Earnings Call Transcript - PLTK Q3 2021

Operator, Operator

Good morning, everyone. Thank you for joining us, and welcome to the Third Quarter 2021 Earnings Call for Playtika Holding Corp. I will now turn the conference over to our speaker today, Mr. David Niederman, Vice President of Investor Relations.

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.

Robert Antokol, Co-Founder and CEO

Thank you, David, and thank you, everyone, for 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 detail, and then Craig will review our Q3 results. We have recently acquired an incredible new studio, launched a new game in October and soft launched another new game last week, and we also continue 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 interior designs, which are then voted and rated by other members of the app's community, making it a highly creative, engaging, and social experience. This represents Playtika's first move into areas beyond traditional games. We are optimistic that it’s the beginning of a powerful long-term growth driver. We believe that the world of games and apps are increasingly converging. The product mechanics and the operational skills required to succeed in both categories have fully overlapped. This is evident in not just Redecor, but also in a number of other prominent non-gaming properties across e-commerce, lifestyle, educational tech, and more. Redecor is an exciting first step to further expand in this direction and gain access to large new markets. In the two months since closing the deal, we have primarily focused on setting the groundwork needed for future scale and complementing the Redecor team's incredible talent with top experts 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 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 by the early feedback from the first few weeks since our global launch, where we originally planned Switchcraft's global launch for 2022, but it is now performing beyond expectations in early testing, which enabled us to accelerate the launch timeline. Switchcraft offers a unique combination of classic match-3 gameplay, with a compelling story of mystery and magic, topped off with top-of-the-line production value that can provide endless hours of fun and excitement 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 as 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, the creator of Board Kings. Merge Stories has been in development for two 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 perform well during the soft launch, we may globally launch two new games next year. This would put us 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 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, particularly in the adjustments in mobile games. We're excited to share more details about the work we are doing in this area in the coming quarters. With that, I will turn the call over to Craig to review the third quarter results.

Craig Abrahams, President and Chief Financial Officer

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 our upcoming product roadmap, 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 one 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 facelift, 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 that 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. This includes local holidays and region-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 into two 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 showcase our strategy to keep our games fresh and appealing to our loyal customers that have been playing our games for many years and attract 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 roadmap 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 roadmaps 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, Operator

Our first question comes from Brian Nowak with Morgan Stanley.

Matthew Cost, Analyst

It's Matt on for Brian. I have two questions, if I could. So just in terms of the guidance update, could you dig into more detail on where the source of the change came from? It seems like there has been a slight downtick in casino specifically versus your expectations, and how you see that playing out as you move through the end of the year and into next year? Secondly, there's a comment in the press release about infrastructure and product investments in Q3. Is the level of OpEx investment that you expect to make in infrastructure and product through the end of the year reflected in Q3? Should it be sustained or kind of step down as we get into Q4? Any detail there would be very helpful.

Robert Antokol, Co-Founder and CEO

Thank you for the question. I will answer the two questions in one shot. As CEO, of course, I'm looking at the current quarter and the right operation. But I think we, as a company, we said it at the beginning of the year, we are focusing on the long term, focusing on investments that will help us grow and take our future to a better place. Yes, we had some issues this quarter, and Craig will speak about it in a minute. But when looking at this quarter, we did three main important things. The first one is, of course, we acquired Redecor, and we did an amazing job doing this so fast and already operating very well. We launched Switchcraft six months before we even thought we would launch it, and we’ll speak about it, of course, later. We built infrastructure in four of our games that will help us grow in 2022. The last important thing, 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. This is a big thing for us as a company that stated at the beginning of the year that we're going to launch one game in 2022. Now we're already focusing on launching two, and maybe three, games next year.

Craig Abrahams, President and Chief Financial Officer

Sure, Matt. Thanks for the question. In terms of the third quarter specifically, two titles we anticipated to have growth, both Board Kings and World Series of Poker, and we saw declines. I think the changes we are going to make in both titles give us confidence that we can 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. Regarding the broader portfolio, we guided the back half of the year to be flat because we saw comparatively fewer new promotions and features due to some of the infrastructure enhancements we're making. The margin for error on the features we did launch was smaller, and when some of those features didn't resonate as well as we had hoped, that impacted the quarter. We think it's more roadmap related across a specific set of titles. That does impact our fourth quarter as well, and we still have some of those infrastructure investments that will permeate through the fourth quarter as well. That's why the guidance for the fourth quarter is consistent with the third. Looking into '22 for the first quarter, we're very confident about driving back the growth again. In terms of your question on costs, 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 a lower EBITDA as well. Some of that is seasonal in terms of the fourth quarter with marketing spend, and some is continued increases due to our increasing workforce. But $980 million is our new target for 2021 in terms of adjusted EBITDA.

Operator, Operator

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

Stephen Ju, Analyst

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 come in a 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? Is your potential backlog of deals elongating on the aftermath?

Craig Abrahams, President and Chief Financial Officer

Sure. Thanks, Stephen. Good question. The M&A environment continues to be competitive. The private markets are not fully aligned with the public markets in terms of where we continue to see valuations. I wouldn't say the private market valuations have been impacted by IDFA. I think some businesses have been impacted, and we will 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 pursue deals that drive equity value for our shareholders. We have a broad pipeline of opportunities given our technical capabilities and our ability to acquire assets in various categories. We're really excited about what we're seeing in some adjacent categories within gaming, and there are also other exciting opportunities beyond games. We have nothing to share at this time, but there is a lot happening within our ecosystem, and we're excited to have liquidity to go after these opportunities. If traditional game opportunities don't come in line when we think these businesses need to be valued, you won't see us pursue transactions that don't make economic sense.

Operator, Operator

And our next question comes from Drew Crum from Stifel.

Andrew Crum, Analyst

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? Separately, Craig, maybe you can talk about the divergence in DAUs, which were down in the quarter versus MAUs, which were up.

Robert Antokol, Co-Founder and CEO

This is an interesting question. We are still waiting to see what will happen. There's a lot of speculation, but we are a little different from other companies, and we have our own proprietary platform that's ready for anything that can happen. Everything is good for us, and we are ready. As we said during the call, we have 22% of our revenue running on our own proprietary platform. We are prepared to grow this platform. We are ready for any other decision. Regarding MAU and DAU, we see that this quarter we’re growing in MAUs. We are implementing many different campaigns and launching new games, creating an environment that fosters this growth. DAUs have been flat like last quarter, which is not a big issue. As I always mention, this is not the main focus of the company. We aren't fixating on this number as our core metric. We were down in the DAU in the first quarter, and our revenues grew dramatically. While it’s a number we monitor, our focus is on quality DAUs, not just the size of the number.

Operator, Operator

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

Batya Levi, Analyst

Can you provide an update if there was any change for 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 lifting up? You mentioned that there will be some changes with Board Kings and that it will grow back eventually. What will drive that?

Craig Abrahams, President and Chief Financial Officer

Sure. In terms of the Reworks guidance, nothing has changed in terms of what we provided in the press release, with a revenue contribution of $30 million for the year, one month of that being in the first quarter and the remainder in the fourth quarter. We did not provide any guidance regarding any EBITDA contribution from that acquisition, given it's minimal. In terms of engagement trends, what we saw in the quarter was that in games where we invested in infrastructure and technology changes, or we had fewer comparative features and releases, you would have seen engagement levels down in terms of player engagement. Overall, everything is normal. There wasn't anything specific we would call out. I think two particular games missed our expectations, which substantially drove the difference between being flat in the back half of the year and where we guided to in terms of our revised guidance.

Robert Antokol, Co-Founder and CEO

Regarding Board Kings, we currently have nine leading games in our portfolio. This diversity gives the company more stability and strength. Sometimes it may happen that one of the games does not perform well. In this case, it was Board Kings that did not perform well. We made management changes, and we are confident that it will start to grow back at the beginning of the year. We are implementing many changes, both technological and managerial. This kind of scenario is not new to our business. It can happen for various reasons, but it's part of the game industry. Our business has always been very stable and growing. We feel secure about this.

Operator, Operator

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

Eric Handler, Analyst

You've seen an acceleration in your new game launch roadmap. I'm wondering if you could comment on what has changed since the IPO that has allowed you to be in this situation.

Robert Antokol, Co-Founder and CEO

Thank you for the question. Yes, when we started the year and went public, we didn’t have the confidence we do now about launching a new game. We stated we would launch one game, but during the last few months, we implemented the Boost platform in our new game development, and we see huge progress both in terms of features and technology, particularly in AI activities. This has given us, as a company, significant confidence about launching new titles and achieving success. This is the main change in the company this year. We are aiming to launch three games next year, which is a big milestone for Playtika. We are very excited about it. The performance of Switchcraft has already shown promising results just weeks after its launch, and, as CEO, I focus on the current quarter while also considering the future. The quality of our products remains our main message. We have successfully navigated the challenges of the last eleven years and are seeing great potential for the future.

Operator, Operator

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

William Lampen, Analyst

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

Robert Antokol, Co-Founder and CEO

Thank you for the question. When we went public, we talked about going beyond games and our first acquisition was Redecor. The interesting aspect is our players see Redecor as an app, not as a game, while we view it as a hybrid. We quickly understood that most apps can be designed to feel like games, thanks to similar mechanics. At the end of the day, we can leverage our tools to monetize and operate these applications similar to games. I can’t provide precise direction on where we’ll go next year and beyond, but we’re confident that acquiring Redecor has allowed us to recognize that we can venture outside the gaming category. We’ll need to demonstrate success with Redecor, as we've only had it for two months. If successful, it could significantly change the landscape for Playtika.

Craig Abrahams, President and Chief Financial Officer

In terms of the first quarter, we didn’t provide specific guidance, but what I can say is that the first quarter of 2021 had a strong roadmap. We see a robust roadmap lined up for Q1 '22 as well, so that puts things in context. Regarding specific guidance for '22 and beyond, we’ll be providing that during our Analyst Day in early March.

Operator, Operator

Our next question comes from Colin Sebastian with Baird.

Colin Sebastian, Analyst

Could you give an update on how you're thinking about industry consolidation in terms of several mobile publishers combining with third-party mobile advertising platforms? Are you seeing any impact from IDFA? What are your thoughts about integrating more mobile ed tech capabilities versus what we were discussing around the IPO?

Craig Abrahams, President and Chief Financial Officer

In the industry, M&A activity is heating up. We are focused on acquiring outstanding content to create long-lasting franchises, which will continue to be a part of our strategy. There are also emerging business models related to games that are intriguing and warrant deep evaluation. I won’t comment specifically on ed tech, but regarding IDFA, as referenced in the prepared remarks, there hasn’t been an impact on the effective CPIs as a result of our adjustments in the quarter. I’m proud of the team’s response to navigating the changing landscape, specifically regarding switching sources, budget shifts to Android, and leveraging our AI technology for efficiency and achieving quicker payback periods resulting in stronger installation numbers.

Operator, Operator

Our next question comes from Doug Creutz with Cowen.

Douglas Creutz, Analyst

Can you talk a little about your user acquisition roadmap for Switchcraft? How you are spending on acquired users now? The download velocity seems modest since launch. When do you plan to accelerate user acquisition for the title?

Robert Antokol, Co-Founder and CEO

Thanks for the question. Switchcraft was our first newly launched game. Our plan is to monitor the numbers and KPIs before scaling the user acquisition activities for it. We launched it a few weeks ago and are seeing very good monetization and Live-Ops results. We intend to wait two to three months before we start pushing user acquisition. This December may not be the best time for acquiring new users; however, at the year’s start, we anticipate a significant push in user numbers for Switchcraft, transitioning it to a much larger scale than it is now.

Operator, Operator

Our next question comes from the line of Brad Chantel. I am showing no further questions at this time. I will now turn the call back over to Mr. Robert Antokol for any closing remarks.

Robert Antokol, Co-Founder and CEO

Thank you, everyone, for the Q&A and for attending our call. I’d like to highlight one more time that our main achievements over the last quarter and our focus for the future. We are very excited about the changes we’ve made to our games, our excitement for launching a new game, and acquiring Redecor. As mentioned earlier, we are focusing on our future, and we see a very bright future for Playtika. I’m not speaking about five years ahead but about one or two quarters from now. This is where we are headed, and we plan to kick off next year very strongly. Thank you so much.

Operator, Operator

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