Operator: Good day and welcome to the SciPlay Corporation Second Quarter Earnings Investor Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Trent Kruse.

Please go ahead.

Trent Kruse: Okay. Thank you, operator. During today's call, we will discuss our second quarter 2019 results and operating performance followed by a question-and-answer period. With me this morning are Barry Cottle, Josh Wilson and Mike Cody.

Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this afternoon, the materials relating to this call posted on our website and our filings with the SEC. We also will discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release as well as the Investors Section on our website.

As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors Section of our website at sciplay.com. Also supplemental reference slides are available on our Investor Relations website. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the Company's results and to be used as a reference document following the call. Now let me turn the call over to Barry.

Barry Cottle: Thanks, Trent. Hello, everyone, and thank you for joining us for SciPlay's inaugural earnings call. Along with me are Josh Wilson, Chief Executive Officer of SciPlay; and Mike Cody, Chief Financial Officer of SciPlay. We are excited to be speaking with you as a publicly traded company following our IPO in May. As you'll hear from the team, Q2 represented another strong quarter of revenue and profitability growth.

Our team is incredibly excited about the future, given the strength of our games and untapped growth opportunities we have ahead of us. The future is bright, and the team is energized to continue to deliver industry-leading growth. With that, I'll turn the call over to Josh and Mike to walk through the details, and then we'll open up the call to questions. Josh?

Joshua Wilson: Thanks, Barry. Good afternoon, everyone.

I'm incredibly proud to be representing SciPlay as a public company, utilizing the support of Scientific Games. This is such an important milestone on our journey. Now before I jump into Q2 results, I wanted to take a moment to highlight the current drivers and future opportunities, which have and will continue to allow SciPlay to deliver industry-leading growth. First, social casino is an incredible, sticky genre, with games generally evergreen in nature due to their loop-driven game play and the ability to naturally incorporate cadence of new end game features and events. This is evidenced by our continued growth in our most mature games.

Second, our pace of content and future releases, along with data-driven, highly-targeted and customized experience we provide in our games, result in increased loyalty and frequency of play. We continue to see growing number of players. And while most of our players play our games for free, we are expanding the number of payers and the percentage of paying players. In fact, the number of paying players has more than tripled in the last few years, and the percent of paying players has increased dramatically as well. Third, we currently offer seven core games, with most of our games having achieved highest monthly revenue in the last year and continuing to grow.

Fourth, digital gaming is a large and strategically important component in the overall entertainment market. Notably, total consumer spend in the digital gaming worldwide is approximately $138 billion in 2018, which is more than twice what consumers spent on movies and music in the prior year. And finally, social casino shares several core mobile gaming concepts with a broader market, such as puzzle games, card games and match-three games, which should allow us to leverage our existing capabilities to add new games and new markets to enable further industry-leading growth. With that, let's move on to our second quarter results. As you know, in May, we took important steps of becoming a public company, and now more than ever, we are focused on executing our mission to become the number one casual mobile gaming company in the world.

We are executing a disciplined strategy, which I'm pleased to say is yielding strong financial results. We differentiate ourselves through a superior data-driven user acquisition, engagement and monetization. Our commitment to data-driven decisions and continuous improvement in new and existing content and features keeps our players involved, engaged and is helping us win the market. We are growing at a rate that has more than doubled the market rate according to the Eilers & Krejcik. According to Q2, we grew 18% to $118 million.

And in June, we realized 24% increase in revenue year-over-year. This is important. We experienced a third-party defective software issue in the quarter and successfully returned to stronger growth levels we anticipated. This demonstrates the dynamic response capabilities possessed to manage through unforeseen challenges. We had strong measures across the board.

We saw 14% increase to ARPDAU to $0.48. Average monthly paying users increased 25% to $0.5 million, and we saw continued growth in our player conversion rate. Importantly, our portfolio strategy drove above-market revenue growth across our game portfolio, reflecting the ongoing popularity and continued growth of our established games like Jackpot Party Casino and Quick Hit Slots, including 28% or 3x market growth in Jackpot Party; as well as the growth of our newer games such as Bingo Showdown and 88 Fortunes that are in the ramp-up phase. This segmentation maximizes our portfolio and minimizes cannibalization across games. Our strategy of building games that appeal to different player segments is working.

It is important to remember that most of our apps are still in the early stages of their life cycle, so we expect them to continue to grow DAU and paying players, along with continued growth in our more mature games. The growing popularity of SciPlay apps is reflected in the number of games we have in the top 30 rankings for Apple and Google Play. Three of our games are ranked in the top 30 in the Social Casino category on Apple's App Store, and six games are in the top 30 on Google Play for Top Grossing Casino. Our team is committed to operational excellence to increase shareholder value. We are leveraging the market-leading, proven content library of Scientific Games, SciPlay and third-party brands to provide an efficient cost structure.

Also by leveraging our services from Scientific Games, we are maximizing our operational efficiency. We are coming out of the gates strong. We have above-market revenue growth, a track record of steady and profitable growth, a strong portfolio management in place to leverage our games' launch ramp and growth plans and efficient cost structure to enhance shareholder value. I want to thank our SciPlay team for their love of the games we make, our investors for believing in us, and most of all, the millions of players that validate why we get up and go to work every morning. Now I'll turn the call over to Mike Cody to walk through financial information in more detail.

Mike?

Michael Cody: Thanks, Josh, and good afternoon, everyone. Our second quarter results were strong with revenue increasing 18%, net income increasing 115% and AEBITDA increasing 44%. Mobile revenue increased 28% to $98.2 million, an all-time record. Our revenue growth was driven by increased monetization of our paying players, with ARPDAU up approximately 14% year-over-year or an increase from $0.42 to $0.48. And as Josh mentioned, revenue accelerated in the back half of the quarter as we experienced a technical issue early in the quarter.

Each game was impacted differently, and we managed through this challenge with our efficient response capabilities as we deploy our capital and resources throughout the portfolio not on a game basis, which is how we manage the business day-to-day. Payer conversion rates increased 6% from 5.4% in the prior year, driven by our live ops strategy, growing player interaction in our games. Sales and marketing expense of $31.2 million represented 26.4% of revenue, which was down 250 basis points from the prior quarter, yet another great example of our focus on deploying resources effectively to maximize ROI. Net income was $26.2 million, an increase of 115%, and net income margin was 22.2%. AEBITDA was $33.2 million, an increase of 44%.

And AEBITDA margin was 28.1%, an increase of 490 basis points from the prior year. Longer term, we are committed to achieve AEBITDA margins of 35%. As a reminder, for modeling purposes, this quarter included a $2.9 million charge for intellectual property royalties paid to Scientific Games prior to the IPO. Going forward, there will no longer be royalties paid on existing Scientific Games content. As part of the IPO, we paid a fixed onetime amount of $255 million funded from the proceeds to obtain Scientific Games IP.

This gives us access to Scientific Games' proven library of land-based content, strong brands and proven hit slot titles that we can leverage across our portfolio that keeps our R&D costs down and our hit frequency high. We generated $18 million in cash from operating activities, which included a $19.2 million payment to fund the majority of contingent acquisition consideration. The remaining $1.8 million payment related to contingent acquisition consideration is reflected in cash flow from financing activities. We ended the quarter with $50.4 million in cash, and we entered into a $150 million revolving credit facility in the quarter, which is undrawn. Finally, we expect a continuation of the strong trends we experienced in the first half of the year.

For the full year 2019, the company expects revenue to be in a range of $480 million to $490 million. Our AEBITDA margin will continue to improve over time towards our long-term target of 35% but will vary from quarter-to-quarter as we ramp marketing up and down based on returns, we are seeing, increasing marketing when we see opportunities to drive revenue growth and pulling back when we don't. With that, we're happy to answer any questions you may have.

Operator: [Operator Instructions] The first question comes from Bryan Kraft of Deutsche Bank. Please go ahead.

Bryan Kraft: Hi. Good afternoon. I want to ask you two things. First, just wondering if you can elaborate on – I think you mentioned a third-party issue that you encountered in the quarter that you recovered quickly from. Can you just talk about what that was? And can you quantify the revenue and EBITDA impact from that? And then secondly, you talked about the strength in the press release at Jackpot Party, Bingo Showdown and 88 Fortunes.

Can you talk about some of the other games in the portfolio, particularly, Quick Hits, Gold Fish, Hot Shots, are they also performing according to plan? And were there any games in the quarter that were soft at all? Thank you.

Joshua Wilson: So this is Josh. So we began seeing a decrease in DAU mainly around our Android platform. This was caused by the third-party software, which caused the device itself to become sluggish during game play. Once we were able to identify that that piece of software was causing it, we were able to remove the software from our applications.

And our engagement KPIs and ANRs from Android went back to normal state, and we've began to grow the way we were anticipating, which is where our June results came from.

Michael Cody: And just to add on to that, this is Mike. From a binary question about Specific Games, and we don't normally address specific game performance. We're happy with the way the portfolio as a whole has performed. We manage it as a portfolio, moving our marketing money around to get the best returns possible.

So sometimes, we will see ups and downs in games. But in the end, we're happy with how the quarter ended in spite of this temporary issue that we did have.

Bryan Kraft: And on the – just a follow-up on the software issue, I mean is it safe to assume that, that had probably a couple of million-dollar impact on revenue and EBITDA in the quarter? Is that a fair range to assume?

Joshua Wilson: Yes. That's a very fair range looking at how we did in June and then working backwards.

Bryan Kraft: Great.

Thank you, guys. Appreciate it.

Operator: The next question comes from Justin Post with Bank of America. Please go ahead.

Ryan Gee: Yes.

Hi, guys. Its Ryan Gee on for Justin. Thanks for taking the question. So the first one, on MAUs, looks like those were down year-over-year, but payers and payer spend were actually up nicely. So can you just reconcile those two for us? Is this a function of changes you guys are making in-game to really get more out of the players? Or is it just a result of losing some of the lower-spending MAUs? That's the first question.

And then second, just it would be great to get your broad, high-level thoughts on – we're hearing a lot about potentially more states legalizing online gambling through mobile. Do you see that as really an opportunity for you guys given your brand awareness or maybe a risk to monitor? Thanks.

Joshua Wilson: So the drop in MAU that you are seeing is actually a result of us pulling back our marketing spend in the second quarter once we identified that we were having the issues, because marketing spend has a lot to do with driving the DAU, it also drives the MAU. We were able to maintain a good chunk of our existing players during that. And so since we were able to maintain our current players, but weren't able to bring in the newer, that is why you saw MAU go down, but paying percentage as a whole go up.

And as far as the other states legalizing RMG, our online gaming, we're actually very confident that it has very little to do with our business as a whole. We've been in New Jersey since before New Jersey legalized, and New Jersey continues to be one of our top performing states for growth in revenue. We don't see any – I don't have any hard evidence on why that happens, but kind of our internal theory of this is a couple of different things. One, they are actually doing advertising for our brands as they are today, and we're able to get brand recognition of our slot machines that way. And then second, believe it or not, people want to go practice slot machines before they go into the real casino, and we are a way they can do it for free.

Ryan Gee: Thank you, guys.

Joshua Wilson: Thank you.

Operator: The next question comes from Shweta Khajuria with RBC Capital Markets. Please go ahead.

Shweta Khajuria: Great, thank you.

Two questions, please. So one, on sales and marketing, could you please remind us of your sales and marketing strategy? You talked about it a little bit in terms of opportunistic spend. So given that you pulled back in second quarter because of the technical issues, do you see greater opportunities here in the third quarter? Or maybe do you think that could be an opportunity in the second half based on your games you may be working on? So how should we think about sales and marketing in the back half and also third quarter? And then the second question is on casual gaming market. So could you talk about how you think about leveraging data to target users to add on casual games? So it's well understood that for social casino games, you're leveraging that access you have to titles from Scientific Games as well as third-party brands. How do you think about efficient R&D spend for casual games? Thank you.

Michael Cody: So I think on the first question – this is Mike. On your question about the marketing spend and kind of the trajectory of that. So, as we mentioned earlier, we do manage it as a portfolio, and we do look at the returns we're getting at the time. We're spending the money, and we will adjust up and down as necessary. We had fantastic returns in Q4 of 2018, Q1 of 2019, and in Q2, when we had our technical issue, we were able to pull back.

But the trajectory of the business really hasn't changed at all in our minds. So we are actively looking for ways to increase that spend again. And as that technical issue is behind us, we're monitoring our games on a daily basis and trying to maximize that spend. And so if we see those returns in Q3, we'll absolutely look to ramp it up and again in Q4.

Joshua Wilson: And as we look at the opportunity of the casual games business, the part that excites us is we overlap very much in that same demographic.

The same simple core loop game play, which makes us very confident that we will be able to utilize our current marketing engine, engagement engine and monetization engine that we have today. We are evaluating whether or not that opportunity will come through acquisition, similar that we did with Bingo Showdown, which was a multiplayer card game, and we were able to plug it into our engine and see more than 3x daily run rate increase over a year or look to bring in the design knowledge of that space and build organically.

Michael Cody: And I think you also asked a question about R&D spend. And in our minds, we have ever been franchises built around established IPs. These aren't one-hit wonders.

They build on themselves over time with cohorts layering on top of each other. Our teams work together with shared technologies, so we use that to keep our costs down. And we operate out of low to mid-cost locations. While those things combined help us keep our R&D spend low, obviously, over time, as our teams grow, that will throw in dollars but not necessarily in a percent of revenue.

Shweta Khajuria: Got it.

Thank you all.

Michael Cody: Thank you.

Operator: The next question comes from Mike Ng with Goldman Sachs. Please go ahead.

Michael Ng: Hi.

Thank you very much for the question. I have two, if I could. First, would you please update us on your plans for new game launches either this year or next? And then second, could you just help us reconcile the implied second half revenue growth based on your guidance? I think it's about 12% to 16% versus the strong 24% year-over-year growth you had coming out of June?

Joshua Wilson: Okay. So we think about new games as being incremental and don't cannibalize existing games. So as we're evaluating markets and new games to bring in, we want to make sure they're 100% additive.

We are working on some exciting new games, but we're not ready to disclose a time line for them today.

Michael Cody: And then, Mike, on your second question about revenue and how you think about that in the future, the back end, Q4, the back half of the year. So again, I think I mentioned earlier that we don't really see the trajectory of the business changed. We kind of slowed down a little because of this technical issue, and so maybe we're a little bit behind in our plan from that perspective. But we had 19% growth year-over-year in Q4 of 2018, 21% in Q1 of 2019, 18% in Q2 of 2019.

If we hit the bottom end of our range, we'd be at 15% in the back half or for the full-year and 18% for the full-year if we hit the top of our end of our range at $490 million. So we actually think that's pretty much in line with where we expect to be. And so again, we're pretty happy with the way that plays out.

Michael Ng: Okay. Thank you, both.

Michael Cody: Welcome.

Operator: The next question comes from Mike Malouf with Craig-Hallum. Please go ahead.

Michael Malouf: Great. Thanks for taking my question.

I'm wondering if you could expand a little bit from what you said on your roadshow with regards to the potential in international. And when do you think we could start to see some pickup there? And how would you go about doing that? Thanks.

Joshua Wilson: We are moving closer to implementing the technology that allows us to expand international. We are getting to the point where we're starting to send information back and forth from individual games to different points. It will be a slow testing process, but we do expect to move forward very soon.

We are very excited about the fact that we have some of the strongest international content and Jin Ji Bao Xi, and we're looking forward to taking that to the rest of the world.

Michael Malouf: Great. Thanks for the help. Appreciate it.

Operator: The next question comes from Ben Schachter with Macquarie.

Please go ahead.

Benjamin Schachter: A few questions, if I could. One, just at a high level, can you talk about the most meaningful changes you've seen to the business since going public and all the time you had to spend on going public and sort of what you're focused on now? That's one question. And then secondly, related to being a public company, you have this currency now, so how are you thinking about potential acquisitions? Do you think you'll be more aggressive? Or do you want to focus more on the core for a bit of time? Just how are you thinking about M&A? And then finally, just any thoughts on MONOPOLY? How it's performing? And how are you thinking about investments for that particular game? Should we expect you to continue to invest there? Thanks.

Joshua Wilson: Thank you.

So meaningful changes to the company, honestly, the most meaningful one was post roadshow, we were able to get back to work and actually start focusing on the business again. We, as a company, like to focus and make sure that we're growing each individual game and giving each individual game what it needs to be a successful franchise. And for better or worse, the road show did take our eye off the ball for a few minutes. As far as potential M&A and targets, we're continuing to monitor the market opportunities. We're going to look for things that are additive to the business and allow us to continue to deliver great results.

We're not focused on one area to – or exclusion over another one. But more than anything else, we are looking for great opportunities to continue to drive our business forward, which could include, example, companies with great games, great companies and provide us with new, unique talent that we're missing today.

Benjamin Schachter: And maybe thoughts on MONOPOLY?

Joshua Wilson: Yes. MONOPOLY is performing very well. To-date, it still has the best KPIs that we have in any other game at that lifecycle.

It is still a new game, so we are consistently evolving the economy as it grows, but we are very confident in its future potential.

Benjamin Schachter: Okay. Thanks and good luck.

Michael Cody: Thank you.

Operator: The next question comes from Drew Crum with Stifel.

Please go ahead.

Andrew Crum: Okay. Thanks. Hi, guys. Good afternoon.

So a pretty strong year-on-year improvement with ARPDAU, can you talk about how you're thinking about that in the second half from a sequential basis? What's implicit in your guidance? And then the 24% growth that you referenced in June, how much of an influence did the Facebook issue from the year-ago period have an impact on that number? Thanks.

Michael Cody: Yes. So I think, first, to your question on ARPDAU, when we build our models, we're obviously looking at multiple KPIs, including DAU, ARPDAU, now all of them putting together to see how we find the right mix that hits our target. We're trying to – we typically prioritize monetization over acquisition in terms of trying to drive the players we have to convert to payers and spend more. I wouldn't say we set specific targets for ARPDAU though, but it is implicit in our numbers, so that will be a part of our growth going forward.

Joshua Wilson: And on the Facebook question, we had a very, very strong June from each one of our KPIs from growing DAU to a growing – to increasing payer monetization. So I don't know that I would look at June as in it was down for because – or it was up because of Facebook. I think it was up because our players were more engaged.

Andrew Crum: Okay. Okay, guys.

Thanks.

Operator: The next question comes from Brian Nowak with Morgan Stanley. Please go ahead.

Brian Nowak: Thanks for taking my question. I just wanted to kind of go back to the pipeline for a new potential IP.

Maybe talk to us about sort of, philosophically, the types of genres and the types of games that you think your software engineers are best suited to really execute and bring to market? And then just sort of on the guidance for the full-year, is there any impact from new games in that guidance? Or is it more sort of a 2020 timeline for new games? Thanks.

Joshua Wilson: Okay. So for our side of the world, we actually – what we do is we look at it as what kind of genres overlap with the type of demographic and player behavior that our current games have. So that opens up the market to say it could be in social casino, it could be in casual mobile games like Puzzle, Match 3, Solitaire, it's more about being able to utilize our analytics engine, our engagement engine and our marketing engines.

Michael Cody: And then on your question on guidance, our guidance that we gave does not include any new games.

We expect to be able to reach that from our existing games and continuing to grow them. That's we're very comfortable with where they are at this point.

Brian Nowak: Great. Thanks.

Michael Cody: Welcome.

Operator: The next question comes from Alexia Quadrani with JPMorgan. Please go ahead.

Anna Lizzul: Hi. This is Anna Lizzul on for Alexia. We're just sort of wondering regarding the broader mobile gaming industry.

One of your competitors reported some pretty strong results for Q2, which was bolstered by some new titles that they had acquired. Could you just talk about SciPlay's market share in the quarter in the broader mobile gaming phase? And are you also expecting to continue the game launch cadence about every 12 to 18 months? Thanks.

Joshua Wilson: So I'll try to answer the second question first and then go to the first – yes. So normally, the way that we look at it is when we identify a new segment that can be additive to our portfolio, we immediately start building. That normally does take a 12- to 18-month window.

We have been consistently doing that in the past, so it'd be hard to – I think you can make the assumption that we would continue doing it, but it is not a guarantee.

Michael Cody: And in terms of market share across the broader base, as you could say, a couple of comments would be remembering, even despite the technical issue that we described, we grew 18% year-over-year, which is more than double the social casino market and also compares very favorably to the overall cash flow market. So we're in a position where we're gaining share. And to reemphasize, that growth was all organic, right. And so as we continue to grow and outperform with our game portfolio and generate cash and look at the market, we also have the opportunities and have a successful track record of doing M&A that can tuck into our – the machines that we just described.

But out of the gate, I think we – on a comparative scale, I think we're – we faired really well this past quarter.

Anna Lizzul: Great. Thanks so much.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Josh Wilson for any closing remarks.

Joshua Wilson: Thanks for joining us today. We appreciate your support. The team at SciPlay is proud of our results. As we look to the second half of the year, we are eager to execute our winning strategy, keep improving our games and driving enhanced results. We operate in an exciting space with casual gaming and international expansions possible and significant opportunities to leverage our phenomenal library of content.

Our global team remains focused on delighting our players and becoming the Number 1 casual gaming Company in the world. I look forward to updating you on our continued progress during our next call. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation.

You may now disconnect.