Alexia Quadrani of JPMorgan.

Can you provide us a bit more color on how revenues trended within second quarter. And specifically, maybe a bit how you think it was influenced by the stay-at-home orders and whether you think that is sustainable looking forward.

Certainly. Alexia, this is Mike. So I think to properly tell the story of Q2, you have to go back to Q1. And when we implemented some quality, economy and feature enhancements in Q1 to prepare ourselves for what we expected to be growth in the back half of the year, it fortunately put us in really good position when COVID occurred. And so we saw the spike starting in the back half of March as we've talked about previously. Our growth continued into April, which we talked about again being a record month. Well, May outpaced April and really was the peak of the stay-at-home impact with everybody with a lot of free time on their hands. So June has now softened a little bit relative to May when the stay-at-home order was lifted. But we've remained at a higher baseline relative to the pre-COVID period. So we're confident that the second half of the year will be strong because we have a good strong road map and feature releases planned. We feel all of our games are in really good positions. And talking about going forward from here, it's really hard for us to predict where this will all end up. As you know, COVID is an ever-changing situation. So we think we put ourselves in a good position to succeed, but it's really, really hard to get to a firm answer.

Okay. And just a follow-up, if I can, on the Come2Play acquisition. Just any color on how you think it could potentially expand the player base.

Yes. So this is Josh, Alexia. The Come2Play acquisition, we're very excited about it, immediately gets us into the board game and also the solitaire market on Day 1. Both of those markets are very large DAU as most of the casual game market as a whole. We are super excited that the team is great. They fit SciPlay amazing and on Day 1 hit the ground running. But we are really, really excited about the game that they have in tech launch right now, which is Solitaire Pets Adventure. This is a Klondike game with a meta around it, which is a first of the kind in the market today. And so as we all know in the mobile games world, first-to-market games have the potential to grow. And as I mentioned, we're in the tech phase right now. My assumption would be that we would expect to start seeing the ramp in 2021.

Our next question comes from Shweta Khajuria of RBC Capital Markets.

Okay. Let me try 2, please. First, on ARPDAU, the growth there at 40% was very strong. And I'd love to hear your thoughts on sustainability of that in terms of your ability to continue to monetize the players on a go-forward basis and also just what drove that strength and any particular product improvement or feature improvement that really drove that growth? And then second, can you please talk about what you've seen in July so far.

Okay. Sure. This is Josh. I think Mike and I are going to kind of tag team this. I'll handle the game side of it. Yes, we saw a great increase in ARPDAU during the quarter. Part of that is the work from home, where people had more days a week that they play. But a large part of it was our shift to focus on live ops monetization and be able to engage the player throughout the entire week, almost as if every day was a Saturday, Sunday. And because of this, we were able to get more monetization to happen across our entire portfolio all 7 days a week, where it normally looked like the weekends are the peak and the weekdays are the low. Basically, everything came up. We have, as Mike mentioned earlier, these KPIs did start to come down a little in June. But for the most part, they are all above what the original baseline was inside of pre-COVID, which does make us confident that we're going to be able to retain a higher baseline overall.

Yes. And in terms of July, so picking up from where Josh left off, we're not prepared to give any numbers for July today other than to say that, as Josh mentioned, we are seeing a higher baseline than the pre-COVID period.

Our next question comes from Matthew Cost of Morgan Stanley.

Two, if I can. So obviously, a lot of casinos have been closed across the country over various time periods. Some are reopening now. Can you talk a little bit about specifically what impact do you think that might have had on your portfolio maybe in terms of channeling some engagement that might have otherwise gone to casinos into your portfolio. And then do you expect perhaps a reversal of that as we see large-scale casinos opening up across the country? And then the second one is just on the margin trajectory. Obviously, you saw a lot of leverage come through in this quarter just driven by the extraordinary strength in consumer engagement and spending that you saw payer penetration ratio up. You've spoken last year about kind of a 35% margin target over maybe a 3- to 5-year time frame. Has that accelerated at all as a result of this?

Matthew, I think, once again, Mike and I will just kind of tag team here. I'll handle the first part of the question. The great news is really across the country, we saw a tightness on all states, even in other countries outside of the United States and jurisdictions that may not have casinos also. So where there may have been a benefit to casinos being closed, we do not believe it was the major mover of our great quarter. The good news that we look at is, the ones that did come in from the casino, they now got a chance to play our amazing games and our amazing titles, which gives us a really good chance of retaining them as the world opens back up in the future.

And Matt, your question on AEBITDA margins, obviously, we're quite happy that we're able to exceed our 3- to 5-year stated goal of 35%. However, as we think about the future, you can see as you scale the revenues, we don't have to increase cost at the same pace. So that's how we got this expansion. But as you think about the future and the uncertainty around COVID, we're not sure how this is going to play out going forward. So for now, I think that we will maintain our same 3- to 5-year target of 35%.

Our next question comes from Franco Granda of D.A. Davidson.

Congratulations on the strong results. I was particularly surprised at how little you spent on UA in the quarter given the revenue levels. I guess, was this a function of enhanced monetization of your existing player base or simply a better payout on each dollar you guys spent in the quarter?

So Franco, yes. So I guess, first, we spent the most we've ever spent in a quarter, and that did help drive the revenue. CPIs were favorable starting in late March, stayed favorable early into Q2 and then started to harden in, I guess, late May and into June and kind of back to where they were prior to the drop at the beginning of COVID. For us, ultimately, it's kind of a, you look at the percent of revenue being much lower than our kind of original target that we've talked about in the past, it's really a math issue. The revenue spiked so quickly and we spent to our same LTV positive of 6 months or better and maintained our portfolio approach to how we spend across channels and across games and we're really happy with the results. We're able to grow the revenue to record levels and also grow AEBITDA at a record level. So again, really positive, and we think we've got a good mix rather than trying to chase revenue that may not be the best spend with our UA dollar.

Okay. And then one more for me. What are you seeing in terms of spending habits for your player base, particularly on the new player base that you acquired in the second quarter?

Yes. No, that's a great question. Really, if I look at the individual player, the LTV and the LTV curve looks extremely similar to the way it had been the previous year before. The way I'd say that is, if a person looks like they were going to be a $5 person over 6 months, they still look that way today. The major difference in the quarter was we got a higher percentage of payers that came in each day, which allowed us to increase our marketing spend, as Mike said, and bring in more.

Our next question comes from Ryan Gee of Bank of America.

Can you help us or can you help us understand the disconnect between the year-over-year growth, the strong growth in revenue and ARPU versus kind of the unchanged audience in terms of both players and payers. I mean, it seems to suggest that a big part of all of this is, hey, more leisure time at home, sitting idle, playing games, which is to be expected. But at the end of all this when we take away that idle time, what spending patterns would look like? Has COVID really transformed your business in terms of audience and whatnot? So not sure if you agree with any of that thinking, but just wanted to get your thoughts on that. And then I have a follow-up.

Okay. Thanks, Ryan. I think Mike and I may actually piggyback on each other here a little bit. So I did want to start with, yes, when you look at it year-over-year, it does look very flat. But actually, quarter-over-quarter, it did grow, and it grew across the entire portfolio in both MAU and DAU. As we have progressed over the past year, we have really focused on converting payers and keeping payers in our game long term, which does cause us to spend less looking for the nonpayer DAU and spend more looking for high-value DAU. This is why over the course of the last year, you have also seen our average revenue per monthly payer increase during this time because we are getting more and more valuable DAU in our portfolio.

Yes. And just to add on, so I think Josh said it well. I mean, it's really the audience did spike back up in Q2 from the prior quarter and they were spending more. So those 2 things are a flywheel and kind of jumped on each other and just kept going forward. So obviously, our job is to maintain that going forward and try and make these games a part of people's habits and then play every day going forward with this newfound audience. So we think there is some sustainability at some level, but we just don't know what that is yet.

Okay. That's super helpful. And then a follow-up would be just looking for transformational change here. Has the uplift that you've seen outside the U.S., how has that compared to sort of the uplift that you've seen in the U.S. where social casino is much more prevalent? I mean, do you feel like social casino internationally has really taken hold and can be a much bigger market going forward from here?

Yes. So the answer to your question is yes, but I will caveat. We did see the largest amount of growth happen in the U.S. as that is the largest section of social casino players. We did see other first world countries increase, including the number of installs. Unfortunately, what we didn't see is the revenue per user spike with the installs like we saw in the U.S. It is definitely an opportunity for us. We may have to change the game in order to optimize their behavior in the future.

Our next question comes from Matt Thornton of SunTrust.

Maybe 2, if I could. First, you talked a little bit about some of the new features and content that launched 1Q into 2Q. Just curious if you're able to tease apart, maybe quantify maybe what kind of lift you got from some of the new features, new content or at least kind of what titles those kind of came through in. And then just when you take a step back and think about linearity and kind of cadence to the year when you think of new features, do we expect acceleration in 3Q, 4Q? Are we on kind of on an upward trajectory in terms of the delivery of content or is it fairly steady looking forward? And I've got one follow-up and I'm good.

Okay. So well, actually, Mike and I will kind of tag team once again. I'll start with the second question. We have an extremely exciting road map coming into the back half of this year across the entire portfolio. The great news is, even though during the time of COVID, we did pivot to be much more of our development on live ops. We were able to keep our feature teams moving during this time. So we plan on doing a full release of meta in all of the third and fourth quarter of this year.

And on your first question about kind of quantifying how features play out in the games and versus COVID impact, it's really hard to break that apart. I mean what we can say is, when we launch certain new features like tournament of champions in Jackpot Party, for example, those features cause players to play the games longer and do stay in the game for a longer period of time and perhaps come back more often. And so we do see some change in behavior when those features occur. So we're confident that, that's part of the mix, but it's really hard to kind of break that out at this point. And so I don't think we're able to do that for you here.

All right. Fair enough. And maybe one just quick follow-up, if I could. Obviously, Apple's getting ready to make some changes here to the ability to kind of track in-app starting in September. Just curious if you have any thoughts on whether that might have any type of an impact on either advertising or in your case, user acquisition given you guys don't have any advertising in the business, but just any thoughts on any potential impact.

Yes. Great question, Matt. When you're dealing with external partners that do get to make choices, you always have to be on your toes and be able to pivot to whatever new rules and regulations come out. Where this change will cause us to have to internally change how we measure their performance, we feel very confident that we are going to have a solution that will allow us to continue effectively spending our marketing money on all platforms like we are today.

Our next question comes from Bryan Kraft of Deutsche Bank.

This is Ben on for Bryan. My first is on the organizational structure changes. I guess would love to get a little bit more color there, both in terms of when you think we can start seeing the impact and are there any costs associated with making these changes?

Yes. Thanks, Ben. That's a great question. So I'm going to try to move as fast as I can because I want to give you the color on why and then get into the timing. So as we made these changes at the end in 2017 with Jackpot Party, what we were able to do was create individual swim lanes inside of a team that would allow the team to focus on multiple areas at once. So we created a future customer team or meta game team, a technology team, which is basically always making the app run faster and a monetization team, which is focused on the day-to-day of the user. Now this was the first time inside our company that we had done this. All of our other games basically had to choose between 1 or 2 of those lanes at a time. We've made the investment in early June this year to move our next 2 largest games into this model. Some of it was internal moving of people. A lot of it is going to be new hires which will all take time. So where we believe we'll be building up the teams and starting to get things moving, running smoothly, we probably won't see the impact until 2021 when that team can start releasing features into the game.

And Ben, in terms of cost, it's stuff that fits exactly within our trajectory of planned spend, so this is not a material impact.

Got it. Makes sense. And then one more on costs, really. So I mean, obviously, costs were up this quarter, which is clearly a very strong investment by you guys. I just wanted to get more information from you guys on how you think about how much to spend, would spending more on marketing generate more growth and higher returns, how do you guys think about balancing what the right level is?

Yes. So today, and this has been true since Day 1, we spend all of ours up to a 6-month ROI on all spend. So whatever that CPI is going to cost us to the individual, we want to be breakeven within that 6 months. And we spend 100% up to that cap. So it does go up and down mainly based on how CPI inflection goes. So in a normal year, for example, January, February, CPIs all go down. We're spending a lot more. On the flip side of it, December CPIs go up, we tend to spend less. So it is very fluid. Do you want to give any feedback?

Yes. I mean the only other part I would add is, as we talked about in the past, we manage this as a portfolio across all of our games. And so we'll shift and move money around based on how certain games are performing, and what kind of monetization we're seeing versus the CPI. And that's been consistent with what we've done from Day 1.

(Operator Instructions) And the next question will come from Chad Beynon of Macquarie.

I just wanted to ask a general one on the product road map. You guys noted some strong success within your portfolio, I guess, mainly for Gold Fish in the quarter. Is there room for another organic launch or do you think the best path for organic growth, particularly given what you've been able to achieve from a monetization standpoint this quarter, is to really do that and just continue to focus on bringing up some of the core games that aren't producing strong metrics as the others?

Yes. So to the last part of that, we absolutely have some huge opportunities in all of our games, by the way, including Jackpot Party. As we know, like there are people in the industry that have a significant higher ARPDAU than even Jackpot Party does, which does give us a lot of confidence that we have all that room in all 7 games now including the Come2Play games, too. Organically, it's probably a mixture for us. Some of this, we kind of look at the Come2Play acquisition as an organic game, where we basically, the purchase price got us a built game that is then tech launched, which is a very similar process that we would internally do, which is invest resources into a game, have the cost, then we tech launch it, and then that's where the future comes. It doesn't stop us from doing any new game organic growth. We will continue to look at all the opportunities there. And if we feel confident that we have the team that can do it and the skill set for that simple core loop, it will definitely be something that we look at on our road map.

Okay. Makes sense. And then, Mike, just on back on the balance sheet, your cash position is extremely strong even after making this accretive acquisition. How should we think about how you're going to use this strong balance sheet over the next couple of years. Is it kind of a wait-and-see approach or just kind of keep some dry powder around and analyze other opportunities or is there a right amount of leverage that you would feel comfortable with leveraging up?

Yes. I think as we've talked about, we're going to continue to use the cash to build out this business, whether that means more team members, user acquisition or M&A. As we just talked about, we did Come2Play as a small acquisition. We continue to look across the size spectrum for more acquisitions. So that's certainly something that's in play. But again, it's all about doing whatever we can to continue to build out the business. In terms of leverage, that's something we'll discuss at the right time. Right now, that's not an issue for us. And so I think we'll hold off on giving any kind of targets there.

Our next question comes from Ryan Sigdahl of Craig-Hallum Capital Group.

So you mentioned focus on keeping paying players and adding the higher value DAUs. So is it reasonable to assume that DAU, MAUs could be flattish to down going forward, but ARPDAU and conversion increasing and more than offsetting kind of that flat to declining overall user base?

Yes. So I think, Ryan, this is Josh. So first and foremost, we're always going to continue focusing on retention, new user monetization and also optimizing CPIs so we're able to bring new users in. And as long as we keep focusing on that, the potential of growth does happen and is there. So I don't want to say that we will not grow because there's a very good chance that you do see us grow. On the flip side of that, we are going to focus, continually focus on the monetization or the live ops side. As we continue to find ways to engage the players more days a week and more time during a given day, that's really our secret sauce for getting more monetization opportunities is by increasing how many times a week they come in and how long they play, and it gives us more chance to get them into our monetization loop more often during the week.

And I would add on to that, that you have to also think about our individual games and products and their life cycle. So you think about a game such as Solitaire Pets Adventure that we believe is in tech launch, certainly it needs to acquire users and will grow its MAU and DAU as it matures. And so it's a little bit different for some of the games that are further along in their life cycle.

Great. Then just on international, relatively small, but growth was nearly 100% year-over-year in the quarter. What was the primary driver of that outsized growth? And then do you think there are elements of the Come2Play acquisition that could help accelerate that expansion?

Yes. So a good part of the growth is actually a lot of ASO efforts that we did throughout our portfolio to help drive in new installs and people throughout international. We also pushed forward with our MONOPOLY test, which is our first game that uses international servers to give a more frictionless experience to our customers. And we saw positive results from that also. As far as -- sorry, what was the second part of the question? I'm sorry, I...

Yes. Just on the Come2Play acquisition, if that helps accelerate if there's infrastructure, if there is, et cetera?

Yes. Well, the good news here, any place that Klondike solitaire is played, it is a huge DAU opportunity for us. And Klondike solitaire is a worldwide game. So we look at this as the opportunity to grow the DAU internationally on this game because it is a generally played game anywhere.

Our next question will come from Drew Crum of Stifel.

So Mike, just want to get a clarification on your comment for the second half. Are you expecting to meet or exceed market growth? And is that number still in the mid-single digits range. And then for Josh, just a comment on Bingo Showdown and its performance. I know there was a Unity conversion earlier in the year and some enhancements introduced into the game as well.

Drew, so this is Mike. So on the question for the second half, as we've always stated, we expect to beat market. And market, I've seen some recent updates on market for the full year being roughly 15% to 17%. So that's our expectation in terms of, we should be able to beat the market, and that hasn't changed.

And Drew, for Bingo, yes, so Bingo also continued to move forward since its rewrite. As you know, we released the Unity version towards the beginning of this year. During that time, we were able to get the technology all sewed up and now to the point where we believe the technology is finished, and now we're able to get back to focusing on live ops, new features and economy changes. So what I would expect over the next 6, 9 months is a shift in focus of the team from technology to giving the customers more reason to play the games longer.

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

Thanks for joining us today. We appreciate your support. The team at SciPlay is incredibly excited about our record-breaking results in the second quarter and for our future given the strength of our games and the untapped growth opportunities we have ahead of us. We are committed to delivering strong results and returns for our shareholders in 2020 and beyond. I look forward to updating you on our continued progress during the next call. Thank you.

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