Earnings Call Transcript - PLTK Q4 2021

David Niederman, Vice President of Investor Relations

Welcome to everyone, and thank you for joining us today for the fourth quarter 2021 earnings call for Playtika Holding Corp. I'd like to remind you that today's discussion may contain forward-looking statements. Any such statements are not a guarantee of future performance but rather are subject to risks and uncertainties, some of which are beyond our control. Any such 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 any forward-looking statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC. We have previously posted an accompanying slide deck to our investor relations website on February 24 and will also post our prepared remarks immediately following the call. Finally, we’d like to remind investors that we will not be providing any financial guidance on this call, nor will we be addressing a press release published February 24 announcing that Playtika’s board of directors approved evaluating strategic alternatives for the company. We ask that participants on this call please restrict questions to topics regarding our fourth quarter and 2021 results. With that, I will now turn the call over to Craig Abrahams, Playtika’s President and Chief Financial Officer.

Craig Abrahams, President and Chief Financial Officer

Thank you to everyone joining our call today. We closed out 2021 with strong momentum across the company. In the fourth quarter we grew total revenue 13.2% year-over-year. This resulted in full year revenue of $2.58 billion, and adjusted EBITDA of $982.7 million, exceeding our prior guidance of $2.57 billion and $980 million, respectively. We achieve these results by steadily executing our growth strategy and leveraging our industry-leading LiveOps capabilities to grow our core game portfolio. Our casual portfolio grew 22% with Solitaire Grand Harvest and Bingo Blitz leading the way with growth rates of 56% and 22.4% respectively, demonstrating the power of our Boost technology and LiveOps platform to drive exceptional performance in our established games. While the casino portfolio was down 1.8% year-over-year, this decline came on the back of a very strong COVID-driven 12.2% increase in 2020. Across the two-year period, casino games grew at a 5% compounded annual growth rate. We ramped our expansion in new categories during 2021 with the acquisition of 80% of the equity of Reworks in August, and the launch of Wooga’s new game Switchcraft in October, as well as ongoing development work on two additional new game launches. The first full quarter revenue from Reworks’ Redecor Design Entertainment application helped our casino portfolio generate more than 50% of our total revenue in the fourth quarter, a milestone that demonstrates our ability to deploy our Boost technology and LiveOps approach across all gaming entertainment genres. Turning to the fourth quarter, our revenue growth of 13.2% year-over-year was also a 2.1% sequential increase. The casual portfolio led the way with year-over-year growth accelerating to nearly 31.5%. Our casual games comprised 51.8% of revenue in the quarter. Solitaire Grand Harvest remained our fastest-growing game with a growth rate of 60.1% as both DAU and ARPDAU continued to rise. The game's migration to Unity is tracking ahead of schedule with its rollout slated to begin later this month. June's Journey grew 36% year-over-year. Through the Boost platform, we launched multiple collectible album promotions that resulted in June's Journey’s strong performance and record increase in daily payer conversion. In the casino portfolio, revenue was down 2.4% year-over-year, with growth in Caesars Casino and World Series of Poker offset by declines in Slotomania and House of Fun. We were encouraged by the response as we started to do events and products in the World Series of Poker application, which drove monetization and, together with enhanced user experience, led to a steady increase in GAU in the quarter and 7.3% revenue growth on a sequential basis. Caesars Casino also realized increases in conversion and revenue as we launched new and improved events helping the game grow 7.1% year-over-year, which is a strong milestone in a game that recently celebrated its 10th birthday. Now turning to our P&L, cost of goods as a percentage of revenue declined year-over-year from 30.3% to 28.2%. The shift is primarily driven by the percentage of revenue flowing through proprietary direct-to-consumer platforms increasing to 21.7% of revenue, up from 15.5% in the fourth quarter of 2020. Our direct-to-consumer platforms continue to be a competitive advantage and a strong source of margin for Playtika. I'd like to add a quick comment highlighting that we are now referring to our proprietary platforms as our direct-to-consumer platforms. While it's just a change of name, we felt it's important and appropriate as it better describes what we've achieved and more importantly, points to the future potential of this piece of the business. 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, and invested in new user acquisitions and marketing campaigns. GAAP net income was $102.3 million compared to $76 million in the prior year quarter. With a successful refinancing of our debt in March of ‘21, we significantly lowered our future cash interest costs. As such, we reduced the associated need to repatriate cash from our foreign subsidiaries. So we were able to reverse approximately $46 million in tax reserves to pay withholding taxes on future repatriated cash. Adjusted EBITDA was $212.5 million, representing a margin of 32.7%. This compares to $210.4 million and a margin of 36.7% in the fourth quarter of 2020. As of December 31, we had approximately $1.1 billion in cash and cash equivalents and $1.7 billion in available liquidity to fund growth opportunities. With that, we'll be happy to take your questions. We ask that you limit your questions to the fourth quarter and full year 2021. Thank you.

Matthew Cost, Analyst, Morgan Stanley

Hi, thanks for taking my question. Good, how you doing? I appreciate you taking the question. So I guess for margins in Q4, it's certainly in line with the guidance that you gave at Q3 but definitely down year-on-year and down sequentially. Understanding you are not providing guidance for 2022, what were the drivers of kind of the margins in Q4? And should we expect as you mix more towards casual, that margins will be more in the low 30s rather than the high 30s range going forward? And then I have a follow up.

Craig Abrahams, President and Chief Financial Officer

Thanks for the question, Matt. As you mentioned, this was something that we had planned for in the fourth quarter. Obviously, with the execution in the fourth quarter, we exceeded our adjusted EBITDA guidance for the year. It was an investment quarter in growth, both in our people as well as in marketing and media expenses. There were several offline campaigns, more than typically seen in a quarter, which drove additional media expenses, both on production and media. Investing in our people definitely is a differentiator for us in R&D and in our technology. A lot of this showed up in the fourth quarter as we had planned. Much of that media was, especially in Q4, and I'm not sure that necessarily sets going forward. But we're not making comments on forward guidance.

Matthew Cost, Analyst, Morgan Stanley

Got it. That's helpful. And then just following up along those lines, there was a comment in the press release about year-over-year CPI growth being up around 6% in Q4, and I think your commentary on the prior two calls has been that it was stable. I guess I want to get a sense, is that an acceleration in ECPI growth? And sort of what are you seeing in terms of the effectiveness of your advertising? As we kind of stabilized a little bit post-IDFA?

Craig Abrahams, President and Chief Financial Officer

Sure. In the past, we'd given commentary sequentially because people were focused on giving IDFA what was happening on a quarter-to-quarter basis. Obviously, with the holidays in Q4, sequential wasn't the right comparable. So we wanted to show year-over-year. We chose 5.8%, which we feel demonstrates our capabilities and everything we've talked about in the past around our ad tech, our strategies around diversification of sources, and leveraging offline campaigns. But as we really look at this new environment, post-IDFA, it highlights our capabilities. The fact that we are the best at live operations, and that we can have higher LTVs than anyone else within our genres gives us a competitive advantage in marketing, regardless of the landscape. This is in many ways leveling the playing field and giving us an advantage around LiveOps. This is why we provided that guidance, and obviously, we'll continue to execute quarter-to-quarter, and as you can see by the results in Q4, it clearly validates our strategy.

Eric Handler, Analyst, MKM Partners

Good morning, and thanks for the question. I'm wondering if you could talk a little bit about the ramp of Switchcraft and how that's doing relative to your expectations.

Craig Abrahams, President and Chief Financial Officer

Sure, thanks for the question. I think it's still too early to tell. Obviously, it's a unique offering and one that received the Google Play Award. There's definitely an opportunity for us to further optimize it before we put meaningful marketing dollars behind it. It's part of a larger strategy with a slate of titles that we plan to bring to the marketplace. We'll provide updates when there are material changes, but for now, we continue to optimize.

Eric Handler, Analyst, MKM Partners

Okay, and then, as a follow-up, last quarter, you talked about infrastructure investments that were being made in Slotomania and Bingo Blitz. Bingo Blitz didn't seem to have any negative impact from these investments, wondering if you could talk about where you are with these games in terms of how much longer the investment process will continue?

Craig Abrahams, President and Chief Financial Officer

Sure. So I think that the highlight around infrastructure investments was pretty unique to the third quarter, especially for a title like Solitaire Grand Harvest. We mentioned that it's still undergoing a transition that will go through the end of March. With that, we shared January numbers to highlight the strength of the portfolio and execution. We're really past that situation we had, which was pretty unique in Q3 when we had a lot of infrastructure overlap at the same time.

Colin Sebastian, Analyst, Baird

Thanks. Good morning, Craig. A couple of questions for me. I guess, first off, a little more detail on what's driving the increase in payer conversion and ARPDAU. I know, the denominator and numerator may be moving in different directions. Also, just the Eastern European studios, specifically Ukraine and Belarus, are there any disruptions expected from those operations?

Craig Abrahams, President and Chief Financial Officer

Sure. Let’s start with Ukraine, given the importance there in terms of what's happening. Our hearts definitely go out to the people of Ukraine in this dynamic situation that we monitor in real time. The most important thing to us is the safety and well-being of our employees. Our thoughts and prayers are with them. We continue to work on being in touch and ensuring their well-being. We've taken steps over the last few quarters to geographically diversify ourselves across Eastern Europe and have implemented business continuity plans. In the immediate term, there's been no material disruption to our operations. Obviously, it's a dynamic situation, but it has not affected business operations to this point. In terms of your question on conversion, January was also continued execution up to 330,000 daily paying users. With DAU being pretty consistent, conversion continues to get driven higher. This is really a testament to the technology of the Boost platform, and how the teams across various studios leverage Boost to drive monetization and conversion features to deeply engage our players on a personalized basis. This kind of growth really highlights the differentiator between us and our competitors in the marketplace.

Stephen Ju, Analyst, Credit Suisse

Okay, thank you. So it might be a bit early, but now that Redecor is part of the portfolio, is there anything you've learned from operating an app that's sitting slightly outside what you have been doing historically? At the time of the acquisition, it also sounded like there was a greater opportunity to generate ad revenue there, given the exposure to the home decor category. So overall, how is operating this asset? The same, and how is it different versus what you historically have been doing?

Craig Abrahams, President and Chief Financial Officer

Hi, Steven. Thanks for the question. We're still big believers in the gamification of entertainment applications beyond traditional games. Redecor came in at $32.4 million in the quarter, ahead of our public guidance of $30 million. It really demonstrates our ability to execute and gives us confidence in executing around gamifying applications. The integration is ongoing and underway, and everything is on track regarding our thesis around entering this category.

Drew Crum, Analyst, Stifel

Okay, thanks. Hey, guys. Good morning. Last quarter, you talked about Board Kings and some changes that were made with the management team there. Can you provide any updates on what you saw in Q4? I know you're not commenting on ’22, but historically, how has January performed relative to December? Now the metrics you provided in the press release suggested a sequential uptick month-to-month; is that in line with what you typically see historically, month-to-month?

Craig Abrahams, President and Chief Financial Officer

Sure, Drew, thanks for the question. Yes, last quarter we highlighted two games that had either delays or management changes. World Series of Poker was first. That game clearly had a great quarter, executing up over 7% sequentially, and things are strong there. January was the best month in World Series of Poker history, so clear execution is trending into ‘22. Board Kings has also stabilized; revenue for the year was up 13%. We're excited about what that team can do. In terms of that strong execution by the teams, as we look at January, last year was the first year as public company, and Q1 was also pretty strong with a strong roadmap in that quarter. As we previewed last quarter, we talked about a strong roadmap in Q1. And so January obviously demonstrates that.

Batya Levi, Analyst, UBS

Great, thank you. Can you also provide maybe margin contribution of Reworks in the quarter? And I think last time you spoke, you mentioned that marketing expenses will ramp. Are we seeing that through the first quarter, or is there a little bit of a slowdown now? And maybe a final question on any changes in incentive compensation plans towards the end of the year?

Craig Abrahams, President and Chief Financial Officer

Sure, thank you for the question. So in terms of Reworks, we don't break out margin contribution. We're not giving guidance on that on a go-forward basis. And we're not commenting on ‘21 guidance. In terms of incentive plans, there's nothing that changed in ‘21 versus what's happening here in ‘22.

Michael Ng, Analyst, Goldman Sachs

Hey, good morning. Thank you very much for the question. I was just wondering if I could follow up on the question on payer conversion. Were there any particular games that did particularly well in terms of increasing payer conversion? Obviously, really strong numbers in Q4, and in January, are there any elements of the Boost platform that you'd call out that really helped with the payer number?

Craig Abrahams, President and Chief Financial Officer

Sure. I think one of our core theses around initially with casual games was the ability to take our know-how to other new genres. It's clear, as seen by the growth across the casual portfolio, that we're performing well in terms of execution, and that's driving continued payer growth and monetization increases, which is affecting that top line number, continuing into January as well at the start of the year. I would say that there are no specific game callouts other than the casual performance driving those metrics.

Aaron Lee, Analyst, Macquarie

Hi, good morning. Thanks for taking my question. One quick on marketing. I think one of your strengths historically has been the variety of EMEA sources you buy from, as well as the offline campaigns you guys do, which you mentioned in the quarter. I believe you had a billboard in Times Square recently. Have you noticed the cost of those offline campaigns increasing, perhaps as other companies look for ways to get around IDFA? Or have those remained pretty stable as well?

Craig Abrahams, President and Chief Financial Officer

Sure. For us, I think it's a media mix that's shifting in terms of diversifying our sources. In Q4, we had some of the larger campaigns with John Goodman, Ty Pennington, and Penn and Teller. You saw a lot of offline campaigns in the quarter and a bit of a mix shift. But I think you'll see the benefits from that on a go-forward basis, as those brands get built, and you see those benefits over time. For performance marketing, it's measured more directly in the quarter. Some of those benefits are being slightly delayed by ad spend; however, it's a mix shift rather than a broad increase. Thank you, everyone, for listening in, and we'll talk soon. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.