Playtika Holding Corp. (PLTK) Q3 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Third Quarter 2021 Earnings Call for Playtika Holding Corp. [Operator Instructions]. I would now like to hand the conference over to your speaker host today, Mr. David Niederman, Vice President of Investor Relations.

Welcome to everyone, and thank you for joining us today for the third quarter 2021 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, David, and thank you, everyone, joining us today. We have recently had many exciting developments and made good progress in terms of setting the stage for growth in 2022. We are building momentum across all our areas of business, including game operation; technology; and importantly, new game development and M&A. I will discuss all of these in more details, and then Craig will review our Q3 results. We have recently acquired an incredible new studio, launched new game in October and soft launched another new game last week and also continues to drive innovation and product improvements across our existing portfolio. We believe all of these achievements will give us a strong foundation for future growth. Let's start with Reworks and their hit app, Redecor. We were delighted to welcome the team to the Playtika family in August. Redecor is an exciting mobile app where users create their own internal designs, which are then voted and rated by other members of the apps community, making it highly creative, engaging and social experience. This represents Playtika's first move into areas beyond traditional games. And we are optimistic that it's the beginning of the powerful long-term growth driver. We believe that the world of games and apps are increasingly converging. The product mechanics and the operation skills required to success in both categories have been fully overlapped. This is evident in not just Redecor, but also in numbers of other prominent nongaming proprietors across e-commerce, lifestyle, educational tech and more. Redecor is an exciting first step to further expand in the direction and to gain access to large new markets. In the 2 months since closing the deal, we have primarily focused on setting the groundwork needed for future scale and complement the Redecor team's incredible talent with top expert from some of Playtika's most successful studios, bringing experience and data analytics, technology and monetization. Early results from Redecor have been very encouraging. We are thrilled about the potential for Redecor and very happy to future expand our exciting footprint in the mobile hub of Helsinki. As we continue to look to areas beyond games, we believe our unmatched expertise in data analytics, gamification, monetization, technology and integration with our Boost platform will give us a distinct advantage. Let's turn to Switchcraft, the new game from our Wooga studio that we launched globally last month. We are very encouraged from the early feedback from the first few weeks since our global launch, where the originally planned Switchcraft global launch for 2022, but again performing beyond expectations in early testing, which enabled us to accelerate the launch time line. Switchcraft offers a unique combination of classic match 3 game play, with compelling story of misery and magic, topped off with top-of-the-line production value that can provide endless hours of fun and exciting to the player. We also love that the characters in the game are highly diverse, and we believe this is important progress for the mobile game industry. We are really proud of our Wooga studio for creating such an amazing game and hope everyone on the call takes some time to play it. In terms of our new game strategy, we have a deep bench of game developers talent at Playtika that we have built up as we acquired studios. This has provided us with a solid pipeline of new games, which will serve another growth driver. Today, I am pleased to announce that our game, Merge Stories, went into soft launch last week. This game was built by our Jelly Button studio, creator of Board Kings. Merge Stories has been in development for 2 years and offers a unique and innovative take on the Merge category. We received excellent internal feedback from players and the platforms. Merge Stories is a hybrid game that combines the core Merge game mechanics with casual build/battle elements. The metrics we are seeing so far are very positive, putting us on track for a global launch in Q2 of next year. Additionally, we will soft launch another game next year as well. If both games performed well during soft launch, we may globally launch 2 new games next year. This would put us as well ahead of the new game launch timing we discussed at our IPO in January. We will provide more details at our Analyst Day now in March 2022. In conclusion, we are very proud of our progress across these different areas and are confident that we are setting our Playtika for long-term growth and success. Our focus in the long-term health of our business and the steps we have taken this year put us on firm footing to win and lead our long term. Additionally, as we look at the landscape of opportunities and new business models emerging, we are really excited about what we see both in Israel and beyond, especially in the businesses adjustment in mobile games. We're excited to share more details about the work we are doing in this area in coming quarters. With that, I will turn the call over to Craig to review the third quarter results.

Thanks, Robert, and thank you to everyone joining our call today. In Q3, we grew revenue 4% year-over-year to $635.9 million, beating a difficult comparison due to the COVID lockdowns in Q3 2020. This will be the last quarter of this phenomenon, and we anticipate year-over-year comparisons will be more typical going forward. Let's take a closer look at our results for the third quarter. Last quarter, we reiterated our full year 2021 revenue guidance of $2.6 billion. This implied a relatively flat second half, which is what we anticipated at that time. Our actual Q3 results were down 3.6% sequentially. While there were many areas of success within the quarter, a few of which Robert highlighted, there were also a few areas that impacted our results. First, we had lower-than-expected revenues for both Board Kings and World Series of Poker. Starting with Board Kings, we've made recent management changes, which we believe will set the business back to growth. We are also encouraged that the upcoming World Series of Poker Main Event, in collaboration with the World Series of Poker land-based tournaments and upcoming product road map, will spur growth in our WSOP game. In addition, product and platform investments that will help our growth in the future resulted in comparatively fewer new product features for Slotomania and Bingo Blitz. Let me spend some time reviewing our casual and casino theme portfolios. Our casual portfolio continues to perform, growing 12% year-over-year and now accounting for approximately 49% of revenue as we continue to diversify and earn more revenue from our casual games. This does include approximately 1 month of contribution from Redecor. Solitaire Grand Harvest was our fastest-growing game, increasing 45% year-over-year. For Solitaire, we launched an ambitious project in Q3, rebuilding the game on the Unity platform. By shifting to Unity, we'll enable the game to scale more efficiently and position it for continued growth. The project will extend through Q2 next year and is going well. Bingo Blitz had a solid quarter, growing 15% year-over-year. Another strategic initiative in the quarter included a total revamping of the Bingo engine, the first step in preparing Bingo Blitz for the next decade. Looking ahead, we're working on a complete brand face lift, including refreshing the lobby, map, logo, payment page and many other aspects of the game. Additionally, we're planning features that will enhance the social experience even further and provide our players with even more reasons to play. Finally, we saw good results from June's Journey, with this game seeing success with the launch of the collectible album in September, utilizing our Boost platform. This is a great example of how we can apply our technology and capabilities across our portfolio and highlights our potential to replicate this going forward. Turning to our casino theme portfolio. Revenues were down 4% year-over-year. We were highly focused on developing several campaigns, both for product and marketing. We are optimistic these campaigns will drive performance starting in Q1 2022. Starting with Slotomania, the team is working on many exciting projects that will extend through Q4 and beyond. We are very excited to announce that we have developed new localization capabilities for Slotomania that will allow us to operate the game, not just in different languages, but also from a live ops perspective. That includes local holidays and regional-focused marketing. This was an ambitious project that will allow us to bring this capability to other games in our portfolio via the Boost platform. This gives us the ability to tap 2 new growth vectors, further expanding into markets outside the U.S. and also targeting people within the U.S. and current players for whom English is not their primary language. Additionally, we also rewrote the client from the ground up, moving Slotomania from C Sharp to JavaScript. This was the culmination of an 18-month project that will allow us to develop features more quickly and efficiently and also gives us access to a wider pool of R&D talent. For Caesars Slots, we've substantially revised the game experience with an overall rebranding and look and feel of the game. Our new theme is The Caesar's Way, which comes with a new set of features and design to give our players more control within the game, making them feel like a true Caesar. Player feedback has been overwhelmingly positive. Additionally, we launched a marketing campaign with Ty Pennington from Extreme Makeover, and this drove excellent performance with installs of the game up 94% year-over-year in Q3. These are just a few of many technological advancements, new features and marketing campaigns we worked on in the third quarter. These updates and enhancements to our games showcases our strategy to keep our games fresh and appealing to our loyal customers that have been playing our games for many years and attracting new players that love our genre but have not yet played our games. We are proud of the work we've done and believe these investments will position Playtika for long-term growth. Let me switch topics now to marketing and user acquisition. Our effective CPIs were stable in the third quarter, and game installations were strong overall. This further highlights our ability to navigate a changing landscape. We were able to manage the decline in iOS installs by moving resources from social networks to other digital advertising networks and also investing in offline activity, which has increased organic installs. We also shifted budgets towards Android. As we mentioned, we believe Playtika is well positioned to weather changes in the user acquisition environment due to our overall diversification of UA sources, abilities and data analytics and artificial intelligence that allows us to evaluate the performance of marketing investments very quickly and direct dollars to areas that yield the best results. Turning to our P&L. Cost of goods as a percentage of revenue declined year-over-year from 29.4% to 28.2%. This shift was primarily driven by the percentage of revenue flowing through our proprietary platforms to 21.7%, up from 14.5% in the third quarter of 2020. Our proprietary platforms continue to be a strong source of margin for Playtika. This strength reduced the impact to our adjusted EBITDA from lower-than-expected revenues in the quarter. Regarding operating expenses, our R&D, sales and marketing and G&A were all essentially in line with our expectations as we continue to add team members to support our future growth plans. GAAP net income was $80.5 million compared to $119.9 million in the prior year quarter. Adjusted EBITDA was $247.8 million, representing a margin of 38.9%. This compares to $261.4 million and a 42.6% margin in the third quarter of 2020. As of September 30, we had approximately $1 billion in cash and cash equivalents. Following our acquisition of Reworks, we now have over $1.5 billion in available liquidity to pursue M&A and fund growth opportunities. Turning to guidance. With our continued investment in future growth this year, we are revising our full year financial guidance to revenue of $2.57 billion and adjusted EBITDA of $980 million. We expect Q4 to be at consistent top line levels as Q3. But as we look at Q1 '22, the content road map for our entire portfolio is stacked with a compelling set of new features, and we believe these investments will drive growth into next year. We are highly focused on our long-term potential and are making the appropriate investments to position the company for continued organic growth in 2022 and beyond. As Robert referenced, and also from our press release earlier today, I also want to make sure that everyone knows that we're moving our Analyst Day to early March in New York City. We have several exciting projects underway. And combined with what we hope is an improving situation with COVID, we believe it's best to wait a few more months to meet as many people as possible in person and share our long-term vision and plans then. In summary, we had a quarter with several bright spots, exciting investments and new initiatives and also a few challenges. When we survey our business from a high-level perspective, we are confident that the road maps we have planned for our games and the exciting growth drivers that we've spoken to here and on prior calls will allow us to achieve strong growth over the long term. With additional product investments planned through the rest of 2021, we are confident that we'll finish the year with over 8% growth over 2020 and set us up for strong top line growth in 2022, the key differentiators that set us apart and that we believe will give us the ability to outperform are all in place and, in fact, stronger than ever. Our technology, creativity and desire to win are core parts of Playtika's DNA that we have built over a decade working together. We remain focused on the long-term opportunity to leverage our strengths and expand our leadership in new categories and business verticals in the process. With that, we'd be happy to take your questions.

[Operator Instructions]. And our first question coming from the line of Brian Nowak with Morgan Stanley.

It's Matt on for Brian. I have two, if I could. So just in terms of the guidance update, maybe you can just dig into like a little bit more detail on specifically kind of where the source of kind of that change came from? It seems like maybe there's been a slight downtick in casino specifically versus your expectations, and sort of how you see that playing out as you move through the end of the year and into next year? And then just secondly, there's a comment in the press release about like infrastructure and product investments in 3Q. Is the level of OpEx investment that you expect to make in infrastructure and product through the end of the year, is that reflected in 3Q? Should it be sustained? Should it kind of step down as we get into 4Q? Any detail there would be very helpful.

Thank you for the question. So I will answer -- I will try to answer the 2 questions in one shot. So me, as a CEO, of course, I'm looking at the current quarter and looking at the right operation. But I think we, as a company, and we said it in the beginning of the year, we are focusing for long term, focusing for investments that will help us to grow and to take our future to a better place. So yes, we had some issues this quarter, and Craig will speak about it in a minute. But I think when you look at this quarter, we did 3 main important stuff. The first one is, of course, we acquired Redecor, and we did an amazing job and doing this so fast and already operating very well. We launched Switchcraft before that -- 6 months, before we even thought that we're going to launch it, and we'll speak about it, of course, later. We built an infrastructure in the 4 of our games that will help us to grow in 2022. And the last important stuff, and this is a big surprise even for us, we're going to launch another game called Merge Stories in the beginning of next year. And this is a big thing for us as a company that said in the beginning of the year that we're going to launch 1 game in 2022. And now we're already focusing on launching 2 and maybe 3 games next year.

Sure, Matt. Thanks for the question. So in terms of third quarter specifically, two titles we anticipated to have growth, both in Board Kings and World Series of Poker, and we saw declines. I think the changes that we're going to make in both titles give us confidence that we get those titles back to growth. In World Series of Poker, there was a key feature that was pushed back to the fourth quarter as well. In terms of the broader portfolio, we guided the back half of the year to be flat because we saw comparatively fewer new promotions and features as a result of some of the infrastructure enhancements we're making. And so the margin for error on the features we did launch was much smaller. And when some of those features didn't resonate as well as we had hoped, that impacted the quarter. So again, we think it's more road map related across a specific set of titles. And that does impact our fourth quarter, and that we still have some of those infrastructure investments that permeate through the fourth quarter as well. And so that's why the guidance for the fourth quarter is consistent with the third. But as we look into '22 and we look at the first quarter of next year, we're very confident in terms of driving back the growth again. In terms of your question on costs, I think, if you look at the third quarter, you see cost increases year-over-year, primarily in R&D, as we increase both employees as well as some cost increases there, but that's already reflected in the Q3 numbers. As you roll forward to Q4, implied in the guidance, you'll see that there's a lower EBITDA as well. Some of that is seasonal in terms of the fourth quarter with marketing spend. Some of that is also just continued increases as we increase the workforce. But $980 million is our new target for 2021 in terms of adjusted EBITDA.

Our next question coming from the line of Stephen Ju with Credit Suisse.

So Robert or Craig, can you update us on the current M&A environment? I think there was the potential for hopefully, asset prices to maybe start coming in a little bit as some of the more subscale studios run into difficulties ramping their business on the other side of IDFA deprecation. Is this indeed happening from what you can tell? And is your potential backlog of deals, hopefully, elongating on the aftermath?

Sure. Thanks, David. Good question. So listen, the M&A environment continues to be competitive. I think the private markets are not fully aligned with the public markets in terms of where we continue to see valuations. So I wouldn't say that the private market valuations have been impacted by IDFA. I think some of the businesses have been impacted, and so we'll have to see when valuations come in line. As we've always said, we're focused on equity value creation, and we're going to do deals that drives equity value for our shareholders. And so we have a very broad pipeline of opportunities given our technology -- our technical capabilities and in terms of our ability to acquire assets in a variety of different categories. I think we're really excited about what we're seeing in some of the adjacent categories within gaming. I think in terms of beyond games, there's also other exciting opportunities. So we have nothing to share at this time, but there is a lot happening within our ecosystem. And we're excited about having liquidity to go after these opportunities. I think some of the traditional game opportunities, if multiples, don't come in line to where we think these businesses need to be valued, then you're not going to see us do a transaction that doesn't make economic sense.

And our next question coming from Drew Crum from Stifel.

I trust you've had some time to digest the ruling on the Epic Games Apple case. Can you comment on how you see the anti-steering mandate impacting your business? And then separately, Craig, maybe you can talk about the divergence in DAUs, which were down in the quarter versus MAUs, which were up.

So this is a very interesting question because, still, we are waiting to see what is going to happen. We don't know. There's many speculation about the here and there, but anyway, because we are a little bit different than other companies and we have our own proprietary platform. And we're ready for everything now that can happen. Everything now is good for us, and we are ready. As we said in the call now, we have 22% of our revenue running on our own proprietary platform. We're ready to do -- to become -- to grow this platform. We're ready for any other decision. So this side, we need to wait. Regarding MAU and DAU, we see that this quarter, we're growing in MAUs. We are not -- we're doing many, many different campaigns. We're doing many experience because we're launching a new game. So there is a big environment of growing the MAUs, rather DAUs that were flat like last quarter, nothing happened here, not a big issue. And the last thing, as I always saying in the call, this is not the main focus of the company. We are not looking at this number like this is the number. We saw in the first quarter, we were down in the DAU, and our revenues grew dramatically. So it doesn't affect any of our revenues, but it's a number that we are looking at and trying to understand how to bring the quality DAU, not only the big number.

Our next question coming from the line of Batya Levi with UBS.

Can you provide an update if there was any change for -- in the contribution from the Reworks acquisition in terms of maybe revenue and EBITDA? And generally, can you talk about some of the engagement trends that you're seeing? If there is any change with the pandemic kind of like lifting up. And you mentioned that there is going to be some change in terms of Board Kings and will go back to growth eventually. What will drive that?

Sure. So in terms of the Reworks guidance, nothing has changed in terms of what we provided in the press release, $30 million for the year, 1 month of that being in the first quarter and the remainder of that being in the fourth quarter. We did not provide any guidance as it relates to any EBITDA contribution from that acquisition given it's minimal. In terms of -- sorry, what was the second part of the question?

Engagement.

The engagement trends.

Yes, in terms of player engagement, I think what we saw in the quarter was that in games where we had investment in infrastructure and technological changes or we have fewer comparative features and releases, you would have seen engagement levels down in terms of player engagement. But I think in general, overall, everything is normal. There wasn't anything that we'd call out. I think there was 2 specific games that missed our expectations and that drove really the difference between being flat in the back half of the year and where we guided to in terms of our revised guidance.

Regarding Board Kings, I want to mention a few things here. So we have today 9 leading games in our portfolio. It gives the company more stability, more strength. And sometimes happening that 1 of the games don't perform well. And this time it was the -- and the kind of Board Kings did not perform well. We did the management changes, and we are sure that is going to grow -- started to grow back in the beginning of the year. We are doing many changes there, technology changes and management changes. And it's happening every time. It's happened to another game. And this is the life of our business. This is the life of our company. There's nothing new. The only new thing here, that we are a public company and we are speaking about it. But it's happening all the time and our business always is very stable and growing. So we feel very secure about it.

Next question coming from the line of Eric Handler with MKM Partners.

You've seen an acceleration in your new game launch road map. I'm wondering if you could comment about what has changed since the time of your IPO that's allowed you to be in this situation?

Thank you for the question. So yes, when we started the year, and we became a public company, we didn't have the confidence that we have today about launching a new game, and we said we're going to launch 1 game. During the last few months, we implemented the Boost platform to our new games development. And we see huge progress by feature side, but technology side, a lot of the AI activities there. So it give us, as a company, big confidence about launching the new titles and for success. So this is the main thing that's changing. I think this is we need to focus a bit, because actually, this is the new thing that's changing in the company during this year. Because we never launched games in the past. And this year, we are aiming to launch -- for next year, sorry, 3 games. So this is a big, big thing for Playtika. We are really excited about it. We see amazing performance of Switchcraft. We launched it few weeks ago. We see already things happening there. And me, as the CEO of the company, as I said in the beginning, I'm looking in the quarter, but I'm focusing in the future. And this is the important stuff. We want to say the quality is our main message. We are a 11 years old company, and we are -- we did very well every year. And this year, the main thing that makes me excitement is launching these new title. This is the next challenge of Playtika. And until now, it looks very promising..

Next question coming from the line of Clark Lampen with BTIG.

Two for me, please. Robert, I wanted to see whether you might be willing to expand on some of the comments you made at the start of the call. Those are some big verticals you highlighted between e-commerce, lifestyle and ed tech. It sounds like maybe you think there's a services model extension with Boost. I'm curious if you'd elaborate on whether I'm reading that right or maybe the goal is something completely different. Separately, Craig, I wanted to see if you could help us think about what exactly a stacked product road map might translate to in terms of growth. I apologize if I missed some quantification here, but if not, I'm generally curious whether you think you can get back to prior levels of organic growth in the low double-digit plus range.

Okay. Thank you for the question. And when we went public, we spoke about going beyond games and our first acquisition was Redecor. And we -- the final thing and the interesting thing, we just said for the -- with our players at Redecor. And they see Redecor as an app, not as a game. And we see looking at it like half game. So we understood very fast that most of the apps in the world, we can make them look and feel like a game, because the mechanics are very, very similar. And at the end of the day, we understand the funnel of the players, we have our tools to monetize, to make a live operation exactly as a game. So I cannot tell you exactly right now what is the direction that we're going to go next year and beyond games. But I can tell you that the confidence of buying Redecor is helping us to understand that now we can go beyond this category because, again, there is things that are similar for everything, segmentation, economy, Live-Ops, scale, it's similar. It doesn't matter if it's a game or if it's an app. And again, we need to show to the market that we are performing very well with Redecor because we acquired it only 2 months ago. And we can tell a lot of story, but still we need to show the number. But after we show the success here, it will give -- it will make Playtika a different company, and it's a very big change for us -- game-changer sorry.

Yes. In terms of the first quarter, we didn't give specific guidance. What I would say is that the first quarter of 2021 had a very strong road map, and we see a very strong road map lined up for the first quarter of '22 as well. So I think that would be a way to put it in context. I think in terms of specific guidance for '22 and beyond, on Analyst Day in early March, we'll be providing that guidance.

Our next question coming from the line of Colin Sebastian with Baird.

If you can give an update on how you're thinking about industry consolidation in terms of several mobile publishers combining with third-party mobile advertising platforms? And perhaps if you're seeing any impact from IDFA? And what are your thoughts about integrating more mobile ed tech capabilities have changed versus what we were talking about around the IPO.

Sure. Thanks. So in terms of what's happening in the industry, there has been a lot of M&A activity. We are focused on acquiring great content to create long-lasting franchises, and I believe that will continue to be part of the strategy. I think there's also emerging business models around games that are very interesting that we're deeply evaluating as well. So a lot happening there. I'm not going to comment specifically on ed tech. I think in terms of IDFA, as we referenced in the prepared remarks, there hasn't been an impact to the ECP -- or effective CPIs as a result of a lot of the things that we've done to make changes in the quarter. I'm very proud of the team for how they've navigated a changing landscape in terms of switching sources, shifting some budget to Android, leveraging our AI technology to be more efficient and get payback periods more quickly and overall, drive stronger numbers of installs. And so the team has navigated very well, and we continue to do a great job in light of those changes.

Our next question coming from the line of Doug Creutz with Cowen.

Can you talk a little bit about your UA road map for Switchcraft? How you're spending your acquired users now? It looks like download velocity has been pretty modest since you launched it. I'm just wondering if there was a point in which you plan to kind of put your foot on the gas to try to drive more users to the title.

Yes. Thanks for the question. So yes, Switchcraft was our first launch of a new game. And our intention is to see the numbers and the KPIs before we are starting to scale the UA activities here. We launched it few weeks ago. We see very good results regarding monetization and Live-Ops. And I think we will wait 2, 3 months, and then we'll start to scale the business. Because actually now, this is not the right time to acquire new users for November, December. But in the beginning of the year, we're going to see a huge push of users to Switchcraft, and it's going to take Switchcraft to a big, big, different scale. This is our intention. Of course, we need to see that nothing is changing. But if it will stay like it is, in the beginning of the year, we're going to see a huge push of users on the Switchcraft, and this is going to take the game to another plane.

Our next question coming from the line of Brad Chantel with Capital [ph]. And I'm showing no further questions at this time. I will now turn the call back over to Mr. Robert Antokol for any closing remarks.

So thank you, guys, for the Q&A. Thank you to have -- to be on our call. I think we said, our main thing that's happened the last quarter and the main thing for the future, again, we are really excited about the changes that we did in our games. We're really excited about launching a new game. We're excited about acquiring Redecor. And as we said in the beginning of the call, we are focusing at our future, and we see a very good future for Playtika. And I'm not speaking about 5 years from now. I'm speaking about 1 or 2 quarters from now. So this is where we are going, and we are going to start the next year very strongly and see you for the next call. Thank you so much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.