Sciplay Corp

F:2XY

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

Hello and welcome to the SciPlay Second Quarter 2023 Conference Call. All participants are in listen-only mode. Please note, today's call is being recorded.

At this time, I'd like to hand the floor over to Rob Weiner, Vice President of Investor Relations. Please go ahead.

[Robert Weiner, Vice President, Investor Relations]

Good morning, everyone. This is Robert Weiner speaking. I am the Vice President of Investor Relations for SciPlay. Before we begin our formal remarks, please note that we will not be conducting a question-and-answer session due to Light & Wonder's proposal to acquire the company's outstanding shares, which it does not already own. During today's call, our team will discuss the 2023 second quarter financial results and operating performance. With me today are Josh Wilson, CEO; and Daniel O'Quinn, Interim CFO.

Our call today will contain remarks 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 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'm pleased to turn the call over to Josh.

[Josh Wilson, Chief Executive Officer]

Good afternoon and thank you for joining us today. We are excited to share the latest update from SciPlay, so let's dive right in. For the sixth consecutive quarter SciPlay has outperformed the entire social casino market. Revenue grew $190 million up from $160 million in Q2 last year. This is a strong 19% year-over-year growth. It demonstrates the resilience of our games and the consistent engagement of our player base. We deliver great gaming and entertainment experiences to our customers. Thanks to our terrific SciPlay team. Net income was $41 million, an increase of 28% compared to last year's second quarter, AEBITDA performance was exceptional. We achieved 45% year-over-year growth reporting $59 million in AEBITDA in Q2 up from $41 million compared to last year's second quarter.

SciPlay is experiencing this success because we deliver unrivaled Live Ops and have incredible disciplined marketing strategies. Our teams continue to develop games that attract, retain, and grow players, and then convert them into payers. In terms of our GAAP, we achieved an impressive new record of $0.93 in Q2, representing 26% year-over-year growth. Additionally, our average monthly revenue per paying user rose 12% reaching a record of $102.04 compared to $90.99 in Q2 of the previous year. Q2 proved to be strong quarter and defy typical seasonal patterns.

During the warmer months, players generally engage in fewer weekly sessions. To manage this seasonal trend, we remain vigilant and carefully analyze the data and the trends. We plan accordingly for these effects using predictive analytics. We also implement traditional in-app marketing strategies to ensure continued growth of our user base. To maximize returns, we made strategic adjustments in our marketing approach. We reduced our UA spend during the second quarter and reallocated it to the second half of the year when returns are expected to be higher. We have kept a meticulous eye on all KPIs. Despite Q2's slight decrease in user behavior, we maintained reasonable CPI levels. And combined with the marketing spend pullback, we were able to surpass our profit margin expectations.

On a sequential basis we anticipate a slight dip in Q3 profit. This is due to the reallocation of marketing spend from the previous quarter. We continue to make tremendous strides in converting our nearly 6 million monthly active users into loyal paying customers. It is a clear testament to our ability to seize the opportunities and capitalize on our vast pool of active players. This is yet another example of how our dedication and expertise turn engagement into real life value. It is also worth emphasizing that we hit our highest payer conversion rates to date with an impressive 10.5% in Q2. Through dynamic targeting, we are driving quality installs, retaining players with entertaining content and converting players with our highly engaging Live Ops. SciPlay has enormous runway for the future growth through continued conversion of our player base into paying customers. Even with the seasonal fluctuations in the marketplace, SciPlay remains strong momentum without any signs of consumer slowdown.

Our leading game franchises, Jackpot Party Social Casino, Quick Hit Slots and Gold Fish Casino continue to captivate our players. They push the boundaries and are setting new records. In fact, according to Data AI's Q2 report, these games are ranked in the top 3 fastest growing social casino games in the U.S.

Jackpot Party Social Casino had strong double digit growth year-over-year and its fourth consecutive quarterly revenue record. The highly popular title dominated the charts once again being listed as Data AI's Number One Social Casino Game in the U.S. for the third consecutive quarter. Quick Hit Slots posted its sixth consecutive quarterly revenue record celebrating two straight years of growth. In its fourth consecutive quarter, Quick Hit Slots has secured the position of the Fastest Growing Game in Social Casino category according to Data AI.

Gold Fish Casino also had a record quarter in Q2 with double-digit growth year-over-year. The game continues to gain momentum posting a high-single-digit increase in revenue quarter-over-quarter. These three leading games continue to outpace the market. Exciting new features and engaging unparalleled Live Ops are driving their success. We are further advancing the balance of our portfolio by applying these valuable insights and learnings from our larger game franchises.

As example, we are also seeing solid year-over-year growth and momentum from 88 Fortunes. SciPlay has a competitive lead in the industry as the result of a meticulous planning and highly disciplined guidance strategies. Our player-first focus drives everything we do. The wide application of the SciPlay engine across all of our games has made it possible to provide highly personalized player experiences. We pay attention to every single player.

We continue to evolve our investments such as data analytics, ad tech, marketing, innovation, DTC and new games. Every dollar we invest, we carefully analyze to deliver the best impact to our shareholders. SciPlay has advanced our ad monetization infrastructure to strengthen our position in the in-app advertising market. With the integration of Alictus completed, our exceptional marketing and game teams are leveraging the enhanced resources to capture valuable first-party data and further improve our player experiences. These developments are pivotal to our forward-looking strategy and will contribute to our ongoing success, including the launch of two new IAA games later this year, we are actively laying the foundation for sustainable long-term growth. We remain fully committed to continuously and strategically investing throughout our organization. We are constantly improving operations, optimizing processes and staying ahead of the industry trends. This allows us to deliver exceptional value to the shareholders and continuously improve our performance.

We are expanding our global communities through channel development and new channel entries. And with our collaboration with Light & Wonder, we are extending our reach and our impact with cross-market and cross-marketing opportunities. Our mutual R&D partnership serves as both a catalyst for new content development and also reliable testing engine for both companies. Submitting the backbone of our success is our exceptional team, a group of visionary leaders and experts with various domains, including data, development, analytics, engineering, and marketing. With their deep collective knowledge and skillset, SciPlay continues to innovate, create, deliver, and achieve. SciPlay is a dynamic company performing exceptionally well, investing in the future sustainable growth, and increasing competitive advantages. We are a very disciplined company. Guided by our performance measurements and our KPIs, we have stringent objectives around ROIs and build proprietary capabilities.

Looking ahead, we are excited about SciPlay's prospects for the rest of the year. Our strong execution, continuous outperformance of the social casino market and our unwavering passion to win will undoubtedly help us to achieve our goal. I want to extend my pride and gratitude to the entire SciPlay team from around the world for their commitment and exceptional contributions that set us apart and propel us towards continuing growth and success.

Now on more details and review of our financial numbers, Daniel.

[Daniel O'Quinn, Interim Chief Financial Officer]

Thanks, Josh. Good afternoon, everyone, and thank you for joining our call today. SciPlay continued to perform at a high-level in the second quarter of 2023. Our performance further illustrates the quality of our earnings, cash flow stream, and the sustainability of our growth. We're delivering engaging experiences to our players, retaining them in our games, and heightening our payer base and their monetization. SciPlay once again outperformed the social casino market for the sixth consecutive quarter. Let me repeat. We've been the top performer for the past six quarters in a row. We're delivering this performance consistently and we're driving it through our top game franchises. We're not buying growth, we're not cutting cost or limiting our investments. We're doing the right things operationally and strategically. Today, SciPlay has the healthiest position in the company's history.

We have three game franchises achieving industry leading performance, and all three have set new revenue records this quarter. As we continue to lead, we continue to invest in the following: Current and new games; new growth initiatives; in proprietary technologies and systems to enable organizational scalability.

We're a player-first focused. And by executing on that mission, we're delivering wins for our customers and our shareholders. Together, we're building a stronger business with better entertainment experiences and increasing shareholder value.

As Josh mentioned, our game franchises continue to win in the marketplace with players driving strong year-over-year revenue growth and KPIs. Our largest three games all set new quarterly revenue records driving quality growth in revenue, earnings and cash flow. This is fueled by our games with the longest presence in the market, which underscores the stickiness of our content and the resilience of our payers.

Now I'll turn to the financial performance details. Revenue was $190 million up 19% year-over-year. This marks our fourth consecutive quarterly revenue record. Net income for the same period was up 28% in Q2, reaching $41 million and translating into a 22% net income margin. Diluted earnings per share attributable to SciPlay was $0.25, representing a 9% growth year-over-year. AEBITDA grew 45% year-over-year to $59 million achieving a margin of 31% in Q2.

As Josh mentioned earlier, we adjusted our marketing spend to maximize returns. We reduced UA spend in the second quarter and reallocated that budget to the back half of the year when we anticipate higher returns. As a result, we expect decreased margins on a sequential basis as we increase our marketing in Q3. We set new KPI records again this quarter.

For the second time ever, our average monthly revenue for paying users surpassed $100, reaching an impressive $102.04. This marks the 13th consecutive quarter above $90. We also set a record for ARPDAU of $0.93, an increase of 26% year-over-year and we grew our payers 9% year-over-year to 609,000. SciPlay's financial foundation is strong, generating year-to-date operating cash flow of $102 million with $395 million in cash and total liquidity of $545 million. We have considerable financial strength and flexibility. This enables us to effectively deploy excess capital to drive increasing shareholder value.

We focus on organic growth drivers, including our games, technology, systems, people, and our global reach. My focus is delivering our strategic objectives, which are designed to: One, spur profitable growth with discipline and based on returns. Two, effectively manage our resources as we reach for new opportunities. And three, invest wisely to continue driving our leading competitive position in the market. Often we're asked the question, how does SciPlay consistently perform at such a high level? It boils down to investing in our people, organic growth and technology to drive us forward as a company.

Our three largest and best performing game franchises have been in the market for a long time. And over the years, we've learned and adapted to an agile environment. But at the core, it's our daily focus on players and the games that we deliver to them.

The majority of our revenue and profit comes from organic growth of our game portfolio. This is a key point, illustrating the quality and sustainability of our cash flow and earnings stream. It is also an important distinction for SciPlay. As a prominent player in the mobile gaming industry, the majority of our success stems from organic investments and internal resources. The solid foundation sets us apart from others as we've relied on our own capabilities to achieve our position in the market. With such a strong groundwork in place, we can continue to invest in innovative growth opportunities and further amplify our in-house strengths.

Our investments made during 2022 and the current year have been designed to leverage our strong platform to further our competitive lead. Those investments fuel the creation and development of new and emerging opportunities for growth. The payoff from these investments is evident in our operational and financial performance.

We also employ dynamic strategies that win in the marketplace. As illustrated by our Q2 performance, we invest wisely and with discipline to ensure we adhere to our ROI driven criteria. Here are a few examples of our fiscal discipline and prudent decision making. We reduced our UA spend in Q2 due to lower ROI visibility and returns. We closed our Finland studio and its affiliated game. We continued investment in the SciPlay engine. And finally, we repurchased $60 million of SciPlay shares since May of 2022, including repurchases of nearly $15 million or approximately 860,000 shares during the second quarter.

In our Q1 call, I outlined some factors that have influence on our operational and financial performance this year. To review, the Jerry O'Connell campaign in Q1 was such a success that we'll be running another round in Q3, as well as incremental UA investment in the second half of the year. With the integration of Alictus completed, we've incorporated its resources and capabilities across our platform. We anticipate launching new in-app advertising games by the end of this year. We'll have an increase in marketing spend to test those games beginning in Q3.

Like many other companies we're experiencing rising costs driven by growing concerns surrounding global privacy and data security. As a result, we'll need to invest more than originally planned for this year. This area is of a paramount importance and is constantly evolving in the industry. As a consequence, our current year's investment will exceed our initial projections, and we're planning for an increase in 2024.

Finally, we discussed in our last call the approximately $5.5 million impact we anticipate for legal expenses to defend state allegations and legal matters. We incurred about $1 million in Q2 with about $2 million per quarter anticipated in each of the next two quarters.

In summary, we remain focused on achieving three primary goals: To outpace the growth in the social casino market and take share; to expand our margins prudently but not at the expense of investing in future growth; and to reliably generate strong and growing operating cash flows. We are confident that our team's determination to succeed will enable us to obtain these objectives. And generate increasing shareholder value through our sustained industry-leading performance. Our team strong execution is expected to continue fueling our performance in the social casino market. Thank you for your time.

[Josh Wilson, Chief Executive Officer]

Thank you for joining us today. We shared SciPlay updates and achievements. Our commitment to being the best remains unwavering and are rooted in the culture and the spirit of our amazing team. We look forward to continued growth, delivering value to our shareholders, and providing exceptional entertainment experiences. Thank you and have a great day.