SciPlay Corporation (SCPL) Q3 2020 Earnings Call Transcript

SciPlay Corporation (SCPL)
Q3 2020 Earnings Call
Nov 04, 2020, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening, and welcome to the SciPlay third-quarter 2020 results conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Shore. Please go ahead.

Robert Shore -- Investor Relations Contact

Thank you, operator. During today's call, we will discuss our third-quarter 2020 results and operating performance followed by a question-and-answer period. With me this afternoon are Josh Wilson and Mike Cody. Our call today will contain certain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued this afternoon, the materials related to the 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 the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release as well as in the Investors section on our website.

As a reminder, this call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website at sciplay.com. Also, supplemental reference slides will be posted on our Investor Relations website. While management will not be speaking directly to these 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?

Josh Wilson -- Chief Executive Officer and Director

Thanks, Bobby. Good afternoon, everyone, and thanks for joining us. The third quarter represented another strong quarter for the company driven by the execution of our live ops strategy to increase the monetization of games and franchises that players love to play. Let me start by sharing some key highlights from the quarter.

Number one, we achieved a 30% year-over-year revenue increase, which exceeds market growth. This was driven by strong performance throughout the majority of the portfolio. Our baseline has continued to remain above pre-pandemic levels even as stay-at-home tailwinds begin to wind down in the quarter. Number two, we have started on our path to expand into the casual genre, which represents a total addressable market in excess of $20 billion.

We are working toward the launch of our Solitaire venture with a beta expected out in early '21 and the full launch in the first half of '21. Number three, we have brought on some of the best talents in the industry, building on an already impressive team collaborating across the world. Looking ahead, we are confident we have strength and momentum across our games that will enable us to outpace industry growth in 2020 and beyond. Our success will be driven by a few key pillars.

The first is the customer is number one. We go to work every day with a focus on the game franchises that players love. We seek out and get direct feedback on our current state and future path of our games. This helps ensure that we are building games that will resonate with our core demographic and, along with authentic content, our player base will continue to be so sticky.

The second is delivering unmatched quality. This is a collaborative effort across the company to create and implement best-practice standards to ensure smooth, uninterrupted gameplay free of friction so that players can consistently enjoy our games and maximize the entertainment value of their time playing our games. The third and fourth really go hand-in-hand, building a winning culture and attracting top talent. I can confidently say we have a great culture at SciPlay.

Our culture took years to develop, and we work hard to be unique in how we operate. We value individuality and collaboration as a formula to win. We believe that this winning formula is reflected in this quarter's strong results, which we were able to deliver thanks to the hard work and dedication of the team members around the world, including Austin, Cedar Falls, Tel Aviv, Pune, Bangalore, and Kiev, where our newest development team is located. The strength of our culture has attracted and will continue to bring in more top talent to the organization.

To that end, we would like to welcome Danny Moy to the team who's joined as our chief strategy officer in Q3. Danny has 20 years of experience at Zynga, King, and Yahoo! in mergers and acquisitions, business development strategy, and operations of leading global companies. In his new role, he will lead our corporate and business development efforts to identify M&A, new business opportunities, drive strategic planning process, and oversee the corporate strategy. We also welcome leaders in user acquisition, data, product management, quality assurance, and engineering that brought in experience from across the mobile gaming and broad technology industries.

As noted last quarter, we are replicating the success of our Jackpot Party game team structure across our other franchises. As a result, our largest games will have dedicated teams working on live ops, feature implementation, and tech quality and improvement. We believe this enhanced team design will allow feature releases to go to market faster, maximize player engagement, and lead to future growth. Briefly touching on the upcoming IDFA changes from Apple, we are and have been proactively working across our teams and with our partners to understand and mitigate any potential impact.

And while we are still working through the details with our scale and team, we believe we are doing everything feasible to be in the best possible position in post-IDFA world. While our evergreen franchises remain strong with more growth ahead, we also have many opportunities to continue to grow the business in other areas from entry into casual space with the acquisition of Come2Play to expanding international testing to our other games, to identifying additional value-creating M&A opportunities that complete our core strengths. With our talented team and great culture, we remain confident that we are in the very early stages of a multiyear revenue growth and earnings expansion cycle at SciPlay, and we couldn't be more excited by the prospects and opportunities. Now I'll turn the call over to Mike Cody to walk through the financial information in more detail.

Mike?

Mike Cody -- Chief Financial Officer

Thanks, Josh. In the third quarter, we generated revenue of $151.2 million, which, as Josh mentioned, was 30% higher than the prior year. Net income was up over 40% to $35.1 million versus $25 million in the prior year, and our AEBITDA increased 54% to $49.3 million. This strong growth was driven by the operating leverage in our business model, consistent results across the majority of the portfolio, and continued benefit from the stay-at-home dynamic.

Net income margin increased 170 basis points to 23.2%. Sales and marketing expense of $33.7 million represented 22.3% of revenue, which was down 600 basis points from the prior year. We continue to expect some variability in sales and marketing spend as a percent of revenue from quarter to quarter as we execute our portfolio approach to targeting our spend on the games and channels where we see the opportunities for the highest returns. We generated $56.4 million in cash provided by operating activities.

This represents an increase of $22.6 million or 66.9% from the prior year. We ended the quarter with $210.3 million in cash and cash equivalents, which was an increase of nearly $100 million year to date. At quarter end, our available liquidity, including our undrawn revolver, was $360.3 million. We achieved very strong results in essentially all financial metrics, including average monthly revenue per payer, which increased 11% to $94.10; average revenue per daily active user, which increased 34% to $0.63; and payer conversion, which reached a quarterly record of 7.3%.

Our focus remains on exceeding market growth with our existing evergreen games. And we are in a solid cash position, providing ample resources to continue to grow the company. With that, we're happy to take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Bryan Kraft with Deutsche Bank.

Ben Soff -- Deutsche Bank -- Analyst

Hey, guys. This is Ben on for Bryan. Thanks for taking the question. The first one would be around ARPU, and I was wondering if you could help us think through some of the moving pieces here with the COVID tailwinds moderating and if there are any initiatives you guys are working on internally, be it maybe getting more people into the payer base but they're lower paying or any of the moving pieces there and sort of to help us understand how this could trend going forward.

Thanks.

Josh Wilson -- Chief Executive Officer and Director

Yes. So this is Josh. Great question. I think the way that we're thinking about it at this point is the work that we've been doing throughout the entire year where we've been not only working on sewing up some of the technology in the game throughout the year, we've now focused on putting in new engagement features in each of our games, and we had multiple ones released in the third quarter of this year, which has allowed us to continue seeing high engagement from not only our payers but also the rest of the population itself.

Where the ARPU is down slightly from Q2, it is up in Q3 compared to where it was in Q1, and that is primarily because of the new engagement we've seen.

Ben Soff -- Deutsche Bank -- Analyst

Got it. Thanks. And then the second one would be around the Come2Play acquisition, just any updates on how the integration is going and the development process with that IP would be really helpful. Thank you.

Josh Wilson -- Chief Executive Officer and Director

Yes. For sure. At this point, we cannot be more pleased. We are 100% on track in the integration of Come2Play.

The team has shown to be as amazing as we thought they were during the due diligence and are really hitting the ground running. We have integrated with some of our SciPlay legacy talent in order to build out a very immersive meta game around the best-in-class Solitaire core loop that they had already had. We have started doing small tech testing, which we imagine to continue happening throughout the year with going into beta sometime in Q1 of next year, with looking to ramp in first half of next year. Also with the Come2Play integration came a new development studio in Kiev.

This group is amazingly talented engineers, artists, QA. We have seen great value-add to the entire business, and we actually are looking at them as a long-term play as we work toward our 35% EBITDA margin over time to help us continuing controlling our R&D costs.

Ben Soff -- Deutsche Bank -- Analyst

Got it. Thanks.

Operator

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

Franco Granda -- D.A. Davidson -- Analyst

Hi, guys. Thanks for taking my question. I was just hoping you could perhaps spend a little bit on IDFA. I know you kind of talked about it.

But can you maybe discuss a few of the efforts that you're putting in today? And maybe discuss a little bit on what you're going to have to do once it comes online.

Josh Wilson -- Chief Executive Officer and Director

Yes. For sure, Franco. So I mean as we spoke about last quarter, we are looking at taking multiple different routes down this. One is through third-party solutions that are out there, our own internal solution, and then also integrating the SKAdNetwork, which is Apple is talking to be its future platform for UA on iOS.

During that same time, since we have full access to all of the players, we skewed a little bit more heavy on our spend on the iOS platform, even going slightly above our six-month ROI goal while we're able to track that user 100%. As we sit right now, I'd tell you I feel very confident that when Apple does put out its new changes, we will see the very minimal effect to the business and actually are looking at it as a possible benefit, being one of the first movers to take advantage of the new platform.

Franco Granda -- D.A. Davidson -- Analyst

All right. That's certainly helpful. Thank you for the -- for all the color. And I guess as you have always expanded your M&A team, your M&A-focus team, and your cash balances keep on growing, at this point, how large is your appetite for M&A? I guess how big can you go?

Josh Wilson -- Chief Executive Officer and Director

I mean, how big we can go really depends on the ROI of the investments that we're looking at. At this point, I would say we don't have a dollar amount that says we're going to stay under this. I would say anything is an option as far as that goes. But what we are doing in the meantime is, where we brought in Danny Moy and other people on his team, we are strengthening the number of people that we have that are going out and looking for these amazing studios and amazing games that can help us build out the model to show that these acquisitions can be to the benefit of the shareholders of SciPlay long term.

Franco Granda -- D.A. Davidson -- Analyst

All right. Thanks, guys.

Operator

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

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Good afternoon. Thanks for taking my questions. I guess, first, the social casino category, which you guys are in, has held up relatively better than some other categories in mobile from the 2Q highs during the lockdown.

And just curious to get your thoughts at a high level on why you think that might be and whether you guys have done any sort of user surveys to show really a transformative impact on mobile social casino that would suggest this is a longer-lasting uplift than maybe we expected? And then I have a follow-up.

Josh Wilson -- Chief Executive Officer and Director

OK, Ryan. Thanks for the question. We have done some small surveys as far as that goes, but it's kind of hard to look at those as tangible data. I think the tangible data comes in the engagement KPIs so that we have seen not only flatten but even start to go up again as the third quarter went.

So yes, for sure, during the COVID, the entire mobile world saw a large increase of players. But even post that, we are seeing all of these players be more engaged. And when I say more engaged, they are playing more days a week and more time on app when they do play. So we're kind of looking at it as, one, we were able to get back a whole bunch of people who had used to play the game a long time ago and now have come back in and seeing a new Jackpot Party, a new Gold Fish and are as engaged as they were the very first time they came in but I think, more importantly, is continuing to focus on features that keep them in the game long-term.

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

OK. Yes. And it sounds like, certainly, spending has done well sequentially. But how do we -- what should we make of the quarter over quarter, year-over-year decline in the monthly and daily users, especially against sequential uptick to a record payer conversion.

It seems to suggest, at least to me, that the new users aren't really contributing to the bookings, and it's really a core group of payers, your monthly payers, that really as long as they stick around, you guys should be fine. So how should we -- what should we make of that dynamic there?

Josh Wilson -- Chief Executive Officer and Director

Yes. So while I understand how you got there, it isn't actually -- it's more of a change in methodology or philosophy on our side. So during the last, call it, six to nine months, we started focusing more and more of our marketing spend on bringing in payers over just pure DAU, which means that our CPIs went up slightly, and we brought in less installs. But the value of these installs were higher than the previous ones.

So we're actually seeing a very similar contribution from our marketing spend because we are still running at under our six-month ROI goal. And as you could see the dollars, it gives you the math on what is actually being returned as far as that side of the world goes. I think it's probably a continued strategy that you see us doing, especially in the social casino world where our main revenue is coming from in-app purchases. As we get ready to expand with Pets Solitaire in first half of next year, you will see us on that particular game taking a more DAU approach as we're starting to use monetization as the larger way to monetize.

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

OK. That's super helpful. And then just lastly, a housekeeping question. G&A stepped up significantly quarter over quarter.

Just curious if there is a -- that's a onetime step-up or additional overhead due to the M&A.

Mike Cody -- Chief Financial Officer

No. It's 7.5%, which is roughly in the range that we've been historically. I think if you're referring -- comparing to Q2 of '20, of course, it was down because of the increase in revenue. But 7.5% is very similar to last year, which was 7.2%.

Q4 of '19 was 7.5%. So it's very much in line with what it has been historically.

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

OK.

Operator

Our next question will come from Chad Beynon with Macquarie.

Aaron Lee -- Macquarie Capital -- Analyst

Hey. This is Aaron Lee on for Chad. Just thinking about all the marketing going on right now around sports betting and iGaming. Have you guys noticed any changes in your user acquisition trends? We've heard from the real money gaming operators that they're spending a ton on marketing right now.

And given the difference in player bases and your strong quarter, it seems like there may not be much of an impact, but just wondering if there's anything you guys are seeing.

Josh Wilson -- Chief Executive Officer and Director

No. So I would say, from our side, we do not believe we're seeing any impact from the increase of sports betting or iGaming happening. We do see a little bit more of an impact in the iOS world, more around the fact that, one, we've increased our spend on that platform during the last four to five months that the IDFA is continuing to be on. And then also many of our competitors are doing the same thing at the same time.

So you're just getting more competition mainly in mobile games than we are from the real money gambling side of the world.

Aaron Lee -- Macquarie Capital -- Analyst

OK. Great. That's helpful. And I wanted to just take a shot at this here.

And appreciate it might be early, but is there anything you can share in terms of October trends?

Mike Cody -- Chief Financial Officer

No. I mean, not at this point. I think we're still seeing numbers that are better than pre-COVID levels, but we're not ready to give any guidance at this point.

Josh Wilson -- Chief Executive Officer and Director

I will say that probably the one thing that we are very happy is, during the month, we released a couple of features, especially inside of Jackpot Party and Gold Fish. And we have seen the same level of engagement, even some higher engagement in October.

Aaron Lee -- Macquarie Capital -- Analyst

OK. Awesome. That's helpful. Thanks very much.

Operator

Our next question comes from Matthew Thornton with Truist Securities.

Matthew Thornton -- Truist Securities -- Analyst

Hey. Good afternoon, guys. Thanks for taking the questions. Two, if I could, and I apologize if you've hit on these already, I jumped in a little bit late here.

The first, on international, the initiative there, just curious if maybe relative to when we all spoke three months ago, whether that's incrementally more positive or negative and kind of maybe an update on when you think that could start to impact numbers. And then secondly, the initiative around kind of implementing some of the Jackpot Party team structures around some of the other franchises. I think that was really an effort to drive throughput off of live ops. Again, just looking for an update on how that's progressing and when you think that transition or that initiative is complete.

Thanks, guys.

Josh Wilson -- Chief Executive Officer and Director

So I'll go ahead, and I'll start with the second question here. So we started making the transition around our Gold Fish franchise and our Quick Hit franchise late summer. And just based on where they are during the COVID time, we've been able to progress on them at different speeds. We have seen output coming out of this in the Gold Fish franchise, which we've seen and some amazing features in live ops that came out during the third quarter.

We expect to see more of the benefit on the Quick Hit changes in, call it, late Q1, early Q2 of next year. On the international side, we've continued to run, the major game that we are focusing on now is still MONOPOLY. I guess maybe the best way I would say it right now, we are continuing to see good numbers, and we are continuing to see good KPIs. But as it sits today, we are still seeing more favorable ROIs in the U.S.

So we continue to put more of our dollars there. One thing that we are very excited about that we expect to hit in the first half of next year is a change to the way that our Social Casino slot machine do a spin. And with this change in the spin, we expect to see latency across all of our games go away, which will give us the chance to push harder on the content -- or the games that have the content that is more international, for example, 88 Fortunes, which has a lot of shared content with both Australia and Macau would be a very good game there for us to be able to push harder.

Operator

[Operator instructions] Our next question will come from Shweta Khajuria with RBC Capital Markets.

Shweta Khajuria -- RBC Capital Markets -- Analyst

OK. Thank you. Again, I'm sorry, too, if this was covered. I hopped in a little bit late.

But can you please comment on intra-quarter trends, so from July to August to august to September, and if sequentially you saw improving trends, whether it was an engagement or overall growth? And then do you see any correlation in engagement with markets that were opening and closing because of COVID, anything that we can draw out? Thanks.

Josh Wilson -- Chief Executive Officer and Director

Yes. So I'll try my best here. It's good to talk to you, Shweta, it's been a while. So for the, like, extremely encouraging sign, what we saw throughout the third quarter from engagement has eventually flattened out early in the third quarter and then started to rise again as we went through the entire quarter, which, for us, the good signs there means -- we feel like the major engagement that we've got from COVID early in the second quarter were actually flattened out and then now back on growth rates there.

As far as -- I'm sorry, I forgot what the second part of that question was, Shweta.

Shweta Khajuria -- RBC Capital Markets -- Analyst

Did you see any -- no problem. Did you see any correlation with engagement and markets that were open, for example, or closed during the quarter? So did you see a noticeable decrease in engagement in markets that were open, for example, or the other way around?

Josh Wilson -- Chief Executive Officer and Director

Yes. So -- no. When everything was happening in April and May, I would have said that is a very, very true statement. But now when we kind of look at our engagement by state in the U.S., we don't see any major difference from California, which is still majority closed, to Iowa, which is majority open.

Right now, the engagement metrics look very, very similar across both.

Shweta Khajuria -- RBC Capital Markets -- Analyst

OK. That's very helpful. Thanks, Josh.

Operator

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

Josh Wilson -- Chief Executive Officer and Director

Hey. Thanks, everyone, for joining today. We really appreciate your support. I'm excited for the remainder of this year, 2021, and beyond, as we begin our road into the casual space, which will augment our growth of our Social Casino games.

We are confident in our strategy to create value. We look forward to updating you on our continued process during our next call. Thank you, and have a great day.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Robert Shore -- Investor Relations Contact

Josh Wilson -- Chief Executive Officer and Director

Mike Cody -- Chief Financial Officer

Ben Soff -- Deutsche Bank -- Analyst

Franco Granda -- D.A. Davidson -- Analyst

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

Aaron Lee -- Macquarie Capital -- Analyst

Matthew Thornton -- Truist Securities -- Analyst

Shweta Khajuria -- RBC Capital Markets -- Analyst

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