SciPlay Begins U.S. IPO Effort

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About: SciPlay (SCPL), Includes: ALL, ATVI, EA, GLUU, SGMS, TCEHY, ZNGA
by: Donovan Jones
Summary

SciPlay has filed a registration statement for an IPO of its Class A common stock.

The firm publishes mobile casual casino and other games.

SCPL is growing on a large revenue baseline and intends to diversify from its casino game focus to other game categories within the mobile casual game industry.

Quick Take

SciPlay (SCPL), a Scientific Games (SGMS) subsidiary, intends to conduct a U.S. IPO, according to an S-1 registration statement.

The firm operates as a casual mobile and web game development studio.

SCPL seeks to leverage its success with social casino games into a broader set of mobile casual games.

Company & Technology

Las Vegas, Nevada-based SciPlay was founded in 2012 to develop data-driven and highly-targeted free-to-play games that capitalize on mobile ad revenue and the player’s desire to progress faster.

Management will be headed by Joshua J. Wilson, who has been with the firm since 2013 and was previously Senior Director of Social Products and Director of Social Gaming at Williams Interactive, which Scientific Games acquired in 2013.

SciPlay’s games were played by over 11.6 million players in Q4 2018 and include Jackpot Party Casino, Gold Fish Casino, Hot Shot Casino, Quick Hit Slots, MONOPOLY Slots, Bingo Showdown as well as 88 Fortunes Slots.

Below is a brief marketing video of Jackpot Party Casino:

Source: Jackpot Party Casino

SciPlay has access to a library of more than 1,500 iconic casino titles from Scientific Games and its subsidiaries, including titles and content from third-party licensed brands such as James Bond, Monopoly, Michael Jackson, Cheers, as well as The Godfather.

The company employs nearly 400 people and owns five game development studio facilities located in Cedar Falls, Iowa; Tel Aviv, Israel; Austin, Texas; as well as Chattanooga, Tennessee.

User Acquisition

The company provides access to its ‘free-to-play’ games to allow players to begin playing at no charge and receives revenue through ‘additional virtual coins, cards, and chips to enable more game play.’

Management says it plans ‘to use our core social casino games [which are evergreen and provide for more long-term appeal to players] to fuel our growth while expanding our presence in the rest of the casual games market.’

Sales and marketing expenses as a percentage of revenue increased in 2018, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2018

25.40%

2017

23.99%

Sources: Company registration statement and IPO Edge

The sales efficiency rate, defined as how many dollars of additional gross profit are generated by each dollar of sales & marketing spend, was a quite high 2.6 in the most recent year, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

2018

2.6

2017

Sources: Company registration statement and IPO Edge

Average Revenue per User [MAU] increased in 2018, per the table below:

Average Revenue Per

User (MAU)

Period

ARPC/U

Variance

2018

$50.14

5.5%

2017

$47.55

Sources: Company registration statement and IPO Edge

Market & Competition

According to a 2018 market research report by Newzoo, the global games market was valued at $121.7 billion in 2017, grew by 13.3% to $137.9 billion in 2018 and is projected to reach $180.1 billion by 2021.

This represents a CAGR of 10.3% between 2017 and 2021, as can be seen by the graphic below:

The digital games segment accounted for 91% or $125.3 billion of the total revenue in 2018.

During the same year, the mobile games segment grew by 25.5% year over year to $70.3 billion, accounting for 51% of the total games market revenue, shown in the graphic below:

Major direct competitors that are developing casual mobile games include:

  • Playtika
  • Product Madness/Big Fish Games
  • Zynga (ZNGA)
  • DoubleUGames (192080.KQ)
  • Double Down Interactive
  • Glu Mobile (GLUU)
  • Activision Blizzard (ATVI)
  • Electronic Arts (EA)
  • Rovio (ROVIO.HE)
  • Tencent (OTCPK:TCEHY)

Source: Sentieo

Financial Performance

SciPlay’s recent financial results can be summarized as follows:

  • Moderately growing topline revenue
  • Increased gross profit
  • Stable and high gross margin
  • Positive and growing EBITDA
  • Increased and high cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$416,200,000

15.2%

2017

$361,400,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2018

$255,800,000

14.8%

2017

$222,800,000

Gross Margin

Period

Gross Margin

2018

61.46%

2017

61.65%

EBITDA

Period

EBITDA

EBITDA Margin

2018

$61,500,000

14.8%

2017

$64,800,000

17.9%

Cash Flow From Operations

Period

Cash Flow From Operations

2018

$76,900,000

2017

$62,200,000

Sources: Company registration statement and IPO Edge

As of December 31, 2018, the company had $10.0 million in cash and $56.3 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2018, was $73.4 million.

IPO Details

SCPL has published an initial filing for an IPO of its Class A common stock.

Class A shareholders will be entitled to one vote per share and Class B shareholders will be entitled to ten votes per share.

Multiple classes of stock are a way for senior management or existing shareholders to retain voting power in the event of losing economic control of the company.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

to purchase LLC Interests from SG Holding I, which amount will be used by SG Holding I to make the Upfront License Payment required under the IP License Agreement;

to purchase LLC Interests from SciPlay Parent LLC, which amount will be used by SciPlay Parent LLC to pay fees and expenses in connection with the Transactions, including this offering; and

to purchase LLC Interests from SciPlay Parent LLC, which amount will be used by SciPlay Parent LLC to pay contingent acquisition consideration that will become payable as a result of this offering.

In addition, the firm will enter into a $150.0 million revolving credit facility in conjunction with the offering.

Management’s presentation of the company roadshow isn’t available.

Listed underwriters of the IPO are BofA Merrill Lynch, J.P. Morgan, Deutsche Bank Securities, Goldman Sachs, Morgan Stanley, Macquarie Capital, RBC Capital Markets, Stifel, and Wedbush Securities.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.