Earnings Call Transcript - PLTK Q1 2022

David Niederman, Vice President of Investor Relations

Welcome to everyone and thank you for joining us today for the first 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.

Robert Antokol, CEO

Thank you, David, and thank you everyone for joining our call today. We have a lot of ground to cover on today's call. From a business standpoint, Playtika continues to be a technology-driven cash generating market leader. We continue to perform consistently, while laying the groundwork for further growth. We are committed to becoming the number one mobile game and entertainment entity. Before jumping to the business, I will start with a few words about Ukraine. From a humanitarian standpoint, and ever since the war began, our top priority is the safety and wellbeing of our employees and their families. Our people have been amazing and nothing makes me prouder than to support one another. We were well-prepared and took significant actions to move out many people before the war. Most of our employees in Ukraine are already working back at their offices and others will come back soon. From an overall business standpoint, we are not affected; Live-Ops and monetization are operating at 100%. Live gaming operations ran from Israel, Helsinki, and Berlin. We are globally diverse in Bucharest and Warsaw, and I always said we have plans and backups for all our games. As always, we continue to invest in these plans, ensuring the sustainability of our operations and further growth. Moving on to our business topics, I am happy to say we had a strong start to the year. Total revenue in Q1 was $676.9 million, growing 6% year-over-year and 4.3% quarter-over-quarter. During this period, we also made significant investments to position our foothold in future areas of emerging technology and opportunities, while building a foundation for strong growth. When it comes to our game portfolio, our casual games continue their high growth, while the casino-themed portfolio has regained growth and momentum quarter-over-quarter. Our product metrics and execution remain solid and strong; we continue to drive strong consumer acquisition, retention, and monetization, leveraging our Boost Platform to optimize our game operations. To summarize, I am pleased that our actions and investments have continued to drive strong top line momentum in Q1 2022. Our business model proves to be different from Playtika and other companies; we grow revenues through Live-Ops operations and monetization using our AI capabilities to bring growth to our business. We make investments to position our future, just play new categories, and invest in emerging technologies in gaming. Our internal and external investments are focused on domains we believe will unlock value for Playtika in the future. Thank you so much, and Craig will continue.

Craig Abrahams, CFO

Thank you, Robert. We had a strong start to the year with first quarter revenue of $676.9 million, up 6% year-over-year and up 4.3% sequentially. Adjusted EBITDA was $220.5 million, down 14.5% year-over-year and up 3.8% sequentially, reflective of top line momentum in the business and the strategic decisions we have made to invest for growth. Operational metrics performed well, with average daily payer conversion increasing 35 basis points year-over-year to 3.2% and ARPDAU increasing 8.8% year-over-year to $0.74. Our strong revenue performance reflects our commitment to our strategy of continuing to diversify our portfolio and applying our proven live operations and Boost technology platform to generate sustainable long-term player engagement levels. During the quarter, our casual games, now representing 52.5% of our revenue, grew 20.7% year-over-year and 5.6% sequentially. Solitaire Grand Harvest had a strong quarter, even during its transition to Unity, up 41.7%. We also had strong growth in June's Journey of 30.4% year-over-year, driven by the continued success of the memoirs feature that was launched at the end of last year. Our casino portfolio was down 7.5% year-over-year but up 2.9% sequentially. We're encouraged by the growth we're seeing in games like Caesars Casino and World Series of Poker, as our product road maps are resonating with our players. Caesars Casino grew 8.2% year-over-year and 8.7% sequentially, as it celebrated its tenth birthday during the quarter. Its strong performance is a testament to Playtika's ability to drive momentum with older franchises through industry-leading live operations, new product features, and creative marketing campaigns. World Series of Poker had its best quarter of all time, with revenue up 2.9% year-over-year and 10.5% sequentially, driven by the success of a new album and key features launched during the quarter. WSOP is another great example of our ability to reignite growth in older titles. Slotomania's momentum is also encouraging, with sequential growth of 1.7% despite year-over-year comps down 7.7%, and we remain optimistic about the roadmap ahead for Slotomania. Turning now to some updates across our portfolio of games. We're excited for the launch of Merge Stories in the third quarter. Merge Stories is an innovative hybrid game that combines the core merge game mechanic with casual build and battle elements, and it was built by our Jelly Button studio, the creators of Board Kings. In addition, we have two titles in development that are slated for soft launch testing later this year. As it relates to Switchcraft, while we are proud that we developed an innovative game that enjoyed a positive reception from early reviews, ultimately the KPIs did not meet our internal metrics, and the ROI did not achieve our threshold to continue to invest, and therefore, we have made the decision to halt marketing and redeploy the Switchcraft team within Wooga. When it comes to investments in new games, we will invest where we see potential to become a $100 million franchise or greater. If we don't see that potential, we will shift resources to better opportunities for growth, which includes other new games in development and core franchise support. With multiple games in the pipeline and Merge Stories launching later this year, we remain focused on executing our disciplined capital allocation strategy and investing where the ROI is most effective. Shifting to marketing, our strategy included a shift in focus in our performance marketing efforts to target the highest value players, and also our continued work to enhance the brands of our games and drive usage with traditional advertising methods, such as TV ads in conjunction with celebrity partnerships. In our casual portfolio in Q1, we continued to focus on building and strengthening our casual brands using 360-degree marketing campaigns, driving a 10% increase in downloads. One key campaign to highlight was the celebration of the 10-year anniversary of Bingo Blitz with a campaign featuring Meghan Trainor. The campaign highlighted the visual enhancements we recently deployed in the game and took viewers on a journey through the new game elements. In our casino-themed portfolio, we partnered with Sharon Stone for Slotomania, Ty Pennington for Caesars Casino, and Laurence Fishburne for World Series of Poker. These campaigns succeeded in bringing new users to the games while also increasing awareness of the brands. Turning to our P&L. Cost of revenue as a percentage of revenue improved 100 basis points year-over-year to 27.6% from 28.6%. This shift was driven by the percentage of revenue flowing through our proprietary direct-to-consumer platforms to 22.5%, up from 18.1% in the first quarter of 2021. Our direct-to-consumer platforms continue to be a competitive advantage and a strong source of margin for Playtika. R&D expenses increased by 32.3% year-over-year, driven primarily by growth in headcount and increases in compensation expenses for our employees. Sales and marketing expenses increased by 28.3% year-over-year, driven primarily by increases in marketing and user acquisition expenses. This increase is due to additional marketing and incremental user acquisition expenses that we had budgeted in the quarter for spending on Redecor and several key offline marketing campaigns. Our spending for offline marketing campaigns is typically the highest in the first quarter, and we expect this amount to ease sequentially for the rest of the year. G&A expenses declined by 23% year-over-year versus an elevated level in Q1 of 2021 due to costs related to the successful completion of our IPO. This decrease was partially offset by an increase in headcount and increases in compensation expenses for our employees. Our effective tax rate in the quarter was 10.4%. Income tax expense in the first quarter included the impact of the release of valuation allowance on certain foreign deferred tax assets. GAAP net income was $83.2 million, compared to $35.7 million in the prior year quarter. As of March 31, we had approximately $1.1 billion in cash and cash equivalents and short-term deposits, and over $1.7 billion in total available liquidity to fund growth opportunities. Looking out to the remainder of the year, we're providing full year guidance to ensure all of our stakeholders have a clear understanding of our expectations for the business. For 2022, we expect revenue of $2.73 billion and adjusted EBITDA of $940 million. On the top line, we expect continued strength driven by an exciting content roadmap across our portfolio with a compelling set of new features. We're encouraged by solid KPIs in the first quarter and we expect continued strong customer engagement. Similar to the first quarter, we will continue to invest as we reset the foundation for the company, establishing 2022 as a transition year to strengthen our position for the future. For example, we believe Redecor presents an exciting opportunity and we'll be ramping up investments to achieve growth in 2023 and beyond. We also intend to ramp up spending on some of the new games that we mentioned earlier, as well as on acquisitions and initiatives that we announced during the first quarter. For example, JustPlay.LOL, creator of the multi-player game 1v1.LOL, has a fantastic team of R&D professionals, and this acquisition is part of our overarching strategy to invest and test new genres for growth. We expect our incremental investments in new games and recently acquired businesses to reduce our adjusted EBITDA by approximately $55 million this year. Other investment areas include increased compensation for our employees to retain top talent and continued development of our R&D capabilities. Finally, our games are no longer available to download in Russia, and we anticipate a $10 million impact to adjusted EBITDA this year due to this. We expect 2022 capital expenditures of $140 million. In closing, we're very encouraged by the strength of our business, highlighted in the first quarter by strong revenue growth and good KPI performance. We have a history of industry-leading margins and will continue to look for areas of efficiencies that we feel will position us well for 2023 and beyond.

David Niederman, Vice President of Investor Relations

Thanks, Craig. Before we open it up to questions, we want to note that we do not have an update on our previously announced evaluation of strategic alternatives, and will not be answering questions related to this topic. With that, we would be happy to take your questions.

Operator, Operator

Thank you. Our first question will come from Matthew Cost with Morgan Stanley. Please go ahead.

Matthew Cost, Analyst

Hi, everyone. Thanks for taking the questions. I guess maybe starting with kind of casino versus casual. It seems like you had some continued very strong growth as you noted in the casual business. And then the casino business down, I think, single digits year-on-year, Caesars up, Slotomania down. I guess, what are you seeing happening across the various genres? Is casino experiencing some sort of seasonality or COVID impact, the reopening impact that the casual isn't? What's driving the difference between those two? And then perhaps a related question just on marketing efficiency. You mentioned kind of shifting your performance marketing doing a little bit more TV and celebrity partnerships. I guess, where are you seeing the most efficiency and how is your performance marketing comparing to a year ago as of this quarter? Thanks.

Craig Abrahams, CFO

All right. Thanks, Matt. So as we look at the quarter for casino, obviously, we're very enthusiastic about the fact that that business grew 2.9% sequentially. If you look at the casual portfolio, it grew 5.6% sequentially. And so that's really where our focus has been: driving road maps for sequential growth. Slotomania obviously returned to growth. Caesars Casino and World Series of Poker had great growth. And then World Series of Poker is the one we had called out just a couple of quarters back and had its highest revenue quarter ever in the first quarter. And so, I think the performance there has been good. And in the casual portfolio, obviously that's where we have very strong performance of 20.7% year-over-year driven by especially solid June's Journey. I think on the marketing side, I'll let Eric talk to kind of what we're seeing there. But obviously, we've done a great job diversifying our spend in terms of leveraging offline campaigns combined with influencers and performance media to really drive results and really bring back and drive momentum in some of our oldest brands as well. So I think it's been great for us in terms of regaining the momentum, raising awareness, and driving results. Eric, I think you had some other clarity you want to add there?

Eric Rapps, Chief Strategy Officer

Yes, sure. Hey, Matt. And for those who don't know me, my name is Eric Rapps, Chief Strategy Officer. We've actually been very encouraged by what we've seen on the performance marketing side year-over-year. And I would note that you're comparing a post-IDFA period in this year to a pre-IDFA period in last year. And when we look at the cost to acquire a paying user, our ROI after 90 days, our average revenue per install, all very, very positive across the majority of our games.

Matthew Cost, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question will come from Doug Creutz with Cowen. Please go ahead.

Doug Creutz, Analyst

Hey. You indicated you expect investments in new games to hit your EBITDA by $55 million this year. Presumably, you were investing in new games last year as well. Is that $55 million incremental to whatever that number was last year, or is that just the absolute number? And if so, can you give us a sense of what the incremental shift is year-over-year?

Craig Abrahams, CFO

Hi, Doug, thanks for the question. Yeah. So for clarity, it's incremental spend across new games as well as investments in marketing at Redecor. So when you look at year-over-year, we were trying to give some transparency as to what are some key areas of investment and highlighting that $55 million.

Doug Creutz, Analyst

Okay, great. Thank you.

Operator, Operator

Thank you. Our next question will come from Eric Handler with MKM Partners. Please go ahead.

Eric Handler, Analyst

Yes. Thank you and good morning. I wonder if you could talk about the Redecor acquisition. Specifically, what has taken place there since the acquisition in terms of what you've done to the game and with marketing and sort of the direction you're heading with that title?

Eric Rapps, Chief Strategy Officer

Sure. Thanks for the question. So if you look at most of the acquisitions we've done in the past, it's typically taken us around 18 to 24 months to drive material impacts in those businesses, and we're on the same trajectory with Redecor. So we continue to feel very encouraged by the design entertainment category, by the progress we're seeing in the app, and the progress we're seeing with the team. So from an operational standpoint, everything seems to be going great, and we look forward to proving out as we have in the prior acquisitions.

Eric Handler, Analyst

Great. And then just as a follow-up, should we think about that 18 to 24-month timeline to make a material impact that should hold up well for JustPlay.LOL?

Eric Rapps, Chief Strategy Officer

Yes, that's the target.

Operator, Operator

Thank you. Our next question will come from Stephen Ju with Credit Suisse. Please go ahead.

Stephen Ju, Analyst

Okay. Thank you. So, you mentioned you have two additional titles in development. It probably varies from game to game, studio to studio, but can you talk about typically how long a game may spend on a soft launch period? And I guess, separately, there's a general slowdown. It seems sector wide as consumers are increasingly mobile and going on vacations and trips. And overall, I mean from a stock market perspective, we can all see the change in public market valuation. So, we're wondering if these two factors are rippling through to private market valuations and potentially greater availability of assets for you guys to be looking at? Thanks.

Craig Abrahams, CFO

Thanks, Stephen. Obviously, over the last few years, there's been readily available capital via the private markets for emerging game companies in various start-ups around our ecosystem. As those markets start to get affected, it seems that valuation should come down. I think we're seeing it be a more difficult environment for entrepreneurs trying to start a game company. And so I think with those opportunities we're a great partner. Obviously, we have the balance sheet to go and execute on that. So I think for us, things are setting up nicely from that perspective. In terms of even your first question on new game development, games can be in various forms of testing for three, six, or 12 months depending on the game. Then obviously something like a Switchcraft took us six months to sort of make a decision there. So I think we like to move pretty quick and make decisions based on results.

Operator, Operator

Thank you. Our next question will come from Drew Crum with Stifel. Please go ahead.

Drew Crum, Analyst

Thanks. Your plan is to move ahead with the commercial launch of Merge Stories but the decision to pull your spending on Switchcraft. How is Merge Stories tracking in your test markets relative to where Switchcraft was at the same point? Just trying to gauge your confidence in that game ahead of its launch. And then I have a follow-up.

Craig Abrahams, CFO

Thanks, Drew. Yes. I think it's hard to compare genres. If you guys see Merge Stories, it's a different genre by a different studio. I think we're obviously pleased with the early results and therefore pushing forward with a soft launch. We have other titles that we've been pushing forward with soft launch. The data is there to support it. We have a slate of new games. The goal is to have commercially viable, successful titles that come out of that slate. If the data isn't there, we'll pull back investment.

Drew Crum, Analyst

Got it. And then your last update, you provided various metrics for January. I'm curious to see if you would be willing to provide any commentary on performance in April.

Craig Abrahams, CFO

Yes. No, sorry, we're not giving month-to-month data. That was – we give January this year and we give January last year as part of a different announcement, but we're not giving month-to-month data going forward.

Drew Crum, Analyst

Got it. Fair enough. Okay. Thanks, guys.

Operator, Operator

Thank you. Our next question will come from Clark Lampen with BTIG. Please go ahead.

Clark Lampen, Analyst

Hi, good morning. Two quick ones for me. On DTC first, as we've been seeing that sort of expanding as a percentage of revenue, I wanted to see if you could talk about any assumptions that are built in for 2022 in terms of new games maybe launching with a browser version, or if that is still expected to be a more meaningful component of revenue going forward? And then second, I'd like to follow up on Eric's question around Reworks. Craig, in the past, you've talked about that being leveraging the company technology to move into adjacent spaces. I'm curious if that's still maybe part of the roadmap. Is that something that, if so, we could expect to see perhaps in 2023, or could it be earlier? Thanks.

Craig Abrahams, CFO

Thanks, Clark. In terms of our direct-to-consumer channels, obviously very pleased to drive that up to 22.5% of revenue. We do have one additional casual title on the roadmap by the end of the year. Obviously, you have to see how that prioritizes versus other initiatives, but we continue to expect growth there. In terms of your follow-up question on Reworks, I think it's similar to our strategy with JustPlay as well. It's how do we expand into new genres, learn and test around our monetization capabilities, and where we see opportunities for growth to really press on those. If we're able to be successful with those genres, then we'll push ahead into other new genres, but I don't think we'll do it without that proof point around success, just as we have with past acquisitions.

Operator, Operator

Thank you. Our next question will come from Aaron Lee with Macquarie. Please go ahead.

Aaron Lee, Analyst

Hi, good morning. Thanks for taking the question. I wanted to touch on JustPlay a little bit. Can you talk about how long you were in discussions for that acquisition? And should we see this as a near-term contributor or an impact to EBITDA, or is this more of a longer-term project?

Craig Abrahams, CFO

Sure. It's an Israeli business. I can't comment on private discussions. But what I can say is that it's a minimal impact to revenue and there will be operating losses in 2022.

Aaron Lee, Analyst

Okay. And in terms of your guidance, can you put into context the major puts and takes that could cause you to come in above or below your guided range? Are there any key features on the roadmap or major developments that would be a major impact?

Craig Abrahams, CFO

No. So what I would say regarding our guidance is obviously we took in the first quarter and trends we're seeing in the marketplace. Obviously, we've seen it for the broader market. Q1 looked like it was pretty difficult for some of our comps in some of the market. And, obviously, we were able to grow year-over-year and sequentially. So I think this type of operating environment bodes well for us given our focus on monetization and live operations and retention of users, and we'll continue to excel in those areas.

Aaron Lee, Analyst

Okay. Thanks.

Operator, Operator

Thank you. Our next question will come from Franco Granda with D.A. Davidson. Please go ahead.

Franco Granda, Analyst

Hi. Good morning, everyone. I have two quick questions here. So a few months ago, you appointed a VP of Blockchain Technology. I was hoping you could talk about your efforts there and perhaps any progress you've made? And then if you could speak to the mix between casino and casual for your direct-to-consumer platform? Thanks.

Robert Antokol, CEO

So thanks for the question. As I already said in the past, for us, every new platform is a new opportunity. Playtika today is the best operator in the market and we are really excited about the new opportunities. We invested as of thoughts for the future. In the end of the day, this new blockchain and Web 3.0 will give us an edge over our competitors. What was the second question?

Franco Granda, Analyst

It was if you could give us the mix between casino and casual for your direct-to-consumer platform? Just trying to get the trends there.

Robert Antokol, CEO

So far, most of our revenue is coming from the casino genre. This year, we plan to introduce another title from the casual segment. This is an outstanding tool that Playtika possesses, which others do not, giving us a competitive advantage to improve margins and increase revenues on our platform.

Operator, Operator

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

Robert Antokol, CEO

Yes. So I think we need to look at what happened last quarter and see the difference between Playtika and other players in the market. Playtika had a very good quarter; we grew our revenues. We grew the revenues from Q1 2021 and good revenues from Q4. I think the opportunity in the market is a match for Playtika. The thing that I'm always speaking about in the last 1.5 years is the advantage and the difference of Playtika running revenues through operation, monetization, and AI. We see it right now when the market becomes tough, and Playtika is shining. We are really excited about this year. We are really excited about what's going on, and we are really happy with our results. Thank you so much everyone.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.