SciPlay (NASDAQ:SCPL) Beats Q1 Sales Targets

Full Report / May 09, 2023
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Digital casino game developer SciPlay (NASDAQ:SCPL) reported Q1 FY2023 results topping analyst expectations, with revenue up 18% year on year to $186.4 million. SciPlay made a GAAP profit of $41.8 million, improving on its profit of $32 million, in the same quarter last year.

SciPlay (SCPL) Q1 FY2023 Highlights:

  • Revenue: $186.4 million vs analyst estimates of $178.9 million (4.18% beat)
  • EPS: $0.24 vs analyst expectations of $0.24 (1.94% miss)
  • Free cash flow of $45.5 million, down 13% from previous quarter
  • Gross Margin (GAAP): 69%, in line with same quarter last year
  • Average Monthly Paying Users: 0.63 million, up 25 thousand 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. Cheap, powerful computing and graphics chips have made ever more realistic versions of classic sports, driving and shooting games while also introducing immersive metaverse-like gaming. 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 15.3% annually. This quarter, SciPlay beat analyst estimates and reported a moderate 18% year on year revenue growth.

SciPlay Total Revenue

Ahead of the earnings results the analysts covering the company were estimating sales to grow 2.65% over the next twelve months.

Usage Growth

As a video gaming company, SciPlay generates revenue growth by growing both the number of players playing its games, as well as how much each of those players spends on (or in) their games.

Over the last two years the number of SciPlay's paying users, a key usage metric for the company, grew 12.1% annually to 0.63 million. This is decent growth for a consumer internet company.

SciPlay Average Monthly Paying Users

In Q1 the company added 25 thousand paying users, translating to a 4.17% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for SciPlay it measures how much revenue each user generates, which is a function of how much paying users spend.SciPlay ARPU

SciPlay’s ARPU growth has been decent over the last two years, averaging 5.77%. The ability to increase price while still growing its paying users shows the value of SciPlay’s platform. This quarter, ARPU grew 13.3% year on year, reaching $298.24 for each of the paying users.

User Acquisition Efficiency

Consumer internet businesses like SciPlay grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.

SciPlay is efficient at acquiring new users, spending 38.1% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a relatively solid competitive positioning, which gives SciPlay the freedom to invest its resources into new growth initiatives.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

SciPlay reported EBITDA of $53.5 million this quarter, which was a 28.7% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 27.9%.

SciPlay Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. SciPlay's free cash flow came in at $45.5 million in Q1, up 31.5% year on year.

SciPlay Free Cash Flow

SciPlay has generated $149.8 million in free cash flow over the last twelve months, an impressive 21.4% of revenues. This robust FCF margin is a result of SciPlay asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from SciPlay's Q1 Results

With a market capitalization of $371.8 million SciPlay is among smaller companies, but its more than $357.5 million in cash and positive free cash flow over the last twelve months give us confidence that SciPlay has the resources it needs to pursue a high growth business strategy.

It was good to see SciPlay outperform Wall St’s revenue and EBITDA expectations this quarter. That feature of these results really stood out as a positive. On the other hand, revenue growth is overall a bit slower these days. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 2% on the results and currently trades at $17.34 per share.

Is Now The Time?

When considering SciPlay, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think SciPlay is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been decent, over the last three years. On top of that, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its impressive EBITDA margins show massive profitability of the business.

At the moment SciPlay trades at next twelve months EV/EBITDA 1.9x. 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.

The Wall St analysts covering the company had a one year price target of $18.3 per share right before these results, implying that they saw upside in buying SciPlay even in the short term.

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