Playtika Holding Corp (PLTK) 2022 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Playtika Holding Third Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Mr. David Niederman, Vice President of Investor Relations. Please go ahead, sir.

Welcome, everyone, and thank you for joining us today for the Third Quarter 2022 Earnings Call for Playtika Holding Corp. Joining me on the call today are Robert Antokol, Co-Founder and CEO of Playtika; and Craig Abrahams, Playtika's President and Chief Financial Officer.

I'd like to remind you that today's discussion may contain forward-looking statements, including, but not limited to, the company's anticipated future revenue and operating performance.

These statements and other comments are not a guarantee of future performance, but rather are subject to risks and uncertainties, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.

For a more complete discussion of the risks and uncertainties, please see our filings with the SEC. We have posted an accompanying slide deck to our Investor Relations website, and we'll also post our prepared remarks immediately following the call.

With that, I will now turn the call over to Robert.

Thank you, everyone, for joining our call today. In the third quarter, our casual games growth strategy continued to succeed. We saw excellent results from our casual games, which grew 14% year-over-year. These results demonstrate Playtika's superior technology, Live-Ops and ability to optimize and grow revenues over the long term. Bingo Blitz is driving these results using advanced Live-Ops and using a new AI-based tools, which has the potential to create upside across our portfolio.

Thanks to our strong marketing capabilities, Bingo Blitz has also become a compelling mainstream franchise, leveraging celebrities and music stars with marketing partnership and is now the #1 game in Playtika portfolio by revenue, and it shows that we are creating amazing entertainment experience that our players love.

I will now touch our slot-themed games. The slot category is a mature competitive market. Having said that, we are creating exciting roadmaps for 2023 that we expect to provide our players with a unique innovation content.

Finally, I'd like to introduce a new initiative I'm passionate about, digital studio. This will be a new way of managing game studios. It is a sophisticated AI and machine learning tool that enables studio to run more efficiently using automation. This is something we are testing with our legacy titles, and we'll talk about more in the future.

In closing, I'm excited and confident in our position and ability to win this market. Playtika has a solid foundation in place for the long term, a diversified portfolio of top-ranked games, passionate, long-term players that have enjoyed our games over many years.

Our direct-to-consumer platform is at scale and a strong competitive advantage. Our data- and technology-driven capabilities and approach to user acquisition allows us to be fast, efficient and optimize resource.

And finally, we have a strong financial position with a healthy balance sheet to pursue growth opportunities. I will sum up by saying that we are excited to continue building Playtika and enhancing its position as a leading mobile game company.

With that, I will now turn it over to Craig, who will provide more details on our financial results.

Thank you, Robert. Revenue was $647.8 million, up 1.9% year-over-year. Regarding adjusted EBITDA, as our debt investors calculate a different EBITDA metric, going forward, we will provide both credit adjusted and adjusted EBITDA. The difference between these 2 non-GAAP financial metrics is our management retention plan, which expires at the end of 2024 and M&A-related retention payments.

Adjusted EBITDA was $230.7 million in the quarter, down 6.9% year-over-year. Credit adjusted EBITDA was $203.5 million in the quarter, down 6.2% year-over-year. Revenue across our casual games grew 14.4% versus a year ago.

June's Journey from our Wooga Studio grew 32.5% versus last year, driven by strong conversion from the [Vault] feature in addition to new features implemented throughout the quarter.

Solitaire Grand Harvest was up 14.3% versus a year ago. Bingo Blitz grew 14.7% year-over-year, driven by the Majestic Blitz promotion and very strong execution. This quarter, Bingo Blitz enjoyed amazing momentum and became the largest game in our portfolio from a revenue perspective.

Casino-themed games revenue for the third quarter was down 10.2% versus a year ago. This was driven primarily by results in Slotomania and House of Fun and offset by positive results in World Series of Poker.

Slotomania had a challenging quarter, down 12.7% year-over-year. This performance was driven in part by new features we introduced that did not resonate with our players. To address this, we plan to shift focus back to the core of the game, including better slot cell content, optimizing the game economy and overall being more responsive to player feedback.

We have a compelling feature roadmap built for 2023 and are making Slotomania a strategic priority for the company.

House of Fun was down 21.2% year-over-year. As per our comments in Q2, we continued our strategy of cutting back on marketing and pursuing a more efficient studio model and ultimately aligning with the company's focus on overall adjusted EBITDA generation. As we evaluate the performance of this strategy, we have the potential to apply it to other mature titles as well.

World Series of Poker performed well, growing 8.2% versus last year, driven partially by the World Series of Poker main event in July, which helped build awareness for the game.

Looking at operational metrics, average daily payer conversion increased 60 basis points year-over-year to 3.4%. ARPDAU increased 16.4% year-over-year to $0.78, and average daily paying users increased 5.8% year-over-year to 310,000.

Turning to marketing. The digital user acquisition environment continues to evolve, and cost per install have increased in the third quarter. As we look out to our plans for 2023, we will continue to increase marketing investment in our growth franchises while being disciplined and data-driven in how we allocate marketing capital.

Our offline marketing campaigns have been a great method to offset this changing user acquisition dynamic to drive user growth and also showcase the brands of our games.

We continue to partner with celebrities in the third quarter, including Drew Barrymore, Jane Seymour, Dr. Phil and Jay Leno, among others.

Turning to our P&L. Gross margins were stable at 71.9%, up slightly from 71.8% year-over-year. Additionally, direct-to-consumer platforms were 23.3% of total revenue, up from 21.7% in the third quarter of 2021. Total operating expenses increased 10.7% year-over-year, primarily related to employee-related expenses.

R&D expenses increased by 25.8% year-over-year, driven primarily by headcount growth and increases in compensation expenses for our employees as we discussed on prior calls.

Sales and marketing expenses increased by 3% year-over-year as we remain disciplined in how we allocated marketing dollars. G&A expenses increased by 6.5% year-over-year. GAAP net income was $68.2 million compared to $80.5 million in the prior-year quarter.

As of September 30, we had approximately $1.26 billion in cash and cash equivalents. Upon closing of the Tender Offer in October, we used approximately $600 million of the cash from our balance sheet, excluding fees and expenses.

Following the October transaction, our balance sheet of cash and cash equivalents is approximately $650 million. Additionally, this will reduce share count in the fourth quarter by approximately 51.8 million shares and have a commensurate impact on per share measures.

Our effective tax rate year-to-date was 30.2%.

Regarding our financial outlook, despite a difficult market environment, we anticipate we will finish the year within the previously provided ranges for revenue and adjusted EBITDA.

In closing, we're encouraged by the success we saw in our casual games and the continued innovation and creativity of all of our teams as they strive to provide our players with the best quality entertainment. And as I mentioned, we are working to stabilize revenue in our slot-themed games while operating them in an efficient manner.

Looking to 2023, we will continue to invest in our strongest franchises to build on momentum they've achieved. We are prioritizing our investments across our portfolio of games as we look to align growth and expense profiles. We will maintain our focus on free cash flow generation while continuing to drive growth in our successful casual titles and build on our leadership position in mobile games.

With that, we will be happy to take your questions.

(Operator Instructions) And our first question comes from the line of Matthew Cost from Morgan Stanley.

I have two. So just thinking about the divergence between the casual games and the casino games, obviously, the casual games are performing very, very well, and you mentioned some challenges specific to Slotomania.

Is there a market-level challenge going on in the casino gaming market right now that you expect to turn at some point? And what should we be watching for to assess when that turn is going to occur?

And then just on the marketing front, obviously, in the past, you've been very effective at sort of maintaining a flat or relatively stable effective CPI. You mentioned CPIs being up a little bit in 3Q. So I'm just wondering were there certain channels where you were seeing more challenges or sort of what drove the CPI up?

Thank you for the question. So first, Playtika has an amazing portfolio of games, and we actually proved in the past that we know how to change momentum of games that perform [automatically], like Bingo Blitz 6 years ago, like WSOP [2] years ago.

And this is what's happening around Slotomania. We are building an amazing roadmap for 2023. We're excited about this roadmap. We believe in this roadmap. We believe -- to stabilize the revenues, and this is our target. And regarding CPI?

Sure. So in terms of CPIs, we've shifted focus for higher-quality traffic and traffic sources and focusing more on ROI. And I think that's really been helpful for us. And the fact that we have our scale, our AI technology and how we buy traffic and our Live-Ops capabilities, I think those 3 things combined really gives us an advantage in an environment where precision on buying traffic is so important.

(Operator Instructions) And our next question comes from the line of Eric Handler from MKM Partners.

Robert, I wonder if you could just touch on your thoughts about new game launches. I know you had several in the pipeline. How you're thinking about that in this current macro environment?

So thank you for the question. So we launched Merge Stories in September. It was a solid launch, still early to know about the future of the game. It's not an easy environment to launch new games. This is -- it's not a surprise. We see it overall. We see in this world.

We have another 2 games that we are right now exploring the [event] to launch them. I think in a quarter or 2 quarters from now, we will know exactly what is the future of new games. But again, as we said in the beginning of the year, our focus is to have, again, that doing around $100 million. And this is the target of Playtika for new games.

Until now, it's really hard for us to get an answer regarding Merge Stories, but I believe that in the quarter or 2 quarters from now, we'll have a solid answer.

Okay. And then just as a follow-up, I wonder if you could talk about sort of an update on the Redecor game.

So Redecor, as we said in the beginning, when we acquired Redecor, it's a project, project of 18 to 24 months. We did changes in the game. We built an amazing team in Israel. We brought a talent from other kind -- or other studios in Playtika. And I believe that during next year, we will have a better view on the future of the game.

Our next question comes from the line of Colin Sebastian from R.W. Baird.

I guess, first off, I know you guys don't really look at it this way, but on the decline in DAUs, do you have any concern over time around limitations, the DPU growth or revenue per DPU at the top of the funnel doesn't expand?

And then secondly, I know there's a lot of divergence and performance by title. But are you seeing any specific areas where you're making changes to Boost? Are there areas where you're seeing some of those technology initiatives, improved performance in some titles that can be applied to other titles? Any sort of visibility on using the technology platform would be helpful.

Sure. Thank you. So in terms of DAUs, we've been focusing on higher-quality Tier 1 traffic. And so in doing that, you're going to see lower levels of DAUs in terms of daily paying users, which is the metric we focus folks on. You saw a 6% year-over-year increase and stable at 310,000 quarter-over-quarter.

And so I think that is the metric in terms of the engaged player base -- payer base and trying to grow that where we're primarily focused.

So regarding the Boost question. So really, I'm happy to elaborate more regarding Boost and digital studio because at the end of the day, when we announced about Boost 2 years ago, Boost is a platform to share knowledge of new features of content between the apps, and it's working amazingly.

The digital studio, the next level of the Boost, this is how we're going to operate our games in the future. This is how we're going to use AI technology to make the operation and the [livelihood] much faster, much efficient than we're doing today.

In the beginning of next year, we're going to elaborate much more about it. We're going to share more information, but this is one of our best and interesting project.

And our next question comes from the line of Stephen Ju from Credit Suisse.

So I think, Robert, you touched on this in your prepared remarks. And I think there was also a recent interview with Eric talking about the acquisition opportunities out there, also. And you have to think that versus the pandemic environment when every studio out there was probably [flushed] with business, we're probably looking at a different situation now.

So can you talk about the current environment and whether those conversations may or may not be accelerating?

Sure. Thanks, Stephen. So the M&A environment continues to be competitive. I think everyone acknowledges that mobile gaming is the biggest gaming platform within video games.

And in terms of the investments and M&A opportunities that we're evaluating, there continues to be a variety of interesting opportunities in the marketplace. I would say that there continues to be a divergence between the private markets and public company valuations.

But that being said, post Tender Offer, we have $650 million of cash in our balance sheet. We have $600 million in the form of a revolver. So we definitely have the capabilities and capacity to continue to execute on transactions and we're definitely focused on that as we look to add world-class IP to our portfolio.

And our next question comes from the line of Clark Lampen from BTIG.

I wanted to ask a question around directional trends in light of, Craig, I think you characterized the market environment is difficult right now, which is certainly in line with what a lot of peers of yours are saying. But what did you see?

I guess, last quarter, you gave us some helpful color on monthly progression, noting May and June were a little weaker relative to April, but that July performance that sort of uptick. Did you see improvement relative to July? And how has sort of 4Q started off relative to that end-of-quarter exit rate?

Sure. Thanks for the question. We're not going to comment on kind of monthly trending. I think what we would say is that we're proud of our execution in light of the market conditions, being able to stay within the range. I would say that both revenue and adjusted EBITDA probably will end up more towards the bottom end of the range.

That being said, especially as it relates to the expense structure, some of the R&D projects that we anticipated this year ended up being projects that get expensed versus capitalized.

So our CapEx guidance for the year previously was $140 million. It will now be $125 million to $130 million. So neutral effect from a cash flow perspective, but some change that affects where we end up in the range.

Okay. And your direct business has also been growing year-on-year in terms of mix. I think you're up to about 23% or 24% right now. Do you believe that, I guess, sort of traditional channels of distribution with sort of mobile and app stores are under pressure?

And if that is the case and perhaps we're looking at maybe medium to long term, a slower growth environment, that might be a little bit too much of a stretch.

But I'd be curious if that is something that maybe is coming over time. Does that change your view around sort of long-term mix or the opportunities associated with direct and third-party channels and maybe driving the former a little bit higher?

So direct-to-consumer has always been a strategic priority for us. As you referenced, it's currently 23.3% of the business. Other than Bingo Blitz, none of our casual titles, are yet on direct-to-consumer.

And so we do see opportunities to provide more opportunities to give our consumers choice. And with that, we hope to see growth as well. So I think for us, nothing has changed strategically with that. It continues to be a competitive differentiator for us.

(Operator Instructions) And our next question comes from the line of Eric Sheridan from Goldman Sachs.

Maybe two, if I can? Just coming back to the concept around improving monetization within the slots performance, is that a couple of quarter initiative? Or do you think you could take upwards of 6 to 12 months? How should we be thinking about the timeline of improvement?

And how much of that is sort of in your control in terms of just game optimization versus elements, where there could be potential from external factors like the broader macro environment or consumption environment. That would be number one.

And number two, I know you referenced having over $600 million in cash on the balance sheet now post the Tender Offer and talking a little bit about the potential for acquisitions with the wider spread between public and private.

But how should we think about the rank order of priorities for that cash as you look out over the next 12 months in terms of where you think the greatest potential for ROI and deploying the balance sheet is?

So regarding the first question, Slotomania, so as I said in the beginning of the call, we are focusing at 2023. This is the year now that we're going stabilize. We're going to -- we have an amazing roadmap, like I said before. And this is top priority of Playtika Slotomania.

And again, as I said, we had cases in the past of games that didn't perform well, and we changed the momentum and grew them and look at Bingo Blitz that has become the #1 game in Playtika today. So I'm very optimistic about it. And...

Thanks, Eric. In terms of your second question on M&A, it's always been a strategic priority for us. If you look at all of our top titles today other than Slotomania and Caesars Casino, they all came through acquisition. And it will continue to be a strategic priority for us and rank order quite high in terms of how we intend to prioritize.

And our next question comes from the line of Douglas Creutz from Cowen.

A couple of questions. First, can you give me a sense of what the revenue currency headwind was in Q3 and what you think it could be in Q4?

Secondly, you talk about difficult market conditions, and we've heard this a few times. Can you be a bit more specific about -- is that on the monetization of engagement side, the engagement of user side or the ability to grow DAU side?

And maybe can you talk a bit about -- there's been a pretty big spread of performance between the companies in Q3 and talk about why you think that is.

Sure. So on the first question on FX, as you know, is about 70% of our business today is in the U.S., 30% outside the U.S. And so there were tailwinds to revenue from FX impact. Some of that was offset by the fact that we employ so many people in Israel, in Europe and Eastern Europe and got some benefit there outside of what was hedged.

But the net effect overall, definitely, was a tailwind -- sorry, it was a headwind in terms of overall impact from FX.

In terms of the market conditions, obviously, there's a few things that we've referenced in the past. The fact that CPIs are increasing in the marketing environment, more broadly, has been challenging. I think we've navigated the market better than what we've seen in terms of other public data, in that we have a very strong overall portfolio.

I think the evergreen nature of the franchises that we have, the casual titles specifically have been driving that outperformance, and I think that is combined with our Live-Ops capability is really what differentiates us.

And our next question comes from the line of Jason Bazinet from Citi.

I just had a question on these healthy payer conversion rates, which were in the high 1s and then low 2s and the mid-2s and high 2s, now we're approaching sort of mid-3s.

Can you just talk a little bit about how much of that is a function of Boost? How much of a function is going after higher-quality traffic, I think, was the term that you used? And what's a reasonable ceiling for how high that number can go?

Sure. So thanks for the question. I think as we've looked at in the past, we've kind of made the statements that we've looked at our most mature franchises and looked at the conversion levels there. And that's given us visibility and confidence that in the more newly acquired titles that we can grow their conversion rate over time.

Conversion as a whole kind of directly correlates to the length of time that we've owned a title and operated it, leveraging our Live-Ops know-how and bringing people the right content at the appropriate time.

So I think that is something that we're very good at and where a lot of our focus comes in, in trying to continue to drive that daily paying user number over time.

And our next question comes from the line of Omar Dessouky from Bank of America.

So if I were to assume that advertising revenue was similar to the first and the second quarter, it would seem to suggest that implied revenue per daily paying user is a little bit down quarter-over-quarter. First of all, is that the case?

And second of all, if it is the case, is that driven by -- is that seasonal? Or is it more driven by reductions in spending across the board? Are you seeing any changes in behavior? Or is it driven by the mix of gamers, where maybe higher-spending gamers are less active or lower-spending gamers are more active within that number?

Omar, thanks for the question. So I think it's more driven by the portfolio mix that we have in terms of performance quarter-over-quarter. If you're looking at a slight sequential decline quarter-over-quarter, it was driven more by the slot titles, both Slotomania and House of Fun. So I think it more correlates to that than some other broader trend.

As you've seen, we had very good quarters from both Bingo Blitz and Solitaire Grand Harvest, sequentially driving real growth. So it's hard to call out that there's some other broader market for us when we see such strength within the portfolio.

(Operator Instructions) And our next question comes from the line of Franco Granda from D.A. Davidson.

I was wondering, have you noticed any difference between some of the newer cohorts that you're acquiring through your offline campaigns and those from conventional UA, particularly, any commentary around LTV curves, [D7], [D30] retention, et cetera?

Nothing notable that we comment on this call. I think the power of the offline campaign is really that it further reinforces the brands. As you've seen, it's really further elevated Bingo Blitz. Now it's the #1 title within our portfolio, truly distinct entertainment personalities in creating a real halo around it.

So I think the benefits there are more qualitative in nature and helping in diversity of how we acquire traffic as well, but nothing specifically we'd call out in terms of the cohorts.

Okay. No, that's helpful. And then recently, you've been reorganizing your company and shuffling some games around some of your different studios. Where are you in that journey? And then can you share any progress report of sorts with how that's gone internally?

No. I think as we've noted before, some games like Redecor and Best Fiends are now being managed out of our headquarters in Herzliya, and there's no update there other than the teams continue to get up to speed and execute on their business plans.

All right. And then one very last one, if I could just squeeze one in, can you give us more color around that digital studio initiative that you talked about with your AI tools? Any color around the logistics and how that would work?

Thank you for the question. So I cannot put more color than what I said before. I only can say that this is going to be a meaningful thing for Playtika in the future. And this is how we're going to operate our games. This is how we believe the world is going to look.

And as I said, we're going to elaborate more about it in the beginning of the year and that it's going to be an amazing thing for us.

And our next question comes from the line of Aaron Lee from Macquarie.

And I apologize if I missed this. I got dropped from the call. But do you still see any macro impact on consumers and their willingness to pay?

Last quarter, you had talked about May and June have looked a little weak, but things had improved in July. And we have heard from some companies that called out macro weakness in Q2 that it didn't really play out, as they had feared. So just curious what you're seeing in the consumer and the health of consumer?

Thanks for the question. So I think what we're seeing is that it really is by genre category, so it's hard to impact an overall economy driving any one result, be that, obviously, the real strength throughout the casual portfolio, and there was great execution there in the quarter. And then it was softer on the slot-themed games.

And so I don't know how much of that -- because you look in some genres, the market data looks like it performed well. And we may have overperformed or underperformed what's happening there.

So I don't think we can make a blanket statement about the consumer. I think what we can show is that we believe that we had very -- we're proud of the results that we had in the quarter amidst kind of the market data that we're seeing.

Got it. As a follow-up, are there any economic indicators that you look at to inform your view of how you think players will behave, whether that's in GDP growth or the stock market, unemployment, anything that could be considered a leading indicator?

Nothing I would know.

This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.