Good day, ladies and gentlemen, thank you for standing by. Welcome to the PLAYSTUDIOS Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And please note that this conference call is being recorded today, November 8, 2022. I will now turn the call over to Samir Jain, Head of Investor Relations and Treasury. Thank you, sir. Please go ahead.

Welcome, everyone, and thank you for joining the PLAYSTUDIOS third quarter 2022 earnings call. Hosting the call today will be Andrew Pascal, PLAYSTUDIOS Chairman and Chief Executive Officer; and Scott Peterson, Chief Financial Officer of the company. Our call today will contain forward-looking statements about future events, expectations and projections. These statements involve risks and uncertainties that could cause actual future results to differ materially from our current expectations. We refer you to our SEC filings for a more detailed discussion of the risk factors that could impact our future operating results and financial conditions. During the call, management will also discuss certain non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is contained in our third quarter 2022 earnings release, which is available on the PLAYSTUDIOS website and in our SEC filings. With that, I'll turn the call over to Andrew.

Thank you, Samir, and good afternoon, everyone. Welcome to the PLAYSTUDIOS third quarter 2022 earnings call. We had a solid quarter, which showed both sequential strength and momentum on some of our key initiatives. Included in this is the performance of our core social casino games such as Pop! Slots, myVEGAS Slots and myKONAMI Slots, as well as notable progress with our newest products such as myVEGAS Bingo and Tetris. Of course, the big news since we last spoke is the acquisition of Brainium, a well-established and successful casual games developer based in Portland, Oregon. We view the acquisition of Brainium as strategically significant and that it fundamentally repositions the company with a more diversified portfolio. I'll just also add that we were able to add Brainium without materially altering our strong financial position. As of September 30, we had no borrowings under our revolver and a cash balance of $212 million. Let's start by talking about the quarter. Results were generally stable across the board, in some cases, gained momentum through the quarter. DAU and MAU of 1.5 million and 6.7 million were largely flat to second quarter, showing a stability in users and a reversal from prior year-to-date trends. Against the current industry backdrop, we're pleased with these results and believe they highlight the popularity of our games, the loyalty of our customers and the efficacy of our playAWARDS platform. On the industry front, we continue to grapple with a challenging user acquisition environment that's making it harder to find and retain profitable players. While changes to IDFA on iOS were instituted 18 months ago, the industry is still resetting. Considering this, I'm encouraged that we were able to generally hold our DAU and MAU figure flat sequentially while also increasing our ARPDAU, a direct reflection of the…

Thank you, Andrew. We reported $72.1 million of revenue during the quarter, compared to $70.6 million last year and $68.4 million in the second quarter of 2022. Better monetization drove increases in our core social casino game ARPDAU. The strong year-over-year and sequential increases were primarily driven by increased revenue per payer. As a reminder, we acquired Tetris in November of '21. Therefore, it was not included in last year's third quarter results. Adjusted EBITDA was $9.8 million compared to $9.6 million a year ago and $7.3 million in the second quarter of 2022. As Andrew mentioned, we were pleased with our third quarter KPIs. DAU was 1.5 million and MAU was 6.7 million, up 24.6% and 87.1%, respectively, over the last year and flat sequentially. Although third quarter ARPDAU was down 20% from last year's levels, those figures are diluted by the inclusion of Tetris to this year's results. Excluding Tetris, year-over-year ARPDAU increased by approximately 10%. On the loyalty side, we saw double-digit gains in partners, outlets and rewards inventory, which now stands at 595 unique rewards. Reward purchases of 553,000 units declined 3% during the quarter, but we saw a healthy increase in rewards store views. On October 12, we completed the purchase of Brainium for $70 million in cash. Additionally, the acquisition includes a contingent payment based upon Brainium exceeding certain financial milestones during the full 2022 calendar year. The maximum contingent payment is $27.25 million. There's been some confusion around this, so let me clarify how the contingent payment works. If Brainium were to generate $1 above the threshold, then we will pay an agreed upon multiple on just that dollar. Effectively, you should view the most likely scenario being a total consideration value of $70 million and a deal multiple at or very close…

Thank you, Scott. So before we end our prepared remarks and open the call for questions, I'd like to reinforce some of the key points. First, we had a solid third quarter that included better-than-industry performance and year-over-year gains in revenue and adjusted EBITDA. Our KPIs were strong with growth in ARPDAU and stability in DAU and MAU despite persisting economic and industry weakness. We made notable progress in Tetris and myVEGAS Bingo, and believe both games are positioned to contribute meaningfully to our 2023 results. We advanced playAWARDS with partners, growing 43% year-over-year as reward purchases reached 553,000 and redemption retail value exceeded $31 million. And we made a strategically significant acquisition with Brainium. The deal is immediately accretive to margins. And alongside Tetris and myVEGAS Bingo, provides the perfect portfolio for playAWARDS to establish itself as the gaming industry's most distinctive and unique player retention platform. Lastly, I want to thank our dedicated teams around the globe, along with our strategic partners and investors. And to our new colleagues at Brainium, welcome to the team. We're thrilled to be partners and are excited about what we can accomplish together. Thank you all for joining us today, and we're now happy to take your questions. Operator, please open the lines.

[Operator Instructions] And our first question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed with your question.

Good afternoon, Andrew and Scott. I appreciate the detailed firms on Brainium or update there. I want to start. We've seen some diverging industry trends between casual and social casino. Do you think these are structural or permanent changes? And then maybe if you can talk a little bit about the bifurcation between your business now that you have a little bit bigger cash flow business?

Yes. Thanks, Ryan. I don't know that we yet have a point of view on whether there are structural conditions here between our casual portfolio and the casino genre. And I said it only because our foray into casual is somewhat recent, right? So with our acquisition of Tetris and now Brainium, we have a pretty healthy suite of products that are in casual. And we're happy, and we see kind of the general momentum that we're experiencing across that portfolio. And certainly, it's stronger when you're looking at its performance kind of sequentially quarter-over-quarter as compared to the casino suite. But as far as whether there's a clear indication as to some structural shift or change in the market that's going to be sustained over time, I don't yet have a point of view.

Fair enough. Moving along, I mean, moving over to the direct-to-consumer platform. So can you provide an update there? We've seen some challenges, kind of ongoing challenges in the traditional app stores. So curious on the progress you have on your D2C platform?

Yes. Thanks. It's a great question. So as we've talked about in the past, I mean, we've obviously spent some time and energy creating a direct relationship with a number of our consumers and try to enable them to purchase with us more directly to avoid the platform tax. Their challenges to the whole experience, as far as getting players that are actively playing on a mobile device to then purchase through the web and then ultimately return to and enjoy their mobile experience. Clearly, our peers that have had success with this keep everybody within the same experience by offering the game and the capacity to purchase all completely and directly on the web. And so we, too, have invested in and have two products that we offer on the web direct, and we'll continue to advance those efforts. And then as we mentioned, we have an invitation-only program for the moment through our playAWARDS program where, for premium players, we allow them to have their own bespoke portal where they can actually look at and see what types of purchases they can make directly with us and there's incentives for them to do that. And then we also offer all kinds of really unique rewards as part of the loyalty program that are only accessible through that portal. So, I would say that our efforts are still early. We're actively advancing them. I think we've learned a lot. We're going to continue to see if we can step up and start to book ever more of our revenues directly with our consumers.

One more for me. Solid margin in the quarter just sequentially from the first half into Q3. Q4 guidance implies relatively similar in Q4 with a little help from Brainium. But how should we think about margins? Is there another heavy lift on the spend side next year to launch new games and transition and cross-sell? Or do you think we're at a point in the model where we can start to see modest kind of operating leverage from here?

Yes. I think we'll slowly start to see the operating leverage. We've talked about how we've been layering in. We've been expanding our teams and talent in locations like Belgrade and Vietnam, which allows us to service our products more affordably with also comparable and really great talent. So we should -- we expect, and we've already started to see the benefits of that. We'll continue to see the benefits of that as we move forward, which should improve margins. We do have some early-stage efforts that we're pretty pleased with the traction that we're getting, and we expect that we're going to be investing in scaling up those products. So as we advance through the balance of the current quarter and get into the new year, we'll form a clear view on just how aggressively we're going to be investing in those. So obviously, Bingo is a product that we've been working on for the better part of the last 6 or 7 months. And we're feeling like it's at a place now where it's investable. We're also feeling really good about the Tetris product. We have a new Tetris product that's in development that we'll be looking to launch and scale next year. So, I think what we'll need to do is probably try to provide a bit more visibility into -- across our portfolio, the margins that we're achieving with our more mature products, relative to the margin profile of those that are in an operating stage but early and scaling and growing. And as a result, operating the loss versus those that are still in the development stage, so that we can give more clarity around the current margin profile of the business and ultimately where we think it's going, but we expect to see margin improvement as we advance to next year.

Thanks, Andrew. Good luck, guys.

And our next question comes from the line of Omar Dessouky, with Bank of America. Please proceed with your question.

Andrew, thanks for taking my question. So, I wanted to just dig into the implied fourth quarter guide. It looks like you upped the range for the full year guide. And I would assume that, that includes roughly 2.5 months of the acquisition that you made at Brainium. Is that correct?

That's correct. That's correct.

Great. So then if I do the math, I'm kind of getting around about $63 million. So it would look as if the -- it would look as if your guide is actually $270 million to $280 million if we were to take Brainium out for the full year. And that would imply a pretty steep decline year-over-year in the fourth quarter. And I was just wondering if my math is right? And what would be kind of driving that kind of guidance in the fourth quarter?

Scott, do you want to speak to that?

Yes. Sorry. Hold on. Sorry, I was on mute. So I guess the general way we look at it is we've sort of given our annual guidance, and we didn't really look at -- provide quarterly guidance previously. So we were still sort of targeting that end-of-year number. And although we did raise it as a result of Brainium, given the current environment and everything else, we just didn't feel like it was prudent to adjust it for any other reason at this time.

Okay. So does that mean that -- what do you expect in the fourth quarter versus the fourth quarter of last year or the third quarter of this year? I mean the imply -- the implication of your guide minus the results of the first three quarters is that it's down. So is that not what you guys are actually expecting?

I'm trying to think how to best answer that other than no. I mean, I would say that we've provided a range, and we think that we're comfortable with that range.

Omar, it's Samir. If I could just help you sort of like think about this. So you kind of looked at our guidance before. It was a relatively wide range, and it was annual guidance. And now if you layer Brainium on top and how we sort of discussed it and like how you rightly categorized this as sort of impacting our results for 2.5 months, and I think what Scott had said at the time when we made the Brainium acquisition was to sort of think about those numbers on a revenue basis and on an EBITDA basis and sort of straight-line them. So if you did that and like you implied on those numbers, we basically took those numbers and just added them to the bottom end of the range. You're not wrong when you look at what an implied figure for the fourth quarter is. But I think what Scott is saying is that we guided towards a full year number, and we are basically just layering Brainium on top of that. And we didn't really guide on a quarter-by-quarter basis that you guys are sort of breaking out our annual guidance and looking at it on a quarter-by-quarter basis.

Okay. Got it. Thank you, Samir. And just for the follow-up, I wanted to dig into what Andrew said that about the social casino market contracting for a couple of quarters now. I think you'd mentioned that for two quarters now, it contracted about 2%. I was wondering what were some of the drivers of that? Was it just simply what you referred to in terms of user acquisition? Or are there other factors that have influenced that such as supply side? Less games coming out? Spend per user potentially going down? Retention? It's not a huge change, but obviously, everybody likes to see kind of consistent growth.

Yes. I mean -- so I think what I shared was that sequentially, we actually saw some improvement. But when you look at it as compared to the prior year, obviously, it's off and off more substantially. And I think it's just generally across the board. I don't know that it's concentrated within any one of the key metrics, whether it's -- we don't see any meaningful reductions yet in the average revenue per paying user. There's some erosion on the number of paying users year-over-year. For us, actually, we saw some strength in an increase in the actual revenue per paying player. So I don't -- I think it's just generally across the board and just some softness in the category. So -- but not concentrated in any one metric.

Okay, got it. Those are my questions. I appreciate the time and looking forward to chatting with you next year.

[Operator Instructions] Our next question comes from the line of Martin Yang with Oppenheimer. Please proceed with your question.

Hi, good afternoon. Thank you for taking the question. A follow-up to Omar's question on 4Q. Another way to look at it is, have you observed any deterioration for UA monetization or advertising from 3Q into 4Q? Just broadly speaking, on the industry environment.

I'm sorry, Martin. Can you reask the question? I don't know that I...

Sure. So because the implied 4Q revenue, excluding Brainium, is showing a deterioration of gross trends into the fourth quarter. Have you observed any deterioration in user acquisition, ad monetization or any other trends for your staff or for the broad industry from 3Q to 4Q?

We're not -- we don't -- we're not speaking to the performance that we're experiencing in the current quarter. I can tell you that we're -- when we look at the overall performance of our user acquisition investments, I don't think that there's anything particularly noteworthy to highlight other than it continues to be a difficult environment. I talked a lot about just the challenges that IDFA brought about and just how difficult it is as a result, and with even subsequent changes to go find to really target and find quality users and monetizers. Now with that said, I think our team has done an amazing job, and nearly all of our products are at a place where the returns that we would expect to see that really warrant are continuing to spend and invest in scaling and growing them, we're realizing or seeing across our portfolio. So I don't see anything meaningful to the third quarter in or around user acquisition that's probably worth highlighting. And as far as the ad monetization is concerned, we've never had a really meaningful component of our business be ad-driven up until we acquired Tetris. From that point, it represented maybe 3.5% to 4% of our total revenues, maybe closer to 5% of total revenue. Obviously, with the acquisition of Brainium, that's now increased. And we're just weeks into having acquired and integrated that team and that portfolio of products. And so I don't know that we yet have a ton of clarity or experience where we can speak to any trends on the ad monetization front. But for the one product that we do have and that we manage, that being our Tetris Prime product, where the team is doing a great job in terms of how they're optimizing its performance and we generally are pleased with the trends that we're seeing there.

Got it. Thank you. Another question is maybe we look further into 2023, is there any fundamental drivers that makes you believe that overall UA environment or overall macro could improve and benefit you?

No. I don't see anything that's probably worth highlighting at this point. I think the things that we focus on that they benefit us are obviously the increased importance on just retaining our existing audience. So if you look at the acquisitions that we've done, whether it's the rights to Tetris and that product and the enormous amount of organic traffic that it generates, or you look at the Brainium suite of products and the scale of its audience, a majority of which is organically driven. But those really -- the dynamics of their user acquisition factored into our decisions, these are a suite of products that are just naturally and organically generating a ton of interest. So, our strategy is to leverage that traffic in that audience for the benefit of the entire portfolio, and we'll do that by incorporating our playAWARDS proposition and providing all kinds of cross promotion and incentives in order to really drive the adoption across our own network. So a tough external environment means that we all -- or every publisher has to get a lot more focused on how they go about retaining and holding on to their existing audience, and that's where we think we have some unique advantages.

Got it. Thank you very much.

And our next question is a follow-up from Omar Dessouky with Bank of America. Please proceed with your question.

Hey Andrew, thanks for giving us your time. Since we were on the phone, I thought I'd ask this question. You guys -- you do still have a lot of cash on the balance sheet. And we know that in the private market, there are kind of numerous assets to be had. Some of those assets have been funded with equity, some of them with debt. Are there kind of any interesting ways that you could acquire assets other than just buying the companies? For example, would it ever be possible to actually acquire assets through ownership of debt, for example? Because I realize there are a lot of privates out there with that floating around. Just trying to think a little bit out of the box and see what other degrees of freedom you guys have in terms of expanding your portfolio and your assets and your use of cash.

Yes, sure. Thanks for that question. Jason, do you want to take that one?

Yes. Look, I'd say that we're obviously always out there in the market, and we're creatively oriented in the way that we kind of like to do deal making. And so if we find the right opportunity and the right asset that's strategically compelling, but the structure by which we could acquire that asset might be different than a straight kind of cash purchase, deliberate about in our approach to date. But I'd say that we are -- we like to think of ourselves as creative dealmakers, and we'll strike the right balance in order to action upon opportunities that are strategically compelling.

Okay. Thank you. And I guess have you guys looked at that debt market? And what -- how -- sort of if you have, like how attractive is it compared to -- like do you think the debt market has adjusted as well as kind of the -- just the equity market in the private space? Or is it still lofty? Or does debt and equity kind of trade at the same kind of yield and risk premium? I know these aren't liquid markets, but I just wanted to pick your brain about that since we're on the phone.

Yes. I'd say I don't really have a view on that today. We haven't spent a lot of time looking at the debt market and the dynamics that are happening there to come provide an informed point of view on this call.

Okay. Yes, no problem. Just -- yes, just wanted to think out of the box. Thanks for entertaining the question.

Thank you.

Thank you.

Thank you. At this time, we are seeing no further questions. And I would like to pass the call back over to Andrew for any closing remarks on the call.

Again, I really appreciate everybody's interest, and thank you for the thoughtful questions. I look forward to again updating you on our progress once we close out the fourth quarter and the year. So thank you, everybody.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.