SCPL - SciPlay Q4 Earnings: Long-Term Story Intact With Some Near-Term Catalysts

2023-03-07 05:08:08 ET

Summary

• After experiencing a dramatic increase in sales during the pandemic, SCPL should be reverting to a more normalized growth rate for staple titles.
• The dynamics of SCPL's performance and the results of their user acquisition initiatives are likely to remain at the center of the investor debate over the coming quarters.
• SCPL reported $182 million in revenue and $59 million in adjusted EBITDA for 4Q22. Total bookings increased 18% year-over-year, with the core portfolio growing 14%.

Thesis

The mobile games developed and operated by SciPlay ( SCPL ) are primarily social casinos that are free to play. I like to set the expectations upfront that after experiencing a dramatic increase in sales during the pandemic, SCPL should be reverting to a more normalized growth rate for staple titles. In addition, from an organic point of view, I cannot envision a way for multiples to grow beyond the current stage. That said, a re-rating in the mobile games industry as a whole or the successful launch of new games in the casual genre could serve as a catalyst for multiples reversion SCPL.

The dynamics of SCPL's performance relative to industry peers and the results of their user acquisition initiatives are likely to remain at the center of the investor debate over the coming quarters. In the long run, I expect SCPL to be a driving factor in the expansion of mobile gaming, both generally and within specific sub-verticals that will outpace the overall gaming industry. If you want exposure to the aforementioned potential catalysts, I'd suggest starting with a small position size and gradually increasing it as we move past the normalization in growth.

However, I must emphasize that the road ahead for SCPL investors will not be smooth. SCPL's growth is dependent in part on the company's ability to consistently release and scale up new games that bring in substantial revenue and ROI. As such, the purchase of new games or the rapid release of a new title would be bullish for SCPL stock price. However, the company would suffer if popular games lost a lot of their audience. Furthermore, there are few obstacles to entry in the social gaming market. In spite of this, I think the exclusive library of well-known IP owned by SCPL helps to mitigate the risk of players migrating to other platforms easily.

4Q22 results

Few important insights can be gleaned from SCPL's 4Q22 results. The most important takeaway, in my opinion, is despite a challenging end market environment, SCPL continues to report solid revenue momentum. Furthermore, SCPL has experienced an increase in growth and marketing return on investment due to the effective acquisition of new users, expansion of its primary game titles, and implementation of varied marketing tactics. Finally, I appreciate how management is continuing to prioritize investments in core franchises and the strategy for acquiring new users. This is significant because it shows that management is not compromising on the long-term objective.

SCPL reported $182 million in revenue and $59 million in adjusted EBITDA for 4Q22. Total bookings increased 18% year-over-year, with the core portfolio growing 14% (up from 13% in the previous quarter). The growth in regular monthly payers, at 13%, is faster than the 11% seen in 3Q22. Management has also pointed to developments in the company's UA strategy for attracting new cohorts and for converting existing ones as key reasons for the company's continued growth in payers. An additional driver of profits was the 0.5% daily conversion rate of SCPL's three-year non-payers.

Guidance

Although it did not offer any specific guidance for 2023, SCPL is confident that it will achieve growth faster than the industry. Management further mentioned that February player spending was tracking similarly to December, which, if it holds, could imply year-over-year growth in the mid-teens for 1Q23. On the expense side, SCPL said it would see a dip in margin from Q4 to Q1 due to increased spending on marketing innovation, but that margin would recover on a quarterly basis.

Conclusion

In conclusion, SCPL mobile games have experienced significant growth during the pandemic, and it is important to set realistic expectations for the company's future performance. The social casino genre, which makes up a significant portion of SCPL's games, may not be able to sustain the same level of growth in the short-term. Also, investors should keep an eye on the company's ability to consistently release and scale up new games that bring in substantial revenue and ROI. On that point, SCPL's recent 4Q22 results demonstrate the company's solid revenue momentum and successful user acquisition strategy, which are key drivers of its growth.

Overall, while the road ahead may not be smooth, I believe that SCPL has the potential to be a driving factor in the expansion of mobile gaming, both generally and within specific sub-verticals. For those interested in exposure to this potential catalyst, I would suggest starting with a small position size and gradually increasing it as we move past the normalization in growth.

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