SciPlay: 15% Revenue Growth And Positive CFO

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About: SciPlay (SCPL), Includes: ATVI, EA, GLUU, KABAM, ROVVF, TCEHY, ZNGA
by: Bilbao Asset Management
Summary

SciPlay is a developer and publisher of digital games on mobile and web platforms.

In 2018, cash flow from operations was $76.9 million, 23% more than that in 2017.

Using a ratio of 3.4x forward sales, SciPlay should have an enterprise value of $1.625 billion.

SciPlay does not expect to have an independent Board of Directors. As a result, directors may make decisions to benefit the largest shareholder, which may damage the interests of minority stockholders.

SciPlay expects to enter into a $150 million revolving credit agreement, which may increase the company's financial risk quite a bit.

Reporting 15% revenue growth and positive CFO, SciPlay (SCPL) should attract the attention of both value investors and growth investors. Using an EV/sales ratio of 3.4x and forward sales of $478 million, SciPlay should have, after the IPO, an enterprise value of $1.625 billion. Having said these beneficial features, there are two detrimental facts that investors should get to know. First of all, the company expects to enter into a $150 million revolving credit agreement, which should increase the financial risk. In addition, SciPlay is a controlled company, and the Board of Directors is not expected to be independent.

Source: S-1

Source: S-1

Business

Founded in 1997, SciPlay is a developer and publisher of digital games on mobile and web platforms.

With regulators in the US working together to assess the characteristics of video games and social gaming, the gaming industry may have a difficult time. Right now, making money while implementing the applicable laws and regulations should not be that easy.

Operating in this difficult environment, SciPlay is offering entertaining free-to-play games and highly targeted and customized experiences with the help of big data. The fact that players don't need to pay anything to enjoy the services provided by SciPlay increases the number of potential clients. In addition, a number of clients elect to purchase additional virtual coins to obtain additional features. Read the lines below in this regard:

While most players play our games for free, a growing number of players, both in terms of total number and as a percentage of paying players, elect to purchase additional virtual coins, cards and chips to enable more gameplay, which can lead to the unlocking of content and features in a shorter elapsed time than players who opt to not buy virtual coins, cards or chips." Source: S-1

The strategy is working pretty well. Keep in mind the following figures. 11.6 million players were reported in the Q4 of 2018 and 32% of the monthly players play every day for, on the average, 54 minutes a day. For those who want to know a bit more about the games offered, the names of the most successful seven games are mentioned below:

- Jackpot Party Casino

- Gold Fish Casino

- Hot Shot Casino

- Quick Hit Slots

- MONOPOLY Slots

- Bingo Showdown

- 88 Fortunes Slots

Positive Revenue Growth, Positive Net Income, And CFO

With revenue growth equal to 15%, the most interesting is not the top line but the bottom line. In 2018, the net income was equal to $39 million, 68% more than that in 2017. This type of income statement should be appreciated by both growth investors and value investors. The image below provides the income statement:

Source: S-1

In 2018, the company reported cash flow from operations of $76.9 million, 23% more than that in 2017. With that, market participants should note that contingent acquisition consideration expenses worth $27.5 million and stock-based compensation worth $4 million were included in the CFO. The lines below provide further details on the contingent acquisition consideration:

Source: S-1

The image below offers the cash flow statement:

Source: S-1

Balance Sheet

With an asset/liability ratio of 3.4x, the company's financial situation seems stable. Having mentioned this appealing feature, there is goodwill worth $120 million, which investors should study closely. It represents 61% of the total amount of assets, which may be a risk for certain investors. Keep in mind that accountants could impair these assets leading to share price depreciation.

It is impossible to review all the acquisitions executed by SciPlay. However, let's review one to understand the amount of goodwill and intangible assets registered. As shown in the image below, in the acquisition of Spicerack, goodwill and intangible assets represented 96% of the total amount of the purchase price paid.

Source: S-1

The image below provides a list of assets:

Source: S-1

The list of liabilities is shown below. As of December 31, 2018, it is very positive that SciPlay does not have large financial debt. It reports only $3.7 million due to an affiliate.

Source: S-1

Having said so, it is very relevant noting that the company expects to enter into a $150 million revolving facility as the IPO goes live. It means that the financial risk after the IPO should increase quite a bit. The lines below provide further details on this matter:

Source: S-1

Use Of Proceeds

The use of proceeds is not ideal. SciPlay expects to use the money from the IPO to acquire LLC interests owned by several holdings. Investors usually don't appreciate this type of transactions as the proceeds are not invested in the business. The lines below provide further details on this matter:

Source: S-1

Competitors And Valuation

SciPlay provided the following list of competitors in the prospectus:

- Playtika

- Product Madness/Big Fish Games

- Zynga Inc. (ZNGA)

- DoubleU

- Glu Mobile (GLUU)

- Activision Blizzard (ATVI)

- Electronic Arts (EA)

- Kabam (KABAM)

- Rovio (OTC:ROVVF)

- Tencent Holdings (OTCPK:TCEHY)

Among the list of competitors, only Zynga Inc. and Glu Mobile have a size close to the size of SciPlay. As shown in the image below, ZNGA and GLUU report market capitalization of $5 billion and $1.6 billion respectively. They trade at 3.3-3.4x forward sales with almost no financial debt and revenue growth of 5% to 27%.

Source: YCharts

With revenue of $416 million and revenue growth of 15%, assuming forward sales of $478 million is reasonable. Using a ratio of 3.4x forward sales, SciPlay should have an enterprise value of $1.625 billion. Having said this, if the company enters into the $150 million revolving facility, market participants may push the valuation of SciPlay a bit down.

Controlled Company - The Board Of Directors Is Not Expected to Be Independent

After the IPO goes live, the company is expected to be a controlled entity. As shown in the lines below, the Board of Directors can elect not to comply with several corporate governance rules:

Upon completion of this offering, Scientific Games will continue to control a majority of our combined voting power. As a result, we will be a "controlled company" within the meaning of the corporate governance standards of the NASDAQ rules. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements." Source: S-1

On top of it, SciPlay does not expect to have an independent Board of Directors. As a result, directors may make decisions to benefit the largest shareholder, which may damage the interests of minority stockholders. The lines below are very relevant:

"Following this offering, we intend to rely on all of these exemptions. As a result, we will not have a majority of independent directors"

Source: S-1

Conclusion

With 15% revenue growth and positive CFO, both growth investors and value investors should review this name. Using the ratio of peers, equal to 3.4x, SciPlay should have an enterprise value of $1.625 billion. With that being said, there are two features that investors may not welcome. Firstly, SciPlay expects to enter into a $150 million revolving credit agreement, which may increase the company's financial risk quite a bit. In addition, the Board of Directors may not be independent, which could harm the interests of minority shareholders. As a result, the total valuation of SciPlay may be a bit lower than $1.625 billion. Keep in mind that certain investors don't invest in controlled companies.

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.