Q2 2022 Sciplay Corp Earnings Call

The J.

Good day and welcome to the SciPlay second quarter 2022 earnings conference call. All participants will be in a 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 questions.

To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jim Bombasie. Please go ahead.

Thank you, operator, and good morning, everyone.

During today's call, we will discuss our second quarter 2022 financial results and operating performance, as well as provide commentary on our second half outlook.

which will be followed by a question and answer period.

With me today is Josh Wilson, CEO of Cyplate, and interim CFO Daniel O'Quinn.

We're also pleased to welcome to the call Rob Weiner, who recently joined the Sideplay team at BP Investor Relations.

Hello and good morning everyone. This is Rob Weiner. I've been a practicing IRO for more than 15 years as well as having IR agencies.

sell, and buy side experiences.

I'm excited to be part of the talented SciPlay team and look forward to working with investors and analysts that I know and those whom I'll meet in the future. Now I'll turn it back to Jim.

Rob will be the IRA point person going forward, while I return to my duties with light and wonder.

I encourage you to engage with Rob as he conducts the SidePlay IR program.

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 more information regarding these risks and uncertainties, please refer to our earnings issued yesterday in 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 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 will be archived in the investor section of our website at www.SciPlay.com. To receive an additional event report click on the link at the end of this video.

Now, let me turn the call over to Josh.

Thanks, Jim. Good morning, everyone, and thanks for joining today.

Cyplay had a solid second quarter performance and we see momentum building in our business as we start Q3. In fact, July was the second highest revenue month in our history for social casinos.

July was second only to our pink revenue month achieved during the height of the COVID pandemic.

I am pleased to report that we outperformed the social casino market during the second quarter with a slight revenue decline year over year.

We also outperform the market quarter over quarter.

Our business foundation is strong.

This has been tested by the market this past quarter, and we have proven our models' resilience during the declining market. The strength of our team and our game portfolio this quarter illustrates our ability to manage diversity.

Our focus is in taking share in the social casino marketplace, and we are proving our ability to deliver that objective despite the headwinds we've been seeing from IDFA and scaling iOS user acquisition.

We are pleased with the continuing momentum in our business as we invest in our core capabilities. Our investments will build upon our business foundation while we are continuing to develop our platform to drive sustainable long-term growth.

This is an important distinction for SciPlay, our ability to both capitalize on demand as we did during the pandemic and sustain it, but also to do this while we've been investing in our new capabilities, strengths and competencies that will make us more competitive and more dynamic.

Looking ahead, we feel good about how our largest gains are performing in the third quarter, and the benefits we are seeing from our strategic investments. Accordingly, we see momentum building in the back half of the year and reiterate our target for a full year revenue growth of 10%.

We continue to be disciplined in our investments band and will see a EBITDA margin scale Substantially in the fourth quarter as we move past our marketing innovation campaign

While we continue to focus on maximizing ROI for every dollar that is spent, given the uncertainty in scaling user acquisition on iOS, we are targeting a full year AEBITDA margin of 28-29%.

Now for some highlights from the corridor.

We delivered the company's second highest revenue quarter with 4% growth year over year and 1% sequentially in the dynamic environment. Our social casino business continues to deliver strong payer metrics. Quick Hit Slots set another consecutive quarterly revenue record. And Jackpot Party delivered one of its best quarters in history.

Our fat was 74 cents, increasing 3% compared to second quarter last year, and we maintained DAU at 2.3 million.

We set a record for increased payer conversion of 9.4% in the second quarter up from a quarterly record of 8.9% which was set in the first quarter of 2022.

Average revenue per daily active user grew in 5 out of 7 of our core games this second quarter. These results validate our continued focus on payers and the Cyplay engine to drive increased monetization. We are very encouraged by this progress as our focus is to increase ARKDAU and we believe we have the potential to double ARKDAU over time.

We made great progress on our investment initiatives, including centralizing Project All-Star into the Sci-PLi engine, as well as building out our direct-to-consumer platform, which I will talk about in more detail shortly.

We saw significant opportunity to enhance brand equity and grow market share as we launched marketing campaigns in a few new channels. These campaigns go beyond our traditional marketing program and reach new players that have been historically untapped by side play.

The integration of ELLICDSIS is progressing as we continue to align their organization to the CyPLI model. We continue to see tremendous opportunity to optimize this acquisition and apply some of our learnings and our capabilities from the CyPLI engine.

Now, I would like to dive a little deeper into the business this quarter.

Our social casino business remains healthy. Our portfolio games continue to perform as we outpace the social casino market in the corridor.

Quicken has its second consecutive quarter of record revenue.

and we continue to make LiveOps improvements.

And we see continued growth in July , which was a record month. A new feature released in the third quarter, Race of Glory, is expected to drive engagement and propel growth. The jackpot party delivered its consistent high performance again with, as mentioned, one of its best corridors in history.

We are seeing this continued strength.

July was the third biggest month ever.

And, as I mentioned earlier, we continue to deliver strong monetization metrics.

Our style continued to grow and remain at historic high levels as we did a great job enhancing monetization while retaining our payers.

Average monthly revenue per paying user in the second quarter remained at a very high healthy level of $90.

This is the ninth consecutive quarter above the $90 level. This illustrates our continuing strength and momentum in our business long past the revenue gains experienced during the COVID related shutdown.

Now, I'll turn to Cashroll.

The integration of ELLICDSIS is progressing well and their strong team is motivated to carve their prominence within scifly.

In the corridor, we saw strong engagement and ROIs on the Lictus existing game.

In the second quarter, when it came to launching the new games, we saw some challenges in scaling the games due to iOS user acquisition environments.

We have seen other companies report similar challenges.

Alictis has historically been an iOS first company and we are using our learnings in Social Casino to shift their game to emphasize an Android first structure where we continue to see strong returns. The games that we launched in this corridor had similar retention and play times as previous games had experienced in the past. This is a very encouraging signal for us.

We are going to apply our learnings from the SciPlay engine to help optimize the LTVs of the players in our new game launches. We anticipate the fourth quarter game launches will reflect this new approach.

Our new Casual Game Portfolio continues to make progress. For Solitaire Pet Adventures, we are excited to soft launch and test our newest version. We have some early positive data, but it's still too early in the RAM process to discuss this corridor. We'll update you in the third quarter call.

Spellspinner remains on track for soft launch in the fourth quarter.

Now, let me turn to updates on our key investments.

We are continuing to invest in our SidePlay engine with the goal to increase reach, retention, and ultimately deepen our player engagement and monetization. As we discussed in the investor day, we continue to productize our capabilities into the SidePlay engine to benefit all of our games across the portfolio and drive sustainable profitability.

We are making great progress in our core capabilities and are on track to deliverables to optimize our platform.

We are also making great progress on our direct-to-consumer platform, which is expected to further enhance margins over time by reducing the 30% platform fee to approximately 10%. We are on track for the fourth quarter launch and expect to scale the platform in 2023.

We are diversifying our marketing channels to reach previously untapped players.

We have partnered with America's Got Talent and the Wendy Williams show where we are seeing great progress. American's Got Talent has over 6 million viewers and we recently signed Sofia Vergara who has influential reach of over 26 million Instagram followers.

Overall, our core portfolio's traditional marketing investments are delivering positive results from our direct response marketing and our brand campaign.

I'd like to wrap up my comments with a summary of where we stand today. Our foundation is strong, with a great and talented team, deep experience and capabilities to lead into the marketplace.

We believe our player-centric model will drive long-term sustainable growth.

We will be able to significantly grow revenues by building great games players love to play, with great core gameplay mechanics and meta features to enhance engagement, leveraging data and economy to provide even better player experience, and utilizing sub-precip play engine capabilities to optimize the player behavior in any given day. Now let me turn it over to Daniel.

to significantly grow revenues by building great games players love to play. With great core gameplay mechanics and meta features to enhance engagement, leveraging data and economy to provide even better player experience. And utilizing such a side play engine capabilities to optimize the player behavior in any given day. Now let me turn it over to Daniel. Thank you, Josh.

First, let me say a big thank you to our team as we delivered year-over-year and sequential revenue growth.

Revenue of $160 million was up 4% versus prior year and 1% sequentially.

Our core business remains healthy.

and our performance benefited from the ELLICDAS acquisition.

Net income for the quarter was $32 million and our net income margin was 20%.

AVIDA was $41 million as we continue to invest in sustainable long-term growth.

Our margins continue to be impacted by our marketing investments, which will continue in the third quarter.

and we expect to benefit from these campaigns in the back half of the year.

ARPDAU was 74 cents versus 72 cents, an increase of 3% compared to the prior year, with a DAU base of $2.3 million in both periods.

ArtDale grew in five of our seven core games in the second quarter.

Average monthly revenue per paying user was approximately $91.

and we have been consistently above $90 for nine consecutive quarters.

Our payer conversion rate was a record at 9.4%, 90 basis points above our conversion rate of 8.5% in the second quarter of 2021.

This demonstrates our focus on creating and maintaining our payers.

We have a strong balance sheet and we're in a great cash position enabling us to invest in our business while returning capital to shareholders.

In the quarter, we generated $38 million in operating cash flows on $41 million in AEBITDA.

We ended the quarter with $316 million in cash and no debt.

As we focus on increasing shareholder value, I'm pleased to share that we return $15 million to shareholders today.

This represents 25% of the total authorization in our first ever share repurchase program.

While we're certainly in a dynamic micro environment, I have all the confidence in the team to execute our initiatives and continue to drive engagement and monetization.

We will continue to be proactive and drive operational excellence throughout the business with continued focus on balancing growth with investments while staying committed to achieving bottom line results.

Our approach continues to be ROI driven, with a combination of short, medium, and long-term investments designed to optimize our returns.

At the same time, we're strengthening our foundation as we further develop our platform for long-term sustainable growth.

So to wrap it up, I'm very excited with the opportunity in front of us as we continue to invest in our largest growth opportunities.

building upon our foundation, and optimizing our platform for sustainable, profitable growth.

Now we'll turn it back to Josh for closing comments.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.

If you are using a speakerphone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time we will pause momentarily to assemble our roster.

And our first question will come from Ryan Sigdahl with Craig Hallam Capital Group. Please go ahead.

Good morning guys. Thanks for taking our questions.

Uh, wanna start?

You mentioned Josh a little bit kind of intra-quarter, some softness, July sounds like it's rebounded, but can you dig in a little bit more, I guess what you saw kind of in May, June , industry peers mentioned kind of a...

material softening in the industry. But did you guys see that? And then can you comment kind of more specifics on what you've seen in July ? That gives you more confidence going forward to reiterate the guidance for the year.

Yeah, Ryan. So, you know, do remember that the mobile video game industry does tend to see softness in the second quarter of each year. You know, normally the first quarter is the kind of new install quarter. Second quarter comes down as summer becomes to hit. Q3 bounces up a little bit from Q2 and then Q4 tends to be our largest. Main reason for this is you start seeing players play.

a half day less a week or a full day less per week. It's not that they leave the games, but they're just playing a little less often and that little less often causes a little softness in revenue. We also did see the macro trend with iOS continuing. We feel very good about the spend that we did in our core games, especially performance and quick hit jackpot party.

But in the Elictus products or Elictus new launches, it became much tougher to scale these games, which is the strategy switch that we talked about during the prepared remarks where the Android market did continue to perform well and we did continue to see great ROIs. Going into Q3, we had made some good investments in our three larger games around our side play.

increased the ARFDAU and the days per week increased the daily active users. This has actually continued to climb throughout July and stayed very consistent even up in August , which is what gives us the confidence that the Q3 will perform in the way that gets us the guidance that we shot for at the beginning of the year.

And then just on the marketing campaigns you mentioned, it'll be elevated in Q3 and then normalized some in Q4, but can you talk through kind of how much of that is just timing within the year, maybe seasonality versus new game launches?

Sure, so we had a little bit of it actually come into Q2 of this year. You know, and even that would be about 170ish basis points to the margin of Q2. In Q3, we actually have the bulk of it running because it's when the massive American Got Talent is, it's when the real showing of the Wendy Williams happens.

and also the cup races that we're sponsoring inside of NASCAR. So, majority of the spend does happen into Q3 of this year and is going to be worth around 400 to 500 basis points to the A-EBITDA margin. But we do expect to see the players that come in be a brand new audience that we have not been able to tap in the past. And so far these users look to be very, very valuable.

and we do believe that the campaigns will be ROI positive long term.

We will have very little marketing innovation going into four of this year.

So we won't expect to have primarily any of our AE but a margin suppressed at all because of the marketing campaign.

Just two quick follow-ups on that Josh. So the four to five hundred BIPs of AEBIDOT margin is that on a year over year basis and then secondly should we expect the timing of kind of these events all those that you mentioned to recur kind of every year is that a Q3 event or is this kind of one-time type promotion?

Just two quick follow-ups on that, Josh. So the four to five hundred bps of AEBIDOT margin, is that on a year-over-year basis? And then secondly, should we expect the timing of kind of these events, all those that you mentioned, to recur kind of every year? Is that a Q3 event or is this kind of one-time type promotions? Thanks.

So first it's actually quarter over quarter, so it'd be Q2 to Q1 and then Q3 to Q2. And I think in the future what our goal is, is to spread it out a little bit more throughout the year. This year bulked into Q3 because we had such great opportunities with Americans Got Talent and Sofia Vergara and then also the Wendy Williams show. So.

It was more of, you know, the timing wasn't the optimal for the entire year, but they were the right programs and they are bringing in the right customers.

Thank you. Good luck guys.

Our next question will come from Aaron Lee with Macquarie. Please go ahead. Most of you asked for information about coronavirus, what is the tools available to you in court?

Hi, thanks for taking my question.

I wanted to touch on the guidance. It's really great to see you were able to hold that. How has the competition of your guidance changed, if at all? Previously, it was roughly split between social casino and Elictus. How much growth are you assuming for those two pieces now?

The guidance still is pretty split between the two equally. We are seeing great momentum in our core business, our social casino business right now and feel like the guidance we gave there is still the right guidance even though the overall market is seeing some softness. With our Lictus piece and our shift to the Android first releases.

We are right on pace with what our original guidance was for the revenue there. So I would actually leave it very similar to the way that we've split it up in the past.

Okay, great.

And then on marketing, it was a bit higher than we expected, but it sounds like that was partly because of timing. But as others in the space kind of pull back on their spend, does that create an opportunity for you to kind of go out there and take more shares?

Yeah, so we do believe this is an opportunity for us, but we're going to look at the opportunity based on KPIs, not based on what we hear. Eventually, as spend gets pulled out, you would assume CPIs will start coming down. As they start coming down and we're able to maintain our LTVs through the engagement that we're driving with the Cyplay engine.

and the investments we're making in ad tech, which allows us to bring in better, better users. This could be an opportunity for us to even further spend into it, as long as we're able to get the metrics that we have always talked about, that we internally say, this is the right ROI for a spend.

Got it, thank you. Congrats on the quarter.

there.

Our next question will come from Franco Granda with DA Davidson. Please go ahead.

Hi, yeah, good morning team. So Josh, your business is clearly outperforming in this tough environment, particularly as many industry pundits called for the perennial decline of social casino post-ATT. So in your mind, what is driving this up performance, particularly around those initial expectations around social casino? And in my mind, this is impressive.

on your end, given the declining MAUs. Would you say you're focusing on this portfolio a little more intensely, perhaps compared to your peers as they look to expand into casual?

I mean, it's obviously a little difficult for me to comment exactly what everyone else is focusing on or whether or not they're focusing harder in one place than the other. What I will say is, you know, for us, we look at the social casino as still an evergreen market that we can continue to grow in. We have a competitive advantage with the slot machines that we have and we have best in class talent running all of the games. You know, we believe we're in a position where we can continue taking.

to continue taking share and you know over time we would like to double our market share here and this is this is kind of how we internally focus. It doesn't take our ball our mind off the ball with casual we continue to invest and we continue to you know look for the simple core games that have the right demographic that match social casino but it does never come at the cost of social casino and that's what I can say about you know CyPlay.

it's a little harder for me to make that statement about any of our competitors. That's helpful and absolutely fair enough. I guess more of a broader commentary around your marketing efforts on an online basis. What did you see on the CPI front in the quarter?

Yeah, so I think for us as a company, you know, we're so metered and we're so, you know, diligent about how we spend our money that when we see CPIs go up and LTVs are not climbing at the same rate, we pull back our spend because, you know, for us, it's about the ROI, not just about driving top line revenue.

And so we have a little bit of inflationary CPI growth that happens. But because we're not overspending into it, I believe our growth in CPI is less than what the overall market is seeing. Because as you would know in particular, if you spend a million dollars, you get one CPI. But if you spend three million on that same game, your CPI rises significantly.

because you're overbidding on more people. So, you know, for us, you know, compared to what I think the overall market is seeing, you know, they were up slightly, but they were within what our predictive range was and the LTV was following.

That's absolutely helpful and thanks for the reference there. And then lastly, have you started your cross-selling efforts? I know that you're just now ramping, I like this, but how are you thinking about cross-selling for the back of the year?

Yeah, so first, thanks for the question about Elictus. We're super proud of this team and they are very amazingly talented. Because of the things that came up with the iOS, returns with Elictus' new games, we put the cross-selling on hold because we wanted them to focus on the newer strategy, which has become an Android first company.

We're still targeting some cross-selling tests towards Q4, but mainly I would assume at this point they get pushed into Q1 because right now getting to be an Android first company is the number one priority for all the new games.

Thanks for all the call.

Our next question will come from David Karnovsky with JP Morgan. Please go ahead.

Hi, this is John for David, actually. Thanks for taking my questions. Just one for me. I wanted to double click on ELLICDS. I'm just wondering if you can give us an update on the integration over a full quarter now and any learnings or color you could share. Thank you.

So, you know, it's been a really productive quarter for the integration. We were able to get together and spend majority of the month of June , you know, digging into the businesses, getting to get a full deep dive into what's happening in the Admon world right now on both the UA and the the Adsell side, and then also start diving into the true benefits of the, you know, side play engine.

to grow the way we originally predicted and they originally had forecasted. Overall we are still very excited about the opportunity. They're hungry, they want to become the largest gaming company in Turkey and I mean they literally have it written on their walls and you know we could not be happier with how things are going so far.

Great, that's very helpful. That's it for me. Thanks, guys. Thanks, guys.

Our next question will come from Benjamin Soft with Deutsche Bank. Please go ahead. Theeely

Hey guys, thanks for the question. I was hoping to kind of better understand the trajectory for MAUs given some of the initiatives you're working on. Specifically, were there any factors you'd call out this quarter that drove the decline and do you think that it'll return to growth in the future?

So, I mean, MAUs are mainly driven by two things, obviously. One is installed and with the marketing softness that we saw, especially in iOS and Q2, MAUs as a whole started to come down. But I kind of want to remind you that MAUs isn't how we focus and it's not what we look at.

We're focusing on payers per month and how do we maintain those and keep those growing because this is the true foundation of our businesses, especially in our evergreen franchises. In Q2, we set an all-time record with 9.4% and in Q3, beginning off Q3, we've actually seen an increase in that as we've released some new features inside of Jackpot Party and Quikit that are really...

Would you be willing to break out how much revenue this quarter came from Elictis versus the core business? Just wondering if you guys plan to provide any additional disclosure around Elictis in the future as you incorporate that more fully into your business. Thanks.

Well, we're not breaking it out today, but we are holding very firm, if you heard the question earlier, that the breakdown in revenue gain is the same that we guided to earlier in the year, which is we would outperform the social casino market, which means our core business would grow approximately 5%, and then the rest of it would come from Elictus and we feel very...

confident with that revenue growth and you know, Elictus is on pace with that today. So I don't see any changes there. In the future we may break out the advertising business, you know, but we're evaluating that quarter by quarter based on, you know, the materiality of them to the rest of the business right now.

Got it. Thanks guys.

Operator, let's take our last question.

Our last question will come from Matthew Thornton with Truist Securities. Go ahead.

Hey, good morning. Thanks for sneaking me in here. Maybe two if I could. Josh, again, just coming back to the bridge to the 10% growth for the year, obviously it sounds like the core has perked up quite a bit in July into August . What else are you assuming in the back half of the year, whether it's new titles, solitaire, or spell spinner, or anything else we might be missing or need to think about in that bridge? And then just secondly around a lyctus in particular.

continuing to grow and we feel that that is where our growth will come from over the next five months. We've seen such great growth in July being one of our highest revenue months that we have ever had. Also, highest revenue month for one of our largest games and then a top three for the other one. We continue to see that growth through the rest of the year.

Now, do remember that seasonality from Q3 to Q4, where Q4 we do have a meaningful bump that happens primarily because Q4 has so many holidays in it with Halloween being in there, Thanksgiving being in there, Black Friday being in there, and then the last two weeks of December basically being holiday for a good share of the United States, that we normally will see a more than five percent increase in the number of people who are in the United States.

but do remember that they did not change much for the rewarded because the rewarded are already on button click because it's something that rewards inside the individual game. Right now, we don't predict to see any meaningful revenue decline from this, from the ad sales for Elictus on Android. We continue to work with Google on being the right way to implement and follow the rules, but...

Right now the Elictus team is very confident that we're going to be able to continue monetizing the way we always have.

Looks like operator we may have time for one more question if we have one.

Our next question will come from Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks so much for taking the question. Maybe two if I can. One, how are you thinking about potential alternative paths to the consumer X, the Android and iOS ecosystems? We hear a lot more from folks in mobile gaming thinking about going more direct to consumer and building more platforms out over time. How are you thinking about different avenues to the consumer as question number one? And then in terms of your existing distribution channels, are there any marketing channels, maybe you're experimenting with or thinking about as alternative channels?

mobile video gaming where you're going to be able to control the platform. So therefore you can get to control the full communication with the consumer and you're able to substantially lower the 30% platform fee down to approximately 10%.

We've made great strides here. We expect to launch the platform in Q4 of this year. We'll start testing, bringing over some users to make sure that everything's working the way that we planned and that they're interfacing and that we have the tools needed to deliver the perfect experience for them. We plan on scaling the platform in 2023 and in obviously...

individual deals with Sofia Vargheira who's got 26 million Instagram followers. We're also heavily, heavily involved with influencers from different channels from YouTube, from Instagram that are really showing great results. We're also starting to look at streaming TV. They're now starting to put commercials in and the commercials are starting to get very high viewership.

So, you know, I think what I could say about our growth team is they're hungry to go find the right customers and bring them into our world so our games can entertain them and they can be long-term customers of Syplay. And I, you know, our growth team is going to go out there and they're going to find every pocket, whether or not that the person is sitting in, you know, Oregon or whether that person's sitting in Australia. And they're going to find the channels that they're playing today. So, that's what we're going to do. And we're going to continue to do that.

and they're going to bring them into our Sci-PLY game. This concludes our question and answer session. I would like to turn the conference back over to Josh Wilson for any closing remarks.

I'd like to thank our side players across the world. We remain confident in our product roadmap and business strategy to deliver exceptional results.

With that, I will turn it over to the operator.

Have a great day

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