Logo of jester cap with thought bubble.

Image source: The Motley Fool.

SciPlay Corporation (NASDAQ:SCPL)
Q4 2020 Earnings Call
Mar 01, 2021, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the SciPlay fourth-quarter 2020 results conference call. [Operator Instructions] I would now like to turn the conference over to James Bombassei. Please go ahead, sir.

James Bombassei -- Investor Relations Vice President

Thank you, operator. During today's call, we will discuss our fourth quarter and year-ended 2020 results and operating performance, followed by a Q&A 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 early 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 materials, as well as in the Investors section on our website.

As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website at sciplay.com. Also, supplemental reference slides will be posted to our Investor Relations website. These slides are meant to facilitate your review of the company's results and be used as a reference document following the call.

I will now turn the call over to Josh.

Josh Wilson -- Chief Executive Officer

Thanks, Jim. Good afternoon, everyone, and thanks for joining us. 2020 was really a great year for us at SciPlay. Our strong execution drove record results.

We grew annual revenue by 25% outperforming the market and increased our AEBITDA by 54% to $189 million. Our core business remains healthy and we continue to strengthen our evergreen franchises with new features and content that are driving player engagement. While we are pleased with this year's results, we see additional opportunity to continue growing our core business, while making a firm commitment to diversify our revenue base into the $20 billion casual markets. We generated record operating cash flow this year with $193 million, which enables us several avenues to further expand into adjacent genres.

Our financial success in 2020 is part of the track record of delivering sustainable growth and margin expansion. If you look at our growth from 2017 to 2020, we grew revenue at a 17% CAGR and AEBITDA at a 40% CAGR with strong margin expansions. The basis of this growth was our payer-focus and live ops strategy. To that end, we achieved records across all key player metrics in 2020, further strengthening our evergreen social casino franchises.

In addition to our financial success, we closed on our acquisition of Come2Play, we're named the top social casino company by Eilers & Krejcik, brought on some of the industry's best talent and we're able to get back to our host communities with programs, play a part together and partners like Toys for Tots and Direct Relief. I attribute the success to our amazing team. Around the world they responded to a new challenging environment like champions, as we shifted to an entirely remote operation, they didn't miss a beat and executed and delivered on our live ops strategy with new features, driving payer conversion and monetization. As a result, our core evergreen games are healthy, growing, and driving revenue with key metrics, succeeding pre-COVID levels.

You may recall, we made an investment in tech stability and quality in late Q4, 2019, and into Q1, 2021, leaving our games in a good position when stay-at-home orders began. Additionally, we consistently update our evergreen franchises with new features and new content to keep them fresh and engaging similar to trying a game for the first time, a returning player can have a whole new game deal and experience, but within the comfort of a game, they already enjoy. To add further color, and for some of our new listeners on the call, a franchise like Jackpot Party has more than 250 slot titles within the game. And the slot title roster is frequently updated with hit titles rotating in and out of the game.

The ongoing efforts to keep improving these games are the foundation of our organic game pipeline strategy. This approach has led Jackpot Party, our oldest and largest game, which increased revenue by 33% in 2020. In previous quarters, we discussed an effort to invest in certain game teams in order to increase development throughput by replicating the team structure of Jackpot Party. We created a more dedicated focus on live ops, long-term features, and tech quality by adding key team members.

I am happy to say this effort is providing tangible success; First, Goldfish experienced its highest-ever revenue quarter in Q4, the team added several new daily events, including a collectible item feature called Greedy Grouper. These new live op features resulted in longer session times, increases in spins, higher average bets, more payers, and more payer transactions. For those of you who aren't avid Goldfish players, I'd encourage you to go check it out yourself; Second, we recently tech launched a new version of Quick Hit Slots, which includes a more comprehensive meta-game and increased live ops capability. We will discuss further details of this effort in upcoming calls as we are currently expecting this new and improved version to be launched worldwide by Q3.

And something I am really excited about is our push to expand our presence in the casual genre. Our expertise in data analytics, user acquisition, and live ops homed in social casino games with simple core loop mechanics translates well to the casual genre. We recently beta-launched Solitaire Pets Adventure, but the full launch on track for Q2. Our strategy revolves around moving into genres with similar characteristics and demographics of social casinos where we can apply our strengths to feel growth.

We've had success with this strategy already with our casual game Bingo Showdown. As you know, Bingo is not a slot game, but it does have similar gameplay or simple core loop game dynamic. As we execute the strategy, we will continue to add depth to our talent base, providing a path to build out a new casual pipeline. To that end, we will be starting a new game studio that will be focused on delivering a new casual game in the second half of 2022.

Currently, we referred to this game as Project X and as we progress, we will provide updates and details for future earnings calls. Our casual pipeline is enabled by the strong cash flows of our core social casino business, which provides the opportunity to concurrently explore M&A opportunities and organic new game development. Now, I'll turn the call over to Mike Cody to walk you through the financial information in more detail. Mike?

Mike Cody -- Chief Financial Officer

Thanks, Josh. Echoing Josh's comments, 2020 was a great year on a number of fronts. Focusing on the fourth quarter, we generated $147.1 million in revenue, which was 30% higher than the prior-year and above the estimated 26% market growth. Net income increased to $31 million versus $28.6 million in the prior year, including a $6.1 million increase in share-based compensation.

AEBITDA increased 40% from $32.1 million in Q4 2019 to $45 million in Q4 2020. For the full year, we achieved our highest revenue and AEBITDA ever at $582.2 million and $188.7 million respectively. We achieved very strong results in essentially all financial metrics in the fourth quarter, and broadly speaking, the business remains very healthy. While the stay-at-home dynamic has dissipated from its peak in Q2, our social casino games focus on payers has been rewarded as key KPIs remain above pre-COVID levels.

For example, ARPDAU in the fourth quarter grew up proximately 26% year-over-year to $0.63 from $0.50. Average monthly revenue per paying user increased 4% to $91.40 and payer conversion reached a quarterly record of 7.8%. To sum it up, our engine works as we are seeing our payers grow and they're spending more. On the expense side, we continue to target user acquisition spend to breakeven at six months.

Our ever-improving engine drives efficiencies, and we lowered sales and marketing expenses as a percentage of revenue to 22.9% down 480 basis points from the prior year. As we launched Solitaire Pets Adventure and expand our pipeline, we do expect to see an increase in our sales and marketing spend both in dollars and as a percent of revenue. The level of spending will ultimately be determined by the returns as we grow DAU, but we currently plan to spend $6 million to $7 million on user acquisition for Solitaire Pets Adventure in 2021, the spend will start small and ramp throughout the year. Our business continues to highly cash generative, which provides us with the resources to pursue our revenue diversification strategy.

In 2020, we generated $193.4 million in cash provided by operating activities. This represents an increase of $100.4 million over 100% from the prior year. We ended the year with $268.9 million in cash and cash equivalents, which was an increase of nearly $160 million from year-end 2019. At year-end, our available liquidity, including our undrawn revolver was $418.9 million.

Looking ahead for the full year 2021, we expect to exceed social casino market growth of 4.5% for Eilers & Krejcik estimates. A couple of additional notes for the year ahead, first, as a reminder, from the seasonality standpoint, the second quarter of 2020 benefited the most from the COVID stay-at-home dynamic, and as such it will be a difficult comp. And second, from a margin perspective, we will start putting the aforementioned marketing muscle behind Solitaire Pets Adventure beginning in the second quarter and our research and development line item will include a new game team. We currently plan to invest $3 million to $4 million into this new game team in 2021.

We expect these investments to have a high return and expand our position in the casual market. While this will cause variability in the interim, we reiterate our long-term margin target of 35% in the coming years as the business continues to scale. We believe our foundation in social casinos with our portfolio of established over-viewing games built on high-quality casino floor content is unmatched. Coupled with our highly talented team and engine that powers our growth, we are positioned perfectly to continue to scale and expand further into new genres.

With that, we are happy to take any questions. Operator?

Questions & Answers:


Operator

Thank you. We will now begin the Q&A session. [Operator Instructions] And the first question will come from Alexia Quadrani with JP Morgan. Please go ahead.

Alexia Quadrani -- J.P. Morgan -- Analyst

Thank you. I just have a couple of questions, if I may. The first one kind of a bigger picture question on the social casino space in general, we're seeing a fair amount of companies coming public in this space. And I'm wondering if that changes the competitive landscape for SciPlay at all.

And maybe you can comment on, how you see SciPlay position now versus the time of the IPO a couple of years ago. And then my follow-up question is really just on M&A, in terms of the acquisition, sort of really, how are you looking to as the next area for the development after Come2Play? And maybe you can elaborate a bit on how you plan a further expanding the IP you already own?

Mike Cody -- Chief Financial Officer

Ok. Alexia, this is Mike Cody. It's interesting, you're right, there's a lot of companies that have gone public recently and I believe seven of the top 10 social casino companies are now public. From our perspective, actually, this is sort of a positive thing.

It has more people telling the same story that we're telling. They're reinforcing the message if I've ever been games. And so we don't see a downside to this. We've been competing against these companies for years, so from a competition standpoint, really no difference.

On the M&A front, certainly, we looked at Come2Play first as a casual game for us going forward. As we're looking further into casual, we focused on casual games as well as social casinos, we're looking at across the size spectrum in terms of small companies, even smaller than Come2Play. And we may look at acquihires to larger much more transformational acquisitions as well. One more question on IP, you clarify your question on IP, I want to sure I get the right answer to that one.

Alexia Quadrani -- J.P. Morgan -- Analyst

Just to elaborate, you gave us some detail, but maybe you can elaborate further on how you're looking to expand the IP you already own?

Mike Cody -- Chief Financial Officer

Ok. So in terms of the SGIP I think, is that what you're referring to?

Alexia Quadrani -- J.P. Morgan -- Analyst

Yes. Yes.

Mike Cody -- Chief Financial Officer

Ok. So as you know, we have the rights that perpetual exclusive for the first three years post our IPO. Our plan at this point is to use that IP pretty much exclusively in the games that we have today. As we expanded into casual that IP has a little bit less value, that's really more social casino-based-IP.

And so those continue to add that into the games. Josh mentioned I believe over 250 titles in Jackpot Party. So we're always rotating those titles in and we want to make sure that we have a long runway of IP to continue to use in the future and with over 1,500 titles, we believe we have that.

Alexia Quadrani -- J.P. Morgan -- Analyst

All right. Thank you very much.

Operator

The next question will come from Matthew Thornton with Truist Securities. Please go ahead.

Matthew Thornton -- Truist Securities -- Analyst

Good afternoon, guys. Thanks for taking the question. Maybe first, maybe for Josh on, bingo -- excuse me, on the solitaire title. How would you have us think about that the size of that opportunity is Bingo Showdown, a good proxy in terms of what the opportunity could look like there? And just, secondly, maybe for Mike you talked about the 35% margin target.

Can you remind us, I think that was a five-year target when you guys came public, so that would make it somewhere around 20% to 24%? I just want to make sure that I had that right? Thanks, guys.

Josh Wilson -- Chief Executive Officer

Ok. Thanks a lot, Matthew. So great question on the solitaire, I think the better way to look at it is, instead of trying to compare Solitaire Pets Adventure to Bingo, I would more compare it to other solitaire games that are currently in the market. The major difference between our particular game and theirs is the difference between Klondike Solitaire compared to Tri-Peaks or Spider.

There are a couple of really good comps out there with like Grand Harvest, Tri-Peaks. Both of them are doing very similar medic games around a simple card loops solitaire game. And we believe this is the potential that our game has once we're able to ramp it in the market.

Mike Cody -- Chief Financial Officer

And then on EBITDA, we did reiterate our 35% long-term target and we still believe that's valid. However, I should say within a social casino, we are marching toward that 35% no issues there. However, we have mentioned some investments we're going to be making in 2021 in the social from the casual space. So as you think about 2021 margins, I think, look at Q4 2020 as a good proxy for the year.

It was 30.6%. We would anticipate being somewhere in that range for the near term, but then continuing our march toward 35% as we scale.

James Bombassei -- Investor Relations Vice President

Operator, we'll take our next question.

Operator

The next question will come from Matthew Cost with Morgan Stanley. Please go ahead.

Matthew Cost -- Morgan Stanley -- Analyst

Hi everyone. Thanks for taking the questions. Two, if I could. So it looks like payers were actually up sequentially in 4Q and just below where they were in 2Q.

So it seems like, payers, that number looks really strong even, as you got six-plus months beyond kind of the peak of the COVID impact in 2Q. So I'm just wondering kind of what were the drivers there and then how are you seeing those payers behave as we start to move into 2021 out of that holiday period. And then the second one is just on Project X, I was wondering if you could tell us a little bit more about that studio and how you're balancing decisions about when to start new studios and invest internally versus do stuff inorganically? Thanks.

Josh Wilson -- Chief Executive Officer

Ok. Thanks a lot, Matthew. So from the payers' point of view, 100%, if you remember in past earnings calls, we spoke about how we made our investments in technology and Q4 of 2019, Q1 of 2020, then it really got all of our games healthy, which allowed us to 100% focus on live ops and new features. We saw the fruits of that labor through Q2, Q3, and Q4 of last year with some huge features released from both Jackpot Party and Goldfish.

Goldfish, which is if you remember the second of our project all-star sorry – it was the second of our project all-star where we were able to build out the team and then also update not only the technology but the foundation of the game, that game was running at full speed, going into Q4 of this year, where it had all-time record across revenue and payers. We believe this is the new baseline for the core business going forward. And so we continue to expect to grow from there over time. From the project deck standpoint, it's kind of twofold.

So the first fold was, as we were doing all of the investments in our current organic games, we focused all-new talent onto those games. As we felt better and better about the future, we started looking at how do we expand the studios into more talent in order to build out as far as what direction we go from there, it's really going to be based on probably one of two things. What simple core loop logic we already have on hand today, whether or not, that's something in the Solitaire world, or maybe even the Bingo world, or what type of talent we are able to bring in from the design standpoint or a technology standpoint to open up more avenues. But I think at the end of the day, the one thing we're very excited about is we feel extremely confident that we can take these simple core loops, plug them into our monetization UA and live ops engines and get the social casino type monetization that we are seeing across our portfolio.

Mike Cody -- Chief Financial Officer

And one point of clarification back on Josh's first part of the answer. Project all-star is our internal name for adding development throughput and copying the structure of Jackpot Party to other teams just in case we were done on our call last time.

Josh Wilson -- Chief Executive Officer

Thank you, Mike.

Matthew Cost -- Morgan Stanley -- Analyst

Got it. Thanks.

Operator

The next question will come from Drew Crum with Stifel. Please go ahead.

Drew Crum -- Stifel Financial Corp. -- Analyst

Ok. Thanks. Hey guys. Good afternoon.

So it looks like Jackpot Party represented more than 50% of your revenue last year. Can you talk about what your expectations are for that game this year? And then separately, any trends, learnings you're willing to share what you've seen during testing of Solitaire Pets as you move closer to that ramp for that launch rather? Thanks.

Josh Wilson -- Chief Executive Officer

As far as the Jackpot Party, I'll start by saying we could not be more excited with the year that we had in 2020. It made us extremely more confident that our decision to copy that team structure and copy that technology roadmap will make us more successful in the future. We have the same expectations for Jackpot Party. We expect it to continue being a market leader and continuing to outperform market growth.

As we have one of the most talented teams in the world running the game on a day-to-day basis. So from those -- sorry about that from the learnings of the slot, at this point, we are in the technical launch of it. So we don't have engagement metrics on it that we would use. But what I would say right now, it's from a technology standpoint, the game is as solid as we can hope to be.

And it is beating all of the benchmarks that we had set forward. And we don't -- we do not believe that the soft launch will be delayed, which we still have coming in Q2 of this year.

James Bombassei -- Investor Relations Vice President

Operator, we'll take our next question.

Operator

The next question will come from Chad Beynon with Macquarie. Please go ahead.

Chad Beynon -- Macquarie Group Limited -- Analyst

Hi, good afternoon. Thanks for taking my question and congrats on the results. Mike, you were kind enough to mention that for 2021, you plan to exceed Eilers's estimate. I was wondering if you could help a little bit on a seasonality basis just kind of looking back over the past couple of years, the seasonality was obviously different than what we saw in 2021.

So could you maybe help us a little bit just think about what that should look like from a rank order standpoint? Obviously, benefiting from Solitaire and some of the live ops that you'll see in the back-half?

Mike Cody -- Chief Financial Officer

Yes. Absolutely. Obviously, pre-COVID seasonality was very different. Typically you would go Q4, Q1, Q2, Q3, roughly about the same.

And so obviously Q2 was much larger last year. We don't expect to repeat that. In our prepared remarks, we also mentioned that it will be a tough comp. So if your stack ranking them again for next year, we'd expect to be back-end weighted with Solitaire Pets Adventure launching with a new Quick Hit coming out things of that nature.

So probably again, go Q4 it'd be interesting to see how, again, Q3 and Q2 do versus Q1. But I think we expect to see some sequential growth in all quarters.

Chad Beynon -- Macquarie Group Limited -- Analyst

Ok. Appreciate that. And then any updated views on Apple's changes to IDFA and how that will impact the outlook.

Josh Wilson -- Chief Executive Officer

Yeah. As of today, we are very confident that it will not have any negative impact on our outlook. We have that preparing for this change now, going on nine months, we believe we're ready for the changes that are going to happen with the IDFA and also the changes at the SKAdNetwork. But like I said, we believe we have everything in place that when they make that change official and it goes live, we will continue to be able to efficiently run our marketing spend as we have been doing for the last few years.

Mike Cody -- Chief Financial Officer

And if you think about how our games cohorts have been built over the years, a lot of our monetization comes from players who have been in the game for many years, including again like Jackpot Party has more than 50% of its revenue coming from players within the game since 2017 or prior.

Chad Beynon -- Macquarie Group Limited -- Analyst

Ok. Thank you both. Appreciate it.

Josh Wilson -- Chief Executive Officer

Thank you.

Operator

The next question will come from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good afternoon, guys. Thanks for taking my questions. I'm just curious about the decision to start a new game studio to develop casual games, project X versus using Come2Play or even existing SciPlay studios.

Josh Wilson -- Chief Executive Officer

Ok. So Ryan, I mean, tactically, we may use the Come2Play studio or one of our existing studios. So I think the way that we would think about it is, we may build-out in Austin, Cedar Falls, or Tel Aviv. We may utilize the development center in Kyiv.

I think the part that we look at it as what we are saying is we're going to internally have resources that are from our SciPlay team, or we're bringing someone on external and we're going to build out from the beginning ownership of not only the design document but the technology and then all the way through the launch phase. But it may end up in any of the locations, which we will talk about it in later calls.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Got it. That's helpful. Then you talked about quarterly cadence on revenue, just thinking on margins. It sounds like costs for Project X, as well as UA for Solitaire Pets, will ramp throughout the year.

So is it fair to assume a kind of sequential decline in EBITDA margin throughout the year?

Mike Cody -- Chief Financial Officer

Well, it really depends again on our sales and marketing spending. We're seeing returns there, so you will see fluctuations in the core business. I don't think it's going to be materially different by quarter, again, using Q4 2020 as a proxy.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Great. I'll hop back in the queue. Thanks, guys.

James Bombassei -- Investor Relations Vice President

Operator, we'll take our last question.

Operator

The last question will come from Mike Ng with Goldman Sachs. Please go ahead.

Mike Ng -- Goldman Sachs -- Analyst

Hi, thank you very much for the question. SciPlay has a lot of cash building up after some strong cash flow generation, particularly this year. I was just wondering if you could talk a little bit about your M&A strategy, how aggressively are you guys seeking to roll up another studio after the Come2Play acquisition? Thank you very much.

Josh Wilson -- Chief Executive Officer

Yeah. Thanks a lot, Mike. So, it's hard to say, so there are a lot of companies that are out there, the companies that are out there, some of them are very promising and have not only amazing growth, but amazing balance sheets out there. I do think that we want to continue focusing on companies that fit our core process going forward.

So, something in that simple casual field that has a simple core loop that we can plug our engine into and help them grow faster than they were. So a one plus one equals more than one or more than two. And then on top of that making sure that we're finding companies that fit SciPlay's culture. So we have built a culture of not only wanting to win but wanting to win together and making sure that any other company that we bring plugs in not only on the numbers side but also plugs in on the culture side as a whole.

I think we'll continue to be extremely active in looking and evaluating every option that is out there. But I do believe that it has to check those first two boxes in order for it to be something that we would proceed on.

Mike Ng -- Goldman Sachs -- Analyst

Thank you very much, Josh. I appreciate the thoughts.

Operator

This concludes our Q&A session. I would like to turn the conference back over to Josh Wilson, for any closing remarks. Please, go ahead, sir.

Josh Wilson -- Chief Executive Officer

Thanks for joining everyone today. We really appreciate your support. We are truly excited for 2021 as we continue to grow organically and continue to expand our presence in the Casual segment. We look forward to updating you on our continued progress during the first-quarter call.

Thank you and have a great day.

James Bombassei -- Investor Relations Vice President

Thanks, everyone for joining us on the call. We'll be available after the call for questions.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

James Bombassei -- Investor Relations Vice President

Josh Wilson -- Chief Executive Officer

Mike Cody -- Chief Financial Officer

Alexia Quadrani -- J.P. Morgan -- Analyst

Matthew Thornton -- Truist Securities -- Analyst

Matthew Cost -- Morgan Stanley -- Analyst

Drew Crum -- Stifel Financial Corp. -- Analyst

Chad Beynon -- Macquarie Group Limited -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Mike Ng -- Goldman Sachs -- Analyst

More SCPL analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.