Q4 2019 Earnings Call

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I'm good day, and welcome to the side play fourth quarter 2019 results conference call with pants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask question to ask a question. You may press * then one on your telephone keypad to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Trent crusie senior vice president investor relations, please go ahead.

Thank you operator. Good afternoon. Everybody during today's call. We will discuss our fourth-quarter and full-year 2019 results and operating performance followed by a question-and-answer. Woke me this morning or 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 involves 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.

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 same section on our website as a reminder. This conference call is being recorded a replay of this webcast and accompanying materials will be an archived in the investors section of our website at siplay.com. Also supplemental reference sides 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 2019 was a great year for siplay. We grew our annual revenue by 12% which beat the industry growth rate by nearly 1.5 x and mobile Revenue surpass $390 million in 2019 setting a new record in addition. We increased our office by 30% to 122 million and generated $93 million of cash from operations. In fact since our IPO. We have delivered 28 million month 9% in Revenue growth and over twenty six million or 37% ebitda growth.

in the

Fourth-quarter, we increased our 9% to fifty cents and average monthly Revenue per payer 15% to a quarterly record of $88.06 month. We had continued strength in our pay our conversion rate at 6% looking at our portfolios games. We saw Jackpot Party continued to drive upstanding results and off solid growth from Quick goldfish and Monopoly slots.

Growing popularity of sight play apps is reflected in our position as top three social games provider and individual game rankings as all seven of our core games are in the page two hundred grossing mobile games across iOS and Google Play and we are incredibly proud that Jackpot Party continues to climb the rain and it's moved to the number eleven wage is grossing mobile game on Android regardless of genre in the December 2019 social gaming monitor report by eilers and krycek. We also moved number 18 highest-grossing mobile game on iOS in the same report.

now while we are

Pleased with our results in 2019. We see an opportunity for improved operating results going forward much of the work is underway with strategic game updates on a national pilot testing and enhanced analytics. We remain firmly committed to our goal to be the top casual Mobile gaming company in the world similar to updates previous implemented in Jackpot Party. We have deployed significant updates across the number of our portfolio games including goldfish and Monopoly and are beginning to see improved results in a continuing to enhance our focus on liveops execution to drive engagement and monetization and are migrating analytics to an internal solution to deliver more real-time data and reduce our dependency on third-party providers also as previously discussed. We launched our International expansion test and Q4. We are early in our International wage.

but we are seeing

Meaningful improvements and retention rates low times and gameplay Dynamics which are very encouraging as many of you know, our business has significantly under penetrated internationally relative to our peers. So International represents a meaningful untapped opportunity for us in our existing and future games.

In addition the team is actively exploring several exciting m&a opportunities, which will allow us to broaden our portfolio Beyond Social Casino and leverage are significant capabilities around data-driven user acquisition engagement and monetization to continue to drive growth.

As we look to 2020 our team is eager to execute Our Winning strategy explore new growth opportunities. Keep improving our games and drive enhanced results wage. We believe we are in the very early stages of a multi-year revenue growth and earnings expansion cycle ATS I play and we couldn't be more excited by our future prospects and opportunities now, I'll turn the call over to my Kodi to walk you through the financial information in more detail Mike.

Thanks, Josh.

In the fourth quarter, we generated 112 point nine million dollars in Revenue which included a 6.3 million dollar negative impact from an out of. Adjustment recorded during the quarter absent. This correction officer would have met Revenue guidance of 400 270 to 475 million dollars for the year.

Are a even increased 31% to thirty two point 1 million, which included a four point four million dollar negative impact from the adjustment to add some color week until these scrutinize our systems long as we embarked on updating some of our analytics engines. We discovered an issue in the scripts. We utilize that resulted in in material errors and revenue these errors were immaterial and all prior periods. Averaging approximately zero point two million dollars per quarter over the time frame involved which includes 2012 until discovering Q4 2019.

Go to have been corrected and we are confident in our processes and controls.

That income was up over 50% to twenty eight point six million dollars versus eighteen point seven million dollars in the prior-year net income margin increase the only nine hundred basis points to 25.3% versus 16.4% in the prior year sales and marketing expense of 31.3 million dollars represented at 27.7% of Revenue, which was down sixty basis points from the prior.

We generated.

Thirty two point seven million dollars in cash provided by operating activities which included a three million dollar payment related to contingent acquisition consideration. We ended the quarter with one hundred and ten point six million dollars in cash which was an increase of 29.3 million dollars from the third quarter.

Our Capital expenditures are modest leading to a high flow through of that year end our available liquidity including our undrawn revolver was $261 giving us plenty of juice powder.

While we have opportunities to continue to enhance our operations over all the cash generation and profitability Discord or highlight the uniqueness and strength of our business model. We are excited to leverage our strong balance sheet and have a game franchises to grow the business in 2020 and Beyond with that you're happy to take your questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question. You can press * then two, please limit your questions to one question and one follow-up. Our first question will come from Brian Kraft with Deutsche Bank. Hi, good afternoon. Wanted to ask you a couple. I guess first. You did some rewrites and launch new features and Goldfish Casino Bingo Showdown a Monopoly Slots over the past. Excuse me a quarter or so off. Now if you could talk about how those are performing and then also just on the revenue side, you've had good year-over-year growth, but sequentially revenues been pretty much flat since the first quarter. Can you talk about the revenue Outlook in 2020 in light of the multi-year revenue growth cycle you mentioned in your prepared remarks and is the growth outlook for 2020.

Do you think that's more of a front or a back?

Back waited trajectory. Thank you.

Hey Ryan, so, this is Josh. I'll go ahead and I'm going to answer the first two and I'll have Mike go ahead and jump in on the last one. So yes, we as we talked about in the past month. Um, we we are goldfish and our Monopoly both of those launched and Q4 of this year. We started to see very good momentum out of both of those products and very excited to what we see in 2024. Both are Bingo one actually just launched in first quarter of this year off because it had been in rewrite for that nine months. We weren't releasing features. We're looking at getting our first features out and early cute to to make YouTube app was seeing the meaningful impact probably hitting in the back half of the year, you know, quarter-over-quarter Revenue throughout the year is probably more looking at we had

multiple technical issues throughout the year except

Actually in the middle to parts of the Year where we had friction across call at four or five of our games. We feel very confident that we have cleaned up all of the problems we had and that the games are very much in a healthy spot moving forward into 2020.

I think so in terms of talking about 20 20 and and and guidance. We're not going to be providing guidance today, but in 2020 as an all years, we expect to grow faster than the overall market and how we met and continue to run the business and you know, just going with what Josh said about the path of growth that we expect being a greater in the second half of the year.

Our next question will come from Brian Nowak with Morgan Stanley.

Hi guys, it's Matt on for Brian. Thanks for taking the question. So just first on Jackpot Party, you know, obviously it's you know continues to do very well charting very well. As you mentioned. The prepared remarks wage. Is that where you're focusing most of your user acquisition dollars and and do you sort of see it as sort of like, you know, the key growth driver going forward and then the second question is just on on the on the revenue impact that you saw in the corridor. So you mentioned again in the prepared remarks you saw in historical quarters about 2 million dollars. I think you said in Prior periods. Where as you saw this 6.3 million dollar adjustment in 4 q what is the reason that the that the impact on for Cuba? Nineteen was was so much larger than those other periods. Thanks. All right, man. I'll go ahead and answer the jackpot find one and then have my jump in for the revenue question. So we are very pleased with Jackpot Party and very pleased with the growth that we solved through 2019.

I think one.

Of the key parts of Jackpot Party is we made an R&D investment to the team to bolster the team to give us multiple shots and goal and we had results of that hit in 2019. We're very excited to be looking at doing that on our second and third largest game in 2020 and expect to see not only jackpot prep continue to beat the market. But our other games can doing features such as Jackpot Party is in 2020.

And then turning to your Revenue question about a Q4 versus the full year. So the issue started years ago about approximately 8 years ago. I was slowly, you know took over time and as you think about it that you got to also have you know, that includes two one Q 3 of 2019. So when you make the correction in Q4 that would include everything off through Q3 of 2019, but when you're looking at the full year 2019 q1 the Q3 a 2019 are technically correct because they're in the right. So that would make the adjustment smaller for a 2019.

That answer your question.

Yeah, I think it doesn't and just just one follow-up if I may, you know on on m&a which you mentioned in the call. Do you see any areas of opportunity outside of Social Casino Games? Thanks. Yeah as we've mentioned before we we see a lot of opportunities for m&a outside of of Social Casino. That's something that we've we talked about focusing on and trying to expand our addressable Market, you know, they talked about looking at are things that have a simple Kaur Loop similar to our car existing games, you know genre as we've mentioned our match three card games puzzle games, you know things of that nature that we think we can add value to what what things that we do. Well such as user acquisition analytics and live opps.

Our next question will come from Matt Thornton with SunTrust. Hey, good afternoon guys, thanks for taking the question. Maybe two if I could and then and then just one clarification at first name you talked about. M&a. Can you talk a little bit about anything going on in the in the organic, you know pipeline anything in the pipeline. It may be any color on just how fast at this point. You've gotta turn around a game would be helpful. Secondly you talk a little bit about some of the the new Gio's is that is that English only markets or are we staying there? And is it still just the two the two titles that you've kind of started testing or any changes on on that front? And then just one quick clarification you talked about growing faster than the market in 2020. Is that the black market according to Tyler? Just want to make sure that we're we're on the same page there. Thanks guys.

So yeah, but I'll do your last question first. This is Mike said that market that we had ourselves against yes is the either Social Casino track or which I believe they're estimating market growth of 7% roughly. And so that's that's what we think about when we think about the market geography. Um, yes, we're would be focused primarily on English-speaking countries first or English as a second language and that's that's what we think we have the the first opportunity to grow the business from the geography standpoint. And then organic pipeline was your first question, you know, that's something we talked about in the past where we are always working on games. You always have ideas that we're trying to pursue we won't talk about when we're going to launch them at this point until we we feel really confident. We're at a point where wage

Our next question will come from Chad Beynon with Macquarie. This is Jordan. Been Ron for Chad. So in terms of markets were real money gaming is legal. What have you down from the Casual player activities so far and then um and then looking at those several States, how are you thinking about expectations for states that have looking to legalize things off? Yeah. So this is Josh and each of the states that have released RMG. We've continued to grow in a couple of internal studies took me like to add New Jersey New Jersey as a state actually is growing faster than other states for us. So we actually don't see any downside and I'm almost more benefit. I don't have any hard evidence on this but as RMG becomes more popular in the United States, they advertise Our Brands.

so we get

a notification of brand awareness from these legalizations

Awesome, and then looking at twenty twenty. How should we think about R&D and your capex budget?

First time with your cat box, but it's very modest and and shouldn't be expected to go along a similar trajectory what you've seen in Prior years, we primarily spend our money on capitalize off. So there's not a lot of other Capital to the business a little bit of Hardware in a little bit above expansion of facilities when we need to but R&D spend the exact same trajectory and we're on about you know, six percent roughly of of Revenue Which is far below our competitors, you know, we have nice Evergreen franchise and filter on the Salish side piece and we don't have that need to spike our R&D to try and you know create that new one hit wonder We Share technology where we can and we operate them into low-to-mid cost location. So these are all things that contribute to how we keep our costs low and we expect to continue to do that into the future.

Thanks guys. I'll pass it off.

Our next question comes from Drew Chrome with stifel.

And you guys any detail you can share behind the sequential decay in use and then separately the the rate of decline for web accelerated and Fork you should we assume a similar trajectory in 2020 or would you expect that to moderate as you progress through the year? Thanks Joe. So are you tomorrow that we talked about or showed in 2019 a large reason for that was some of the technical friction that we added to our users. This caused our users to page. They stop playing but some of them stopped playing Left Off in per week, which immediately affect out we believe we've corrected these technical problems. So we feel very good that way we'll start seeing actual stabilizing doubt and growing doubts throughout 2020.

The other question you asked was about web declining and directory of it and I think for us that that you know, we're primarily focused on mobile. We spend almost all of our user acquisition dollars on Thursday. So I would expect it to to continue to decline maybe at a slightly slower rate, but certainly continue to decline that time. Do you remember that in 2019? We also have the hid of Google deprecating flash on Chrome which caused a spike of web decline. That was a one-time.

Okay. Thanks.

Yeah, I guess one final point on that you can we talk about what focusing more on mobile, you know, we talked about it a little bit in our prepared remarks, but our mobiles almost four hundred million dollars and grew over 21% are about 21% off here. So, you know, our efforts are paying off where we're focused.

Thanks guys. Our next question comes from with RBC Capital markets.

Hi guys. This has been on for shweta just in terms of the opt-out trends across the games. Could you talk about how your live off strategy has been working to drive monetization with Jackpot Party and maybe what life from your larger games or using the drive monetization with newer games like yes. So I think the biggest part our driver that we've seen in our cap growth in Jackpot Party is actually how the metagame all works together to drive higher engagement of our players inside the games. We're getting them to login more times a week and spend more time to a day which are giving us the opportunities to monetize them more often. This is the major growth from the art Dowell is is purely through engagement and there's a one hundred percent learning that we can take all of this and implement it across all of our games so we can see that type of engagements bike across the portfolio.

Thank you.

Our next question will come from Alexia quadron with JPMorgan. Hi, this is Anna was on for Alexia just curious in terms of your your schedule on her new launches about every twelve to eighteen months. Is it fair to say that you're more focused now in terms of game refreshes on Goldfish Casino in Monopoly Slots compared to launching new games. I know you're continuing to look at the m&a pipeline and possibilities of expanding potentially outside of Social Casino such as puzzles or other color schemes.

Yeah, and so I do think you know, we are constantly evaluating New Opportunities and new genres and games that we can go into I would agree with what you said. We do have an enhanced focus on the R&D teams for our larger games trying to recreate what we were able to create Le Jackpot Party wage. Um, but it's not at the cost of looking at new opportunities, you know, and we are very I would say at this point diligent about looking at all the opportunities that are out there to help us expand into new genres.

Thank you.

Our next question comes from Mike Maloof with craig-hallum great. Thanks for taking my questions. If I could just kind of drill down a little bit more on the international side. I know that in the fourth quarter, you know, you you lost it on a couple of a couple of titles and as you look into twenty-twenty how rapid will you offer International capabilities? And and and do you still think that basically internet IP mapping that's going to be your biggest risk, and I'm wondering how that's going so far. Thanks bike. So as we had talked about in the past, we've rolled out into games one implementation in eighty-eight fortunes one implementation in Happily. We found out the implementation inside of eighty eight cents did not work. So we actually shut that test off and started focusing on the Monopoly test in the Monopoly test. We sawed off

Decrease in latency and increase in retention and an increase in engagement out of our users.

But we also did find a couple of bugs in that implementation that we are going to get corrected and then start doing a marketing test on on a brand inside of Australia because at this point we haven't had installed at scaled to be able to prove out the effect of the marketing assuming that drug test works as well as the first test did we will look at expanding on our larger Games first and then down to our lower games after that are smaller games off. Okay, so we can see Jackpot Party sometime this summer if that goes well.

I I will not commit to this summer, but I would hope that we see it in 2020. Okay, great. And then just a question on the acquisition side, you know, it sounds like dead things continue to heat up there. Are you still looking at at different types of Acquisitions with regards to size? I think you talked about maybe even lift outs or small little Acquisitions and all the way up to maybe slightly larger Acquisitions. Try to see a where your appetite is these days. Yeah. Absolutely. We're we're exactly where we said that we were in the thing is we will look at small Aqua higher of a good team that may not have a product that we could put them on or you know of a slightly larger team that has a product that just hasn't taken off to something large transformational if we find the right the right product mix the right culture mix and the right opportunity that we think we can grow our appetites pretty wide and and we'll take you know, every opportunity came to look at what time?

Okay, great. Thanks for the help guys.

Our next question comes from Jeff Cohen with Stephens Inc wage such a sticky genre there's opportunity for you to probably step up spending on user acquisition to maybe grab the top of the funnel.

Yeah, so, you know we've seen amazing returns in our marketing over the you know, I guess over the past few years and it's continued to be great returns even through 2019 when we have better than normal returns. We actually do step on the pedal and invest more. I think we did it a couple of quarters last year where we increased our spend and we got rid of that were very very favorable to us. I think the way that we approach it is if we see that a game is healthy and has a long-term retention that we feel that we can that we can spend into then we do that internally.

Our next question comes from Michael in with Goldman Sachs. Hi. Good afternoon. Thank you very much. For the question. I just have to first do you subscribe what the wage casual games Market looks like right now in terms of competition for assets and valuations and then second with side play affirming. It's 35% long-term time. Can we expect margins to expand in 2020? And if so, can you provide us with any help around the magnitude there? Thank you very much. I'll just take the margin question. We're not giving guidance on that level. So it's hard for us to tell you an exact number or we maintain our long-term strategy of going to 35% and set about all the details we can give you their wage. Um, I'm an environment, you know, certainly it's a competitive environment as always we know of of multiple companies who are are out looking for for you know, Acquisitions of their own will continue age.

speak to find our right fit and

I think we'll be successful when we do.

Great. Thank you, Michael.

Our next question will come from Ryan G with boa. Yes. Hi. Good afternoon. You guys thanks for taking the question. So clarification you called out because I think it's masking sort of what went on in the quarter and then just to follow up on the KP eyes. So when exactly during the quarter, did you guys identify this impact cuz you reported in November and kind of guided maybe with that already in mind and then if you could drill down deeper did you say that this was just a change in your Revenue recognition policy to know change the booking or was this simply some process that was overstating the door because I guess what I'm trying to understand is that you are either actually on a lower bookings run-rate annual wage going forward and I

Yeah, so it's so the issue was discovered in Q4 don't have the exact date.

I mean, but you have to think about more of those are process that was was not working correctly. We identified the issue with that process and fix that process. So, I'm not sure help me out the house. Can I answer your question or clarification you're looking for there?

Well, I guess what I'm just trying to understand is so you're at $130 million in Revenue. This computer was it simply Revenue recognition meaning some change in that your bookings were higher because the the timing that you can recognize that those bookings over your Revenue base will be lower. But the actual bookings going forward is still at the same kind of one level of of Revenue agent. You guys could have been at excluding this impact. Yeah, and one thing to think about with us booking is not really an issue for us. So the time between the the, you know, the person's company purchase and uses are calling we don't end up with a meaningful difference in deferred revenue to even talk about bookings. So there would be really no material difference there at all.

Okay.

And that's an appointment just to follow up on the outlook for KP eyes to improve in 2020. I guess it's the rebound predicated on something that you guys need to do proactively or is the behavior you're already seeing it quarter today. Just improve organically, you know, the rebounding and M a quarter today. Thank you.

So I would say that I would look at we made steps and changes in our process throughout the fourth quarter of last year to solve for the technical issues that we were having through the middle two quarters. We felt very confident that those processes and the output eliminate that and between that and the new added features that will start seeing on each of the games starting in q1 and Q2. We expect to see the engagement increase which will fall into the Dow and now increasing right afterwards.

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. It's I play is incredibly excited about the future strength of our games and untapped growth opportunities. We have a group of us. We are committed to delivering strong results and returns for our shareholders and 2020 and Beyond. I look forward to updating you on our continued project progress on a call. Thank you.

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