Earnings Call Transcript - PLTK Q1 2023

Tae Lee, SVP of Corporate Finance and Investor Relations

Welcome, everyone, and thank you for joining us today for the First Quarter 2023 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 will also post our prepared remarks immediately following the call. With that, I will now turn the call over to Robert.

Robert Antokol, CEO

Good morning, and thank you, everyone, for joining our call today. Building our momentum from last quarter, we achieved sequential growth across both casual and social casino-themed titles. I'm proud of our incredible global talent for our achievements and for setting the pace for the rest of the year. We are on track to meet our financial guidance provided on our last quarterly call, and we are excited about our content roadmap slate this year. Overall, we generated revenues of $656.2 million and credit adjusted EBITDA of $222.7 million. Several months ago, we took meaningful steps to further focus on our core strength of live operation. Our leadership position in mobile gaming was built on a best-in-class live game operation services, which enable us to provide innovative and personalized content to our players at optimal points in their game journeys. This quarter, we took positive strides towards further developing and implementing our AI technology in our Digital Studio. Our proprietary technology platform, combined with the evergreen nature of our titles, has allowed us to successfully drive engagement and monetization year after year. Our technical capabilities allow us to deliver an improved, more personalized experience to our loyal community of players. And I truly believe there is a lot more growth potential across all our games. To summarize, I am confident we will strengthen our position within the industry this year and that we will outperform our peers in the mobile gaming sector. I will now turn it over to Craig.

Craig Abrahams, CFO

Thank you, Robert. We are pleased with our performance to start the year. We saw continued positive revenue trends that we started to see in Q4 across all of our games. Our top 9 games grew revenue per day sequentially quarter-over-quarter. In addition, we are starting to see the flow-through from our focus on efficiency and changes that we have made to how we allocate capital. For the quarter, we generated $656.2 million of revenue, up 4% sequentially and down 3.1% year-over-year. Q4 last year marked a stabilization point for our portfolio, and we're encouraged by the organic sequential growth we experienced to start the year, particularly the strength within our casual games. We made the strategic decision to shift more of our user acquisition spend to our casual growth titles. Our focus on higher margin growth is evidenced in our financials this quarter, generating strong credit adjusted EBITDA. Credit adjusted EBITDA was $222.7 million, up 9.9% sequentially and 12.8% year-over-year. Our credit adjusted EBITDA margin was 33.9% compared to 32.1% in Q4 '22 and 29.2% in Q1 '22. Net income was $84.1 million, down 3.9% sequentially and up 1.1% year-over-year. We generated $151.5 million of revenue from our direct-to-consumer platform, up 0.9% sequentially and down 0.6% year-over-year. Our direct-to-consumer platform is comprised of all of our social casino-themed titles; and Bingo Blitz, our only casual title on the platform. As a result, direct-to-consumer platform revenues were slightly down year-over-year, given the decline in our social casino-themed titles, offset by strength in Bingo Blitz. Looking ahead, we're excited to introduce Solitaire Grand Harvest and June's Journey to the platform starting in the second half of 2023. Turning now to our business results for the quarter. Revenue across our casual-themed games grew 7.1% sequentially and 4.1% year-over-year. This growth was driven by strength in Bingo Blitz, Solitaire Grand Harvest and June's Journey. Our casual games now represent 56.3% of total revenue. Bingo Blitz revenue was $159.2 million, up 2.6% sequentially and up 13% year-over-year. We are extremely proud of our Bingo Blitz team for another quarter of record revenue. Bingo Blitz is a game that we acquired over a decade ago and is still one of our fastest-growing titles. In the quarter, we saw strong results from content packs and promotional features surrounding the Super Bowl, Valentine's Day, and St. Patrick's Day celebrations. We also introduced new mini-games and rolled out the new pets feature, which has received positive feedback from our players. We experienced tangible benefits from Digital Studio's AI capabilities in Bingo Blitz. We are now able to identify new segments of top players much earlier in their player journey. And as a result, we're able to provide these players with personalized content, which led to an uplift in revenue for the studio. The success of this program has encouraged us to roll out these capabilities to additional studios this year. Solitaire Grand Harvest revenue was $85.5 million, up 17.4% sequentially and 29% year-over-year. We are encouraged by this level of growth at such a large scale studio. On our last call, we spoke about the strong momentum that we're seeing in Solitaire. This past quarter, we introduced changes into the game, giving our players expanded game mode selection, which increased player engagement. In addition, we increased the number of levels by over 3x, driving retention and improving satisfaction amongst our community of players. Finally, we introduced our biggest meta feature to date with the new farm that is helping increase player engagement. Solitaire Grand Harvest is a game that we acquired over 4 years ago and the continued success of this franchise is a testament to our proven capability to drive meaningful organic revenue growth. Shifting to our social casino-themed games. Social casino-themed games revenue was up 0.3% sequentially and down 11% year-over-year. The year-over-year decline was driven primarily by lower results in Slotomania. Slotomania revenue was $146.6 million, down 1.7% sequentially and 12.1% year-over-year. From Q3 2022 to Q4 2022, Slotomania's revenue per day declined by 0.6%. From Q4 2022 to Q1 2023, revenue per day increased by 0.4%. We are encouraged to see Slotomania revenue stabilize for the second consecutive quarter, and we're pleased to see the positive trends in average daily paying users in the studio. Turning now to specific line items in our P&L for the first quarter. Cost of revenue decreased 0.6% year-over-year and operating expenses decreased 13.9% year-over-year. R&D decreased by 9.1% year-over-year. The lower R&D expenses were largely driven by the reduction in force that we announced at the end of the fourth quarter. Sales and marketing decreased by 20% year-over-year. Like last quarter, savings in sales and marketing expenses were driven by the timing of some of our offline campaigns and the reduction of user acquisition expenses in Redecore and new games. In addition, we had savings driven by the reduction in force. G&A expenses decreased by 6.7% year-over-year. This was largely due to an increased focus on cost reduction across the organization that we began to implement in the first half of 2022. As of March 31, we had approximately $767.2 million in cash and cash equivalents. Looking at our operational metrics. Average DPU increased 4.2% sequentially and 0.9% year-over-year to $326,000. Average DAU increased 3.4% sequentially and decreased 9.9% year-over-year to $9.1 million. ARPDAU increased 2.6% sequentially and 8.1% year-over-year to $0.80. Finally, we are reaffirming our full year guidance to deliver full year revenue in the range of $2.57 billion to $2.62 billion and credit adjusted EBITDA in the range of $805 million to $830 million. We continue to expect capital expenditures between $115 million to $120 million. With that said, we'd be happy to take your questions.

Stephen Ju, Analyst

So Robert and Craig, can you update us on your stance toward new game development right now and how that might be evolving? And also talk about your ongoing M&A efforts. It seems like it's an ongoing difficult environment, particularly for the smaller studios. So are you seeing an increased number of assets come up for sale?

Robert Antokol, CEO

So thank you for the question. Regarding first regarding the M&A, we see today more opportunities coming to the market. As we said last year, the market is going to be tough for new players, for small players. And the company that will have an issue with understanding the operation will find themselves depending on the marketing effort. And if you depend on the marketing effort, it's really hard to grow the business. So we, as a company that leads the operations in the gaming industry, this is a big advantage for us to help small companies to grow their business. So yes, we see more opportunity in the market. We see more companies approaching us, and we think that this year is going to be a very positive year. Regarding new games, as we said last year, we decided to focus on investing in start-ups and investing in the games that we are promising, let's say, dependent on the internal development of new games. We believe this is the right approach for a company like Playtika. Until now, we see very good results in this direction.

Matt Cost, Analyst

I have 2. The first is just on the stabilization that you're seeing with Slotomania, and I guess with the casino portfolio more broadly. Can you just give a little more detail about what's driving that? And sort of your view on how sustainable the acceleration is from here? The second question is just about generative AI. I was wondering if you could talk a little bit about some of the opportunities that you have to drive efficiencies using those tools, but also are there any risks to your business that you would highlight as those tools proliferate?

Robert Antokol, CEO

So thanks for the question. Regarding Slotomania, we said, I think 2 quarters ago that we have a target. And now we're starting to stabilize Slotomania. And actually, we did very well in the last 2 quarters, especially in this quarter. I think the difference was our approach; we are focusing on the core games by focusing on the things that are really important to the players. We are bringing more paying users to the circles of paying users in Playtika. It's working very well for us. We are very optimistic about the future. And I think we will keep seeing Slotomania, and not only Slotomania, the social casino-themed games being stabilized, and we are even optimistic about growing them. What was the second question?

Matt Cost, Analyst

The second question was around generative AI.

Robert Antokol, CEO

We have been investing in AI for several years and have always believed in its potential. While AI is currently a buzzword, Playtika has been committed to it since our first investment around 2017 or 2018. I'm pleased to report that this quarter we have seen strong results, particularly with Bingo Blitz, which we acquired ten years ago. Thanks to AI, we're seeing promising growth in this game. We plan to apply the insights and experiences we've gained to our other games. AI is here to stay and will not replace employees; instead, it will assist them in growing the business with fewer errors and better outcomes. Our focus is on growth throughout our Digital Studios rather than just efficiency.

Douglas Creutz, Analyst

If I just take your Q1 results and annualize them, a touch above the top end of your guidance range on revenue and pretty significantly above it on EBITDA. I understand it's early in the year, but is there anything that you've seen in early Q2 that suggests to you that your run rate you achieved in Q1 is slowing down? And/or are you guys looking at any sort of increase in your cost base as the year goes on?

Craig Abrahams, CFO

Doug, thanks for the question. So in terms of our guidance, we just gave guidance just a couple of months ago as part of the reporting for the fourth quarter. And obviously, we executed very well in terms of sequential growth with 9 of our top titles all growing sequentially per day. I feel very good about where we are, but it is still early in the year. And so I think given the macro environment, I felt it best to keep guidance there on top line. I think in terms of costs and expenses, we're looking at opportunities to ramp marketing throughout the year as well as some expenses are getting deferred to later in the year. So I don't think you can just look at run rate in Q1. So we decided to keep guidance at this point.

Aaron Lee, Analyst

Congratulations on the results. I noticed an impressive increase in the daily active users and particularly the daily paying users that you mentioned. Could you provide insights on how the trends have been evolving from January to March and what the early part of Q2 looks like?

Craig Abrahams, CFO

Sure. So we don't discuss kind of out-of-quarter results. I would say that we performed well throughout the quarter in terms of Q1. We have been focused, as we talked about in previous calls, on DPU. DPU is the best metric for us in terms of monitoring the health of our user base. And Q1 typically has higher marketing spend. So you will see some top-of-the-funnel growth as a result, but we continue to focus on live ops and conversion and driving that DPU number going forward.

Aaron Lee, Analyst

Got you. And just in terms of macro and the health of the consumer, can you talk about what sort of macro impact you might be seeing on your players and how that's changed in recent months? Obviously, the first quarter results were very nice. Does it seem like you're still fighting against macro? Or has that improved a bit?

Craig Abrahams, CFO

I think what we've seen since the middle of the fourth quarter last year is that the environment has been doing well, and we see a healthy environment for mobile gaming. Obviously, it's represented in our results. Given last year, we had 9 titles in the top 100. I think we have a very good sense of the health of the overall mobile gaming system, and it feels pretty good right now.

Eric Handler, Analyst

Craig, just sort of looking at your expenses, R&D has come way down as you've taken some costs out of the equation. I assume that's all people cost. As you look at how you're staffed across your studios and corporate, is that $102 million sort of a relatively stable number you see going forward? Or will that increase as the year progresses? What can you tell us about that?

Craig Abrahams, CFO

I think from a headcount perspective, we feel like things should be pretty consistent where we are. We obviously made a difficult decision last year to make some changes as we focus on efficiency. But now we're seeing a more efficient organization and one that is able to make quick decisions and move quickly. We feel good about the direction we're headed and feel the expense structure is in a good place.

Eric Handler, Analyst

Okay. And just as a quick follow-up. Looking at your CapEx, it was quite low in the first quarter. Can you maybe talk about how that ramps as we progress through the year to get to your $115 million to $120 million outlook?

Craig Abrahams, CFO

Sure. It's just timing of when purchases were made. We still expect it to be in the range of guidance, but nothing specific from quarter to quarter that we're going to provide.

Nir Korczak, CMO

So regarding the privacy area around Android. I think that we learned a lot from obviously the IDFA. We have a very close relationship with Google as a strategic partner of ours. So I assume that most of the things that we have learned, we can implement in the new area, and we are working with them step by step to be ready for whatever comes.

Robert Antokol, CEO

Thank you. I will handle the question about AI while Craig will discuss M&A. As I mentioned earlier in the call, we have always believed in AI, and it took us some time to fully grasp how to utilize this incredible tool. The first implementation and effect we are experiencing from working with AI is a greater optimization of our existing features and products. It’s important to remember that some of our products were developed 5, 6, or 7 years ago. With AI tools, we can optimize them significantly better in terms of segmentation and in understanding how to deliver these products to players, which also helps us prepare for new players entering the game. This represents a substantial shift in how we conceptualize product development; it’s altering our approach to customer engagement and I can confidently say it’s a game changer. However, there is still much work ahead. The positive aspect for Playtika is that we are currently applying this in one game, and we anticipate implementing it across all our games, marking a significant key to our future success.

Craig Abrahams, CFO

In terms of capital allocation, I think we're pretty consistent with our messaging over the last couple of calls in terms of M&A being an area of focus and priority for us, especially given the changes we made in terms of our pipeline in new games. M&A continues to be a core part of our strategy in terms of bringing on new franchises. I know we've talked about it earlier, but I think the additional recent consolidation in the industry just plays into the fact that mobile gaming entertainment is one of the most attractive categories within the broader entertainment landscape, and we expect consolidation to continue. With that, I think there are going to be opportunities for us to continue adding franchises to our portfolio.

Franco Granda, Analyst

Craig, you pointed out the success you're seeing in shifting more of your budget over to your casual growth titles. Can you perhaps talk a little bit more about your own practices in terms of what is working, what is not, and what kind of return on ad spend assumptions you have embedded into the guide for the year? And then for my second question, how should we think about the mix of online versus offline marketing for this year?

Craig Abrahams, CFO

Sure. I would say, broadly, we're investing in the titles where we see the most potential for future growth, and we have the best return on ad spend. The 3 fastest-growing titles in the portfolio are Bingo Blitz, Solitaire Grand Harvest, and June's Journey. These titles are all seeing increased budgets associated with them. In terms of the tactical specifics, we just don't share that publicly. In terms of the types of things we're doing, you can see some of it on TV, and then that's backed up by continued performance marketing efforts, combined with localization and opportunities to bring our games to new markets as well. I think it's consistent with our previous strategy. I just think we're leaning in more towards our biggest and fastest-growing titles. We're constantly evaluating as we've made product changes throughout the rest of the portfolio, opportunities to ramp marketing there as well for growth.

Omar Dessouky, Analyst

I'm glad to hear that Bingo Blitz has improved, seemingly due to AI technology. I'd like to delve into that further. We've had several questions about AI on this call, but I'm curious to know if the timing and nature of this improvement are linked to recently released AI models or to established models that you have just started using. When I mention recently released, I am referring to those introduced by OpenAI, which have received a lot of media attention and discussion in the technology field.

Craig Abrahams, CFO

No. To give more clarity, this is all tied to our Digital Studio efforts. Our Digital Studio efforts are providing tools to our studios to help improve their games and make better decisions. In terms of the product feature we referenced in the script as it relates to Bingo Blitz, it was about using segments to really personalize the experience to our players. That personalization and better segmentation tools really helped that game. I don't have more technical answers in terms of specifically what did it, but this is all part of our broad Digital Studio efforts, which is something we've been developing internally for some time.

Robert Antokol, CEO

But I want to add something to make things clear. Our growth in Bingo Blitz is not coming only from the AI capabilities and AI efforts, it's helping us. The growth is coming from an amazing job that the teams and the new products and new features they are launching. Of course, we are speaking about a thing that can help us to grow in the future, but to make things clear, this is not what is dramatically growing the business; it's helping the growth.

Operator, Operator

Thank you. All right. That concludes the Q&A session. Thank you all for participating in today's conference call. This does conclude the program. You may now disconnect.