Hi, everybody. My name is Matt Cost from Morgan Stanley U.S. Internet team. I'd like to welcome you to a conversation with Josh Wilson, the CEO of SciPlay. Thank you so much for being here. You're very welcome. Thank you, guys. Thank you guys for coming. Yeah. I do have to quickly run through disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the MS public website at morganstanley.com/researchdisclosures or at the registration desk. All right, with that. Yeah. Maybe just starting out for those who are slightly less familiar with the SciPlay story, it might be helpful to get a brief overview of the company. Tell us a little bit about your strategy. You know, a lot has changed since you went public. Yeah. I guess, you know, you've done several acquisitions. You've gotten exposure to casual and hyper-casual. How is SciPlay evolving from here? Yeah. Who is Zynga? That's kind of an interesting one to start with. You know, the company itself has been around since 1999. It was founded out of Cedar Falls, Iowa, the, you know, the software mecca of the world. We did pivot to free-to-play games very, very early on, so call it 2011, 10, 11. You know, as we know, back then, Facebook was basically the only real platform, free-to-play hit into the mobile world, let's call it 13, 14. I think the important part or the thing that gives us a lot of perspective is because we've been around since the entire evolution, it's been easier for us to understand that things have changed, because they have changed multiple times since games first started coming out. This has just helped us stay a step ahead of where everyone else is. Strategy. Man, strategy is what are you going to do to take care of your players today? This has changed so much. If you kind of looked at video games from maybe 2012 through 2015, all you had to do is put a good game out and it grew. It just straight up to the right. All of a sudden, 2016 happens, and really you started getting. You had to have a good game and great marketing. If you didn't have both, you couldn't grow and scale a game. That basically took us to COVID, which all of a sudden then everyone gets this huge influx of players, things take off. We didn't earn those players. They just came because the world shut down, entertainment goes, mobile video games is a huge part of that. During this time, IDFA happens, no one really knew what was going to happen or how it was going to just change everything. You know, it hit in April of 2021, but we didn't start seeing it because first party data was still out there. Everyone was still able to buy. All of a sudden, the release of the iPhone comes out, the world changed. Overnight, we went from being able to spend, you know, $2 and a half million a month on some of our, you know, larger games on iOS to $500. If we spent $501, we were ROI negative on that next dollar. This caused us to take a step back. Apple has nothing on its roadmap. It's not gonna change. This is the new world. As a company, we had a huge, kind of summit off-site, and we were like, "We've got to switch into a CRM company. Mm-hmm. It's about taking care of the players you own more than it is buying the next one. How we structured the company was around this. All of the internal investments we did were around, you know, build something once, get it to all customers. Our monetization strategy went from, you know, trying to get the most maximized monthly revenue per paying user to getting as many payers as we possibly could out of the customers we have. This is the strategy today. The reality is it should change again. Mm-hmm. I think every betting person believes that Apple is eventually going to become its own DSP. They're going to open up their network again. They're gonna open up being able to really acquire users on their platform again. I mean, today, it went from this to about this. Each new iPhone that comes out, it shrinks. Unless something changes, you know, in the next 12 to 18 months, my guess is, boy, my guess is the Apple platform will just only be the customers you own. Mm-hmm. I feel like we've done a good job navigating it, but it's really difficult to scale on that network. If I was a company that was trying to make all of their money on the next new game I launched or only the returns of my marketing, you're gonna have a rough, call it 24 months ahead of you. There's a bunch of stuff I wanna go into. Absolutely. -that you just touched on. Maybe I'll just start with where you closed, which is on the Apple front. Mm-hmm. Obviously, no one knows what Apple's gonna do, and no one can be expected to predict it. Let's say they were to launch a DSP, as you put it, to kind of open up the data they have access to target ads. How big of a deal would that be? Would that be an overnight, you know, change in your marketing model on iOS? I think it would change the entire mobile games industry, not only just mobile games, it'll also make just normal technology companies that are relying on applications, it'll change their growth profile. We're not in a recession. Like, we have not seen any global recession. We have not seen any drop in user behavior. You know, actually the opposite. They're more engaged, and they're spending more than they ever have. It's just harder to acquire the next new one. Mm-hmm. We basically have one platform that everyone that spends marketing money on spends the most on now, which is Android, which is we're artificially driving each other's prices up. Companies like us take a step back and go, "This is our ROI we're willing to do. We're not in it for the next dollar of revenue. We're in it for the next dollar of EBITDA." For that point, we cap ourselves and say, "We're not going to go further." You open up the other platform, which used to be almost 55% of the marketing, maybe even 60%, you open that back up, I think the entire industry of mobile video games, but not just mobile video games, we talk about mobile video games because it's our world, but reality is it's every technology of application that has been reliant on marketing to grow. Mm-hmm. I wouldn't even be surprised if you're back to a double-digit growth industry. Wow. At least for a few years. That's interesting. I mean, you know, that kind of dovetails into what I was going to ask about. I was going to ask, when do you expect a market recovery, irrespective of anything going on at Apple? It sounds like, you know, you're making the point that there actually hasn't been a market recession. You know, where are we then in terms of, like, consumer behavior on mobile gaming and, you know, what are you expecting to happen this year? I mean, I think you laid out expectations of flattish growth year-over-year. What is that, and is that something you see, you know, meaningfully accelerating sustainably? What do I expect to see? I think I expect to see more and more companies continue to pivot how they run games. I mean, no matter what you want to do, you look over the last, you know, 18 months, there's still really good games growing. We have multiple games growing 20%. We have a few games of scale growing at 30%. Why can they grow and then other large games not? In the time that, call it 2020 to 2021 into this new era that we are in now, everyone talked about LiveOps, everyone talked about economies, everyone talked about how I was gonna monetize people. The general theme for that was to put bolt-on features on top of your games, and these bolt-on features would cause you to behave differently. That's gone. No one no longer cares about that. They only care about things that are going to progress the meta itself. Unless your LiveOps is actually adjusting the meta progression, people have stopped paying attention to it. I think what you're going to see is more and more companies figuring this out. It's almost like free-to-play games have almost, like, morphed a little bit with, like console games almost in a way, where, you know, you don't play it unless you know that progression that you're going after. It's now this way in free-to-play games. Like, not even in my genre, but I think the one potentially doing it the best, not in my genre, is Royal Match right now. The core progression of this game is leveling up, but every LiveOps event helps you complete the next level faster, or every LiveOps event rewards you for getting the next few progressions. Because of this, the game is growing like no tomorrow. It's crazy cool to watch how that game is growing. I'd say we have a very similar model, which is why majority of our portfolio is growing. Not a whole lot of companies can say that right now. Right. Right. Of course. let's talk about direct to consumer for a second. It's something that's become more of a focus, I think, for SciPlay recently. Yeah. Can you tell us a little bit more, really basically to begin, what is a DTC offering? Mm-hmm. What does it mean for your business? You know, what are the main gating factors to scaling it up? I think there's a lot of really amazing things with DTC. One is obviously the biggest one, which is, you know, we pay a 30% platform fee to both Apple, Facebook, Google. There's the potential of getting that lowered to whatever internally you can find per processing fee. It wasn't actually the reason we started doing it at first. The reason we started doing it at first is as we took a step back, looked at IDFA, started looking at the overarching market, trying to understand what Facebook's business model was going to be when they can't monopolize the Apple advertising. We make 8% of our revenue there. Mm-hmm. We have to find a place for those people to go just in case games are no longer played on Facebook. For us, this was originally our thought, was we have to create a platform for the fact that we have a ton of money sitting there. As we started building it and as we started interacting with our players, what we did realize or what we got to there is it actually opened up a world where we own the communication barriers to our players. Mm-hmm. Today, when someone's in Facebook. All we own is, you know, the small part of the screen that they actually give us, but they own literally everything else. They decide what games they'll show. They decide what notifications. We wanted to take that over. Mm. For us, it's how do we create a deeper experience and a deeper relationship and a better communication path. The great part is we'll just become more profitable, and that'll be amazing because we'll be able to take this and invest it into, hopefully, other places where we even get more ROI. I do think it's the long-term progression that video games are gonna go, which then will cause Apple and Google to really take a step back and go, "Am I better off taking 15% and having all of the transactions with me, or 30% and only partial the transactions with me?" Right now, they don't have to do that because they're the only two platforms that are scale, period. As more and more of us have our own, I think it'll become a challenge for them. Let's talk a little bit about SciPlay versus your peers in the marketplace. You've mentioned in the past that SciPlay is working on closing the ARPDAU gap. Yeah ... versus peers. What has led to the gap historically, you know, such that it exists today? How are you working to close it? Then how big is the opportunity if you do close it? Yeah. I think there's multiple things. How did we lead here? We organically built more games than all of our peers did. You know, Playtika, which is amazing company, built 2 games and bought everything else, and everything else they bought was already of large scale. Aristocrat, you know, they did build the 3 games, and then they acquired Big Fish, which has the largest ARPDAU in the industry. For us, we kind of look at it as it's a different life cycle of the player, and we have a broader, a broader representation of all the players because of the different ages of our games. I would also say a little bit of this was mentality. We have... Internally, we talk about payers like it's DAU. What do your payers look like today? Who's in your game? Where do they go? How are they retaining? What is their day-over-day? A lot of companies talk about how much are my payers paying, and how can I get them to pay more today? I actually have a much, much different theory to this one, and, you know, the best way I could explain it is like some of my competitors would say, "If this person has a $100 wallet, I'm gonna get all of it in their first 30 days." I will say, "I'll get their $100 in their first three months because I'll have a better chance of getting them month four than you will getting them month two." It's more about a long game, long LTV, which means we grow our ARPDAU slower, but it's healthier ARPDAU, and it's more resilient ARPDAU because it's spread across many more payers. Great. Yeah. Let's talk about advertising for a second. I mean, showing ads in your games has not been a major revenue driver for SciPlay historically. Is that something you're considering doing more of going forward or, you know, is there kind of another angle where it's the user acquisition and funnel tool? Yeah. you know, it'd be amazing to be able to take those, the ones that you know have high value, funnel them to your LTV games. The great news is, you know, when we think about marketing, right now, you know, let's assume that the world is This is the bucket of A, which means out of this bucket of everyone, you get to target about this much. Everyone is fighting for this much of people. Now, imagine a world where you can go, "Well, I'm gonna go for everyone. My average cost is gonna drop down to $3, and they have to watch about 12 ads, and have no more than 7%, 8% day 30 retention." The seg will go ROI positive in 18 months, or not 18 months, 180 days. It won't be as evergreen. It won't continue to scale. It won't create the same long-term profit. In the short term, you will be able to build a MAU and a DAU. You'll be able to do it profitably, and you could potentially, as you just said, cross it into other avenues. I think that's a huge opportunity. Great. Maybe on profitability, I think SciPlay did about 28% EBITDA margins last year, adjusted EBITDA. I'm wondering, how should we think about your philosophy for managing profitability going forward? Are there targets that you have in mind internally, and are there areas in the business where the level of investment is more or less flexible? I'll start with the last one. I'll go from there. I would say everything is flexible. There is no 3-year plan that you actually follow ever. There's a 3-year plan that lasts about 1 month. Enough stuff changes that you redistribute everything. Way I would kind of think about profitability, this, you know, lucky for us, this is how the company was born. Because it was a bootstrapped, founder-led company, nothing was about driving revenue. Everything was always about how do we drive EBITDA. We take that same approach today. When we're looking internally, which I'd say most of our large investment is internal across things that help us retain customers, give them better experience, therefore they're willing to pay for time. You know, when we look at every marketing dollar, our CRO jokes about this all the time. She's a portfolio manager. Like, she has $140 million-$150 million, and her job is to get the best ROI across all of the portfolio. In this case, I'll call stops, but our video games. She has no care about what dollar comes from which game. All she wants is the highest ROI. This is the mentality, everything we do, whether or not it's a feature. If we don't have 80% confidence that it's gonna pay back, why build the feature? If you can see, you know, if I dedicate these three people to this game, they can get five more LiveOps out, and that five more LiveOps is going to increase revenue by 0.5% ROI, and that's easy as can be. Can you find different places in the world that have same quality of employee but at a different cost? Evaluate it, find it, figure out how to integrate to it. Even new games. This is a very challenging world to be building new games right now, but we are seeing people do it. We are seeing people be successful. What can we learn from them to make that next investment the best one that we can possibly do? We look at it and we invest at that point. I don't know what the long-term margin can be. You know, Talking with one of our CSO not very long ago, and he talked about, you know, our games, and he talked about them how they stack on top of each other, and they're almost an annuity to each other because then you stack the next one and the next cohort, and the marketing money causes each one to drive up and go higher. Well, our average game has. You know, I'd say our average large game has somewhere between 80 to 100 people on it. They increase $50 million, they still have 80 to 100 people on it. Mm. They don't need to double with revenue. Really, it's like, how can we get to the right scale of being able to take care of the customer, but each game makes us more profit over time? I just don't know what the real end is. I'm sure you wanted a number, but bummer. No, really interesting though. I guess, final thing on the quarter itself. Yeah. I mean, I think that one thing that stood out to me was you really were able to outperform many of your peers in a pretty tough environment for mobile gaming. There's a lot of different stories being told about how much is macro versus how much is company specific. What do you think is differentiating SciPlay's performance recently versus peers? Our mentality. It is the mentality of we're an entertainment company that values all of the people who play our games today. Our live or die is not by where our next marketing dollar can be spent. Our live or die is based on can we retain the person that we have today. Then the next evolution of LiveOps, which high or monetization, however you wanna call it, we set ourselves apart. We are a company that runs by the hour. you know, to the joke of a three-year plan, I don't even have a one-week calendar because every day things are going to change based on how the KPIs look at that given point. The mentality of the people that are working on the games also have to have that mentality. To me, this is the part that sets us from everyone else today. The next part is we invested different. We were ahead of the trend before most people were ahead of the trend, and we made the investments needed to be in the economy we are in today. Eventually other people will get there. It's just gonna take a while. Mm-hmm. Hopefully it didn't change again before they get there. The sort of the investments that you made, those were sort of shifting resources from that very marketing user acquisition-heavy approach. Like, what would you highlight there? I'd say a little bit of everything. on the game side, we really started looking at what are things that we can do once that can be scalable across every game. we're able to really start lowering the cost of getting stuff in front of the users and getting it to more users at once. Our marketing team, we actually invested, and we've invested in our own way of looking at returns. We invested in our own way of looking at user retention, user churn prevention, what I would call LTV prediction. This investment helped make us actually outperform what we were hoping to do with our marketing money. You put it all together, I'd say is any place that you can invest $1 that can touch multiple things. This is our... This is really what our focus is. Anytime they have to go to 1 game and invest that $1 in 1 game, it means you only have 1 chance of being right. Interesting. Maybe on the M&A front. You know, should we expect M&A to be not a driver of growth going forward in the way that it has been for many of your peers historically. If that's, if that's the case, how does M&A fit into your strategy and how are you deciding, you know, when and if to acquire something? Well, we've already seen a slowdown in M&A. Much less of it is being done, even though we've seen the multipliers come down. I mean, some of these multipliers, some of these companies being bought at 20x, like, the odds of that company ever being a good purchase are not good. Like, they would have to increase and get better year over year for 8-10 years. How many video games do that, let alone companies? One, I think the way that we were growing through M&A was unsustainable, period. Now the market is down, as far as because, in my opinion, IDFA, therefore the multiples have started to come down. They're not as low as where I think they should probably be, they have started to come down. Now it's gonna be the age of the individual company or game. If you're someone building a brand-new game from scratch, and you're hoping that someone will come in, invest marketing money to grow, but now you have three-year ROIs, kind of hard to say that that's a good business model. Where I think the real opportunities are, especially for a company like us, are going to be around either buying teams of people that have amazing talent that can be additive to SciPlay today or potential games that are out there that are already of scale, already have mass, but they either don't run their LiveOps or they're sitting on bad technology or they've done a poor job with either marketing or data science or data. Where we can actually come help them run their company. I think these are the only two real outcomes that I see happening. IDFA not changing. IDFA changes, and I think everything changes again. Great. Well, I think, I think we're at time, but great discussion. Yeah. Thank you so much for being here. Yeah. Can I ask anyone if anyone has any questions? Ask away. Yeah, I actually have one. Okay. Because I actually don't spend a lot of time on your company. Just sorry about that. I really have a question about, could you please elaborate about the Class A common stock and Class B common stock? Because I think Class B common stock have a huge portion of the company. Yeah. Another thing is, could you please elaborate about the non-controlling interest? The, sorry, the non what? Non-controlling interest on balance sheet. Yeah. Yeah. Yeah. No, great question. You know, we were part of a larger company. At that point, it was Scientific Games. Scientific Games saw the value of social games being on its own and spun us out. At that point, it was basically like 80% owned revenue by them, 20% owned everyone else. But the Class B stocks had a 10-to-1 voting right over Class A stocks. For, you know, so they maintained majority of the voting rights. This has been the situation that we've been in. Now, whether or not that's because market has changed so much, COVID hit during this time, you know, ultimately it's up to them how they wanna decide to use this, and, you know, decide where the best usage of the stock goes. For me, I kind of look at it as no matter who my shareholders are, my job is to build the best company I possibly can, return the most money I can to all shareholders, no matter what. The best way to do that is have sustainable business. This is kind of how we focus on it as an overall... sorry, what was the second question? About the non. Oh, non-controlling. I think we're a long ways before it's gonna be a non-controlling because of the 10 to 1. I don't, you know, Light & Wonder at this point has not shared any aspirations of changing that. Now with that said, I have an amazing independent board that is filled with people who came from the gaming industry. Nick Earl, C.J. Prober, Michael Marchetti, you know, really have been all over. Then added April Henry to really help solidify us from, like, the people side. I would say we've made more strides to making sure that this is the most sustainable long-term company we can because of the board, and they've been amazing. Like, I'll be honest, like, Nick is a great confidant for me. Yeah, welcome. All right. Thank you, guys. Have a great day.