Earnings Transcript for SCPL - Q1 Fiscal Year 2021

Operator: Good day and welcome to the SciPlay First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Jim Bombassei, Senior Vice President of Investor Relations. Please go ahead.

James Bombassei: Thank you, operator. During today's call, we will discuss our first quarter 2021 results and operating performance followed by a question-and-answer period. With me this morning 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 different materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this morning, 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 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 Investor 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 Investor 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 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?

Josh Wilson: Thanks, Jim. Good morning, everyone, and thanks for joining us. In the first quarter, the team continued to execute at a high level and deliver strong top and bottom line results. We have some of the best talent in the industry and our consistently solid results are the testament to their hard work. In addition to the strong performance this quarter, we are evolving SciPlay for the future, setting in on the path of long-term growth as we expand into the $20 billion plus casual market, diversifying our revenue streams and growing our game pipeline. Revenues grew 28% and outperformed the social casino market. The growth is driven by broad-based strength across the portfolio and built on the gains we made in 2020. In particular, I'd like to call out Gold Fish for setting its second consecutive quarterly revenue record. AEBITDA increased 32% to $46 million, our payer focus and live ops strategy produced sequential growth in our key monetization metrics and we achieved a payer record conversion of 8.1%, the fifth consecutive quarterly record. We continue to enhance our evergreen franchises with new features and content to keep our environments fresh and engaging, leveraging our data and analytics and our live ops strategy to drive increased monetization. Ongoing efforts to keep improving games is the foundation of our success, strengthening our portfolio of social casino games and driving growth. Quick Hit is a prime example of this strategy. It is being fully redesigned to capture the thrill and authenticity of a live casino. The new version is currently in soft launch in limited countries. We anticipate moving to our worldwide launch in early Q3. The redesign promotes greater engagement through the immerse and integrated meta-game and improves the performance stability. The advanced live ops strategy is anticipated to extend session time and drive frequency of play resulting in increased monetization. The evolution of Quick Hit is similar to the path of jackpot parties. And we expect great things from this team in the future. The success of our game is underpinned by the SciPlay engine. With the foundation and rigorous and disciplined data knowledge and practices, the SciPlay engine drives the sustained growth of our games, informs our product decision enables efficient user acquisition funds and fine tunes are ever-improving live ops strategy. The power of the SciPlay engine grows with each passing day. As our engine collects and analyzes increasing amounts of data on the players’ behavior, we continue to gain new insights and refine our approach, enhancing the player experience and increasing our ability to engage, and ultimately monetizing our players. Best of all, it is portable to other games genres. As mentioned in prior quarters, our strategy revolves around adding games and game genres of similar characteristics and demographics with Social Casino where we can apply our strengths and our SciPlay engine to build growth. To this end, we are committing to diversify our revenue base into the $20 billion capital market. Recently, we took an important step in this journey with the successful completion of the tech launch of Solitaire Pet Adventures. And on April 19, move to the soft launch phase. This phase is just broadening our geographic reach and beginning to invest in limited user acquisition to gather more data on engagement and retention methods. While it is too early to give specifics, our tech launch phase showed excellent KPIs in terms of stability and pass rate which are the foundations for a scalable and sustainable game franchise. Our capital pipeline is enabled by strong cash flows of the course of the casino business. Our Project X initiative, a new game studio that will focus on delivering our new casual game in the second half of 2022 is on track. We expect to build a pipeline of games as we scale talent. We look forward to providing you updates and details on our progress. On a note, IDFA as most of you likely know, Apple moves forward with releasing iOS 14.5 on April 26 and with that came the long awaited deprecation of the identifier for advertisers or IDFA for iOS. Our teams are diligently working in this new environment. But as a reminder, we don't anticipate meaningful impacts. More than 50% of our revenue is generated outside of iOS. More than 70% of our revenue comes from players already participating in our games. And our current games are based on in-app purchasing rather than in-app advertising. We've prepared for this change and as we do with all of our evergreen games, we will evolve and adapt our user acquisition process and methods to ensure we continue to attract new players into our games. It's an exciting time to be part of this tremendous organization. We have a solid core of social casino games. We continue to enhance those franchises through our SciPlay engine that keeps them fresh and engaging. We are buying this expertise into our expansion into the casual space and we'll layer in additional opportunities through organic development and M&A. We are moving quickly to evolve this organization, putting it on a long-term path of sustainable growth and enhancing shareholder value. Now, I'll turn the call over to Mike Cody to walk through the financial information in more details. Mike?

Mike Cody: Thanks Josh. This was another strong quarter of execution and monetization, building on the games made in 2020. The teams continued to execute at a high level and we feel great about our performance and the direction we're heading. In the quarter, we generated $151.1 million in revenue which 28% higher than the prior year and above the estimated 22% social casino market growth. Net income increased to $37.9 million versus $31.1 million the prior year. AEBITDA increased 32% from $34.8 million in Q1 2020 to $45.9 million in Q1 2021. Our AEBITDA margin in the quarter was 30.4%, in line with Q4 2020. Our payer focus and live ops strategy continues to be rewarded as ARPDAU grew approximately 37% year-over-year to $0.67 from $0.49. Average monthly revenue per paying user increased 11% to $92.80 and payer conversion reached another quarterly record of 8.1%. This quarter is yet another proof point that our engine continues to grow payers and increase their spending. On the expense side, we continue to target user acquisition spend to break even at six months. As our engine continues to drive efficiencies, we have lowered sales and marketing expense as a percent of revenue to 23%, down 80 basis points from the prior year while increasing the overall spending dollars. As we discussed last quarter, Solitaire Pets adventure is expected to increase sales and marketing expenses. We continue to expect spend of $6 million to $7 million on user acquisition in 2021, but the level of spend will ultimately be determined by the returns as we grow daily average users. This spend will ramp up throughout the remainder of the year. We also continue to expect that we'll invest $3 million to $4 million in additional R&D spend in 2021 as we build out the team that will develop our next game in the casual genre. We believe these investments in marketing and R&D will have a high ROI and are facilitating our diversification in the casual market. As we expand our pipeline, we are creating multiple levers of growth and shareholder value. While this will cause variability, we reiterate our long-term margin target of 35% in the coming years as the business continues to scale. In Q1 2021, we generated $19.6 million in cash provided by operating activities as our business continues to be highly cash generative. During the quarter, our net cash provided by operating activities was impacted by the timing of payments from our platform providers which was partially offset by higher AEBITDA. Further, net cash used in financing activities increased due to taxes paid related to net share settlements under the stock compensation plan. We ended the quarter with $272 million in cash and cash equivalents which was an increase of $3.1 million dollars from year-end 2020. At quarter end, our available liquidity, including our undrawn revolver, was $422 million. We continue to expect that we'll exceed the social casino market growth of 4.5% per Eilers & Krejcik estimates for the full year 2021. 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. Our evergreen social casino portfolio has never been stronger and we believe our revenue diversification growth strategy led by our investment in the casual genre will enhance our ability to deliver long-term shareholder value. With that, we’re happy to take any questions. Operator?

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bryan Kraft with Deutsche Bank. Please go ahead.

Bryan Kraft: I want to ask you two if you don't mind, first, how should we think about trends in the business as markets increasingly reopen this year? Are you seeing any changes in user behavior in markets that have reopened to a greater degree versus some of the other markets that have been slower to open? And then separately you guys have talked about your revenue outlook in the context of the social casino growth rate as you just mentioned. Curious how you think about your longer-term revenue growth outlook as you expand into casual? Do you think that that enhances your growth outlook and allows you to grow at a significantly faster growth rate than the industry? Will it change how you think about that growth opportunity for the business? Thanks.

Josh Wilson: Okay. Thanks, Bryan. But I think Mike and I will probably tag team this one. I will start with the trends in the business. So the good news is as things have opened up as the world has continued to get back to normal, we've seen actually more engagement inside of our games quarter-over-quarter. So I would actually say we're seeing - we're actually seeing our games take over and people are playing them as a form of entertainment whether or not they're going back to work or not. And so for us this is a very encouraging sign because what it means is we just have more people playing even though the world is getting back to normal.

Mike Cody: And Bryan on your revenue question for the long-term, obviously, we talked about social casino being roughly 4.4% to 4.5% of long-term growth rate. That's where most of our games are and it's about $7 billion TAM. We're expanding into the casual space which is a much larger TAM. Growth rates are projected anywhere from kind of high-single digits to upwards of 20%. So, we think there is a larger growth opportunity there. And just by the fact that we're not in that space, we will be able to grow faster as well. So, we haven't set a specific target, but we do believe there's a large opportunity ahead of us.

Operator: Our next question comes from Alexia Quadrani with JPMorgan. Please go ahead.

Alexia Quadrani: Just two questions, if I can. The first is as you continue to diversify revenue outside of Jackpot Party I think it was about 50% of revenues last year. I guess where do you expect to see the largest gains in 2021? And then secondly if you can just comment on the M&A pipeline I know it's a very competitive space right now. I'm curious how robust you think the pipeline is and how competitive it is to survive it right now to get those deals done?

Josh Wilson: Yes, thanks, Alexia. And I think Mike and I are going to tag team again here. As we continue to diversify Jackpot Party, the way I would kind of think that, we actually could not be more proud at Jackpot Party, more proud of the team. They've been able to basically help us develop a model that has gotten basically the outlook where we're able to grow at a multiple of markets. And Jackpot Party has been on this model now for call it three years and they've continued to outperform the market every year. We expect that going into the future, so 2021, 2022 and on. We're able to put that model into both Gold Fish and cricket and we are seeing the exact same thing which now makes us very confident that we are going to be able to take that throughout our entire portfolio. And so at this point, we just - we could not be happier about the growth of this overall and the Jackpot Party team.

Mike Cody: And I guess turning to M&A, the question there is obviously, there's a lot of opportunity in the M&A space. We think it's a very robust market right now, we think there is a lot of opportunities out there. And we'll continue to do our due diligence to find the ones that fit us the most. And again as a reminder, we're looking for companies that have simple core loops that have similar demographics that have matching cultures that we think we can expand and then grow with together.

Operator: The next question comes from Matthew Cost with Morgan Stanley. Please go ahead.

Matthew Cost: Thanks for taking the question. So I guess kind of dovetailing on sort of the deeper engagement you've been seeing even as the world reopens. The absolute, I think it looks like the absolute number of payers, monthly payers that you had in 1Q was actually greater than any quarter except 2Q? So that's pretty impressive, you know, numbers of people spending. So what are the drivers there? Is that just, you know, a result of kind of retaining these new cohorts and they become more likely to spend over time? Then I have a follow-up to that. Thanks.

Josh Wilson: Okay. So I mean I'm going to probably break it into two parts. The one part first is even during the last year, we've continued to put out new engaging bene features in each of our games. And these bene features have helped to retain our players and payers longer. And at the same point each given day that we get, we get more data that helps fuel our SciPlay engine which helps tailor the game itself to the user each individual day. And this is allowing us to increase the chances that any given user makes a purchase on any given day that they play. And it's these two things that combine that have - the major driver of our number of payers basically monthly for the last 12 years where we're seeing an increase as we go.

Matthew Cost: Great. And then I guess kind of - kind of a separate but related question about UA. There've been a number of kind of your peers out there who are doing more directly on the advertising side whether that's doing some of their own bidding or mediation or both. Is that something that you guys are considering from the UA perspective and do you think that that's important?

Josh Wilson: Yes so, I mean we continue to evaluate. We continue to look for direct deals and different places where we have very valuable users that we believe would work in the SciPlay universe. We also do look at different ways of expanding our UA capabilities through tools that you said or other marketing efforts that are out there. At the end of the day, it's about where can we find the most valuable users per the lowest cost and bring them into our universe so we can maintain them and let the SciPlay engine take over.

Operator: The next question comes from Matthew Thornton with Truist. Please go ahead.

Matthew Thornton: Good morning, Josh. Good morning, Mike. Couple of quick ones from me, maybe first, I think with Solitaire Pets Adventure, you talked about - you previously talked about commercial worldwide launch late in 2Q, just wanted to see if that's still a reasonable way to think about it. Second, full-year AEBITDA margin, Mike, I think last quarter, you talked about 4Q 2020 being a pretty good approximation to kind of go with? Just want to make sure that’s still the case. And then just third, really quickly on the Quick Hit redesign. Based on what you've seen and kind of what we see in the data around the Gold Fish redesign which has been very successful, is there any reason we couldn't see a very similar outcome with Quick Hit or said differently, is that not a pretty reasonable way to think about modeling out the Quick Hit redesign? Any color there? Thanks guys.

Josh Wilson: Okay. So, I think Mike and I are going to tag team this one again. For the spot, yes, I believe the timing is exactly what you're saying. Right now, we are focused on retention and engagement to make sure that the economy is where we need it in order to do a full scale. We're also doing UA testing to ensure that we're able to find cohorts of people that make the most amount of sense to scale the game. I think the timing that you're talking about, late Q2, is very close to when it will start for better or worse, pushing on the gas to start moving there. For the Quick Hit redesign, I believe that is a really good model. It did start with Jackpot Party. Gold Fish followed a very, very similar model and growth to Jackpot Party’s. So we do believe that Quick Hit will see very similar. Now, it is different players and it is a different game from being a ballet game to a W event [ph] game. But at the same point, we do believe that this is the investment we made is that type of growth rate.

Mike Cody: And Matthew your last question on the AEBITDA margin, the answer is yes. We do still continue to expect look I think we are planning to do I think as reminder that was 30.6%. Q1 were 30.4%, so we do expect that to be a good guideline for the full year.

Operator: The next question comes from Aaron Lee with Macquarie. Please go ahead.

Aaron Lee: Most of my questions have been answered or asked already, but I just want to talk a little bit more about the cohort that you've gotten since COVID. As you noted, 2Q last year is when we saw most of that stay at home benefit. Can you talk a bit more about what you've seen from that COVID cohort in terms of spending retention? Has your behavior been any different than past cohorts?

Josh Wilson: So, Aaron thanks for the question. The individual cohort that were during the height of - that were during the height of COVID, they absolutely performed well and they continue to perform well especially while the entire country was closed down. As the country started to open up, they went to perform a lot closer to what normal was but above the benchmark before COVID. Since that point forward, all of the new cohorts coming in are actually outperforming the cohorts that were pre-COVID. And we believe that mainly because of the new amount of features that we were able to put into the games and the evolution of the SciPlay engine, this is what makes us very confident that this is the new baseline for our company going forward that we're going to drive growth even higher.

Operator: The next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl: You mentioned expectation to outpace industry growth of 4.5% on the social games this year. Is that specific to your social casino games with the additional contribution from the casual games or was that an overall revenue statement?

Josh Wilson: Yes, so it’s primarily social casino. As you know, right now, we do not really use the need for in the casual space in any way without your passive metrics is launching. And so, we expect that to be a slow ramp and not really be again meaningfully a meaningful number for 2021. So, it's really a statement on kind of the existing social casino business.

Ryan Sigdahl: Great. And then in your prepared remarks, I thought you said that users continued to grow even kind of even as COVID reopening happens. But looking at your average MAUs, DAUs, they’ve been declining. So I guess can you clarify what you're seeing on user KPI in that statement?

Josh Wilson: Yes, so I think the better way to say is now that our games are more mature and we're able to get more and more amount of features into them. We are more focused on the number of payers that we're able to create and maintain over time. And then we are looking at the non-payers as how do we convert them into. So, we’re less focused on the MAU and much, much more focused on the monthly paying users because this is the group that we expect to grow quarter-over-quarter going forward.

Ryan Sigdahl: Got it, one more from me so, obviously tough year-over-year comps but any recent revenue shouldn’t grow sequentially off of Q1?

Mike Cody: So, no as you recall on our last earning we did make a statement that we do expect revenue to grow sequentially quarter-over-quarter in 2021. But we certainly don't expect to beat Q2 of 2020.

Operator: [Operator Instructions] The next question comes from Mike Ng with Goldman Sachs. Please go ahead.

Mike Ng: I was just wondering if you could talk a little bit about the potential impact from the growth in iGaming on social casino industry growth? And then separately I was just wondering if you could talk all about how your VIP programs may have evolved because of COVID? Are there any in-person events that are now kind of shifting more towards digital? Yes any color there would be helpful. Thank you.

Josh Wilson: Thanks a lot, Mike. So, I would say at this point, iGaming has had no effect on our core business or our growth as business. In some ways it's actually a benefit because it's another way that brands that are inside our game are being advertised and getting noticed so we've actually seen somewhat of a benefit there for the brand recognition side. So we're actually very excited for the iGaming to continue spreading throughout the U.S. As far as the VIP programs, you're 100% correct. The one thing that COVID did do is it evolved the fact that you can now do virtual concerts. You can do virtual gatherings and a lot of our VIP is very happy about it. So right now, we are focusing on that. Do I believe that someday there will be some in-person events? Probably but we probably will never get away from the virtual ones also as we're able to get more people from around the world together, and they seem to really enjoy that communication with their fellow SciPlay players.

James Bombassei: That concludes our Q&A. Now, I turn it over to Josh for closing remarks.

Josh Wilson: Thanks for joining us, everyone. We really appreciate your support. We are truly excited to be charting the evolution of SciPlay as we expand into casual and build out our pipeline of games. We look forward to updating you on our progress during second quarter earnings call. Thank you, everyone.

James Bombassei: Thanks again, everyone, for joining us on our one quarter earnings call. Now, turn it back over to the operator.

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