Digital casino game developer SciPlay (NASDAQ:SCPL) announced better-than-expected results in Q2 FY2023, with revenue up 18.6% year on year to $189.9 million. SciPlay made a GAAP profit of $41.4 million, improving from its profit of $32.3 million in the same quarter last year.
SciPlay (SCPL) Q2 FY2023 Highlights:
- Revenue: $189.9 million vs analyst estimates of $181.3 million (4.72% beat)
- EPS: $0.25 vs analyst expectations of $0.26 (3.28% miss)
- Free Cash Flow of $53.6 million, up 41.4% from the previous quarter
- Gross Margin (GAAP): 69.4%, down from 70.1% in the same quarter last year
- Average Monthly Paying Users: 610,000, up 9,000 year on year
Headquartered in Las Vegas, SciPlay (NASDAQ:SCPL) offers digital casino games that favor repetition over skill.
SciPlay is a developer and publisher of digital games for mobile and web platforms with a focus on social casino-like games that are repetitive in nature rather than requiring skill. The company was founded in 1998 as a division of Scientific Games Corp, and it became an independent public company in 2019. In 2021, Scientific Games explored an acquisition of SciPlay but ultimately abandoned the deal.
Because no real money is won or lost in SciPlay’s casino-like games, the company maintains that players are not gambling. However, some argue there is potential for legal risk because consumers can still spend money on these games through in-app purchases (to unlock additional features), power-ups (to access bonus games), and premium content such as special themes and characters. SciPlay generates revenue through these sources as well as through digital advertising and partnerships, incentivizing the company to enhance the addictive nature of its games.
SciPlay's flagship product is Jackpot Party Casino, a free-to-play game that simulates slot machines. As you play, you earn virtual coins that you can use to keep playing or to buy special bonuses. Like most of SciPlay’s games, in-app purchases and other spending can enhance gameplay.
Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.
Competitors offering casual digital games that may feature casino-like activities include Skillz (NYSE:SKLZ), Playstudios (NASDAQ:MYPS), and Huuuge (WSE:HUG).Sales Growth
SciPlay's revenue growth over the last three years has been mediocre, averaging 13.5% annually. This quarter, SciPlay beat analysts' estimates and reported 18.6% year-on-year revenue growth.
Ahead of the earnings results, analysts covering the company were projecting sales to grow 1.73% over the next 12 months.
Usage Growth
As a video gaming company, SciPlay generates revenue growth by expanding both the number of people playing its games as well as how much each of those players spends on (or in) their games.
Over the last two years, SciPlay's users, a key performance metric for the company, grew 8.56% annually to 0.61 million. This is decent growth for a consumer internet company.
In Q2, SciPlay added 9 thousand users, translating into 1.5% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like SciPlay because it measures how much revenue each user generates, which is a function of how much paying users spend on its games. 
SciPlay's ARPU growth has been strong over the last two years, averaging 9.47%. The company's ability to increase prices while growing its users demonstrates its platform's value, as its users continue to spend more each year. This quarter, ARPU grew 16.9% year on year to $311.82 per user.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. SciPlay's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 69.4% this quarter, down 0.7 percentage points year on year.
For gaming businesses like SciPlay, these aforementioned costs typically include royalties to sports leagues or celebrities featured in games, fees paid to Alphabet or Apple for games downloaded in their digital app stores, and data center and bandwidth expenses associated with delivering games over the internet. After paying for these expenses, SciPlay had $0.69 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
SciPlay's gross margins have been stable over the past year, averaging 69.3%. These robust unit economics, driven by the company's asset-lite business model and strong pricing power, are higher than its peer group and allow SciPlay to make more investments in product and marketing.
User Acquisition Efficiency
Consumer internet businesses like SciPlay grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
SciPlay is efficient at acquiring new users, spending 35.9% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving SciPlay the freedom to invest its resources into new growth initiatives.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
SciPlay's EBITDA was $59.4 million this quarter, translating into a 31.3% margin. Additionally, SciPlay has demonstrated extremely high profitability over the last four quarters, with average EBITDA margins of 29.3%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. SciPlay's free cash flow came in at $53.6 million in Q2, up 55.4% year on year.
SciPlay has generated $161.3 million in free cash flow over the last 12 months, an eye-popping 21.9% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from SciPlay's Q2 Results
Sporting a market capitalization of $419.5 million, SciPlay is among smaller companies, but its more than $394.9 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see SciPlay beat analysts' revenue expectations this quarter. That really stood out as a positive in these results. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $19.65 per share.
Is Now The Time?
When considering an investment in SciPlay, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We think SciPlay is a solid business. However, its revenue growth has been a little slower over the last three years, and analysts expect growth rates to deteriorate from there. But on a positive note, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits and its gross margins are a strong starting point for the overall profitability of the business.
At the moment SciPlay trades at 2.1x next 12 months EV/EBITDA. There are definitely things to like about SciPlay and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.
Wall Street analysts covering the company had a one year price target of $20.6 per share right before these results, implying that they saw upside in buying SciPlay even in the short term.
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