Brainium Studios, LLC (MYPS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the PLAYSTUDIOS Investor Update Conference Call. [Operator Instructions]. Please note that this conference call is being recorded today, October 13, 2022. I'll now turn the call over to Joel Agena, Corporate Secretary and General Counsel for PLAYSTUDIOS. Please go ahead.

Thank you, operator, and hello, everyone. Thank you for joining us today to discuss our acquisition of Brainium Studios. During the call today, some of management's comments will be forward-looking statements about future events, expectations and projections. Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. You should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risk factors that could impact future operating results and financial condition. During the call, management will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Hosting the call today, we have Andrew Pascal, PLAYSTUDIOS' Chief Executive Officer; Jason Hahn, Head of Corporate and Business Development; and Scott Peterson, Chief Financial Officer of the company. They will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Andrew.

Thank you, Joel, and hello, everyone. I'm excited to discuss our acquisition of Brainium and its significance to our strategy and growth. Jason and Scott will provide an overview of the deal terms and the financial impact of the transaction, but let me first take a minute to delve a little deeper into why we're so excited by this opportunity. Over the past 1.5 years, we've been clear and consistent about our strategic priorities. First and foremost, we're dedicated to the evolution of our unique rewarded play model. Our vision is simple: offer compelling games to attract and engage players, enrich their experience through entertaining and consistently-evolving games, and finally, reward them through our unique playAWARDS loyalty program. Our acquisition of Brainium fits beautifully into this strategic framework. From a portfolio perspective, we're further expanding into the sizable casual games market, a genre we recently entered with the acquisition of Tetris mobile game rights. And we're acquiring an audience of over 5 million monthly active users, enabling us to increase the breadth and reach of our industry-leading loyalty program. From a financial standpoint, the transaction is immediately accretive to annual adjusted earnings per share, adding to our current base of revenues and adjusted EBITDA. Brainium will also increase our consolidated adjusted EBITDA margins and add to the company's free cash flow. I'd also like to highlight that our earnings will be more diversified, with high-margin in-app advertising revenue now accounting for a more meaningful percentage of our earnings. Let me expand on the diversity that Brainium brings to the PLAYSTUDIOS' portfolio. With the collection of Ten cards and puzzle games, Brainium more than doubles our suite of products and firmly entrenches us in the casual gaming space. As you'll remember, one of the 2 key pillars, I previously outlined, was scaling our network by expanding into new games and new genres, creating a foothold in casual gaming and more than doubling our suite of games to this. Our second strategic pillar is to leverage our playAWARDS platform across a broader collection of game genres. Alongside the Tetris transaction and our recent acquisition of WonderBlocks, we believe Brainium's suite of products are perfectly compatible with our loyalty platform. We'll look to leverage playAWARDS not only to drive the loyalty lift in Brainium games, but also to increase the liquidity of our rewards marketplace to deliver more value to our players and rewards partners. This is incredibly important as real-world rewards are a unique and proprietary offering in PLAYSTUDIOS that fundamentally sets us apart in the industry. In short, Brainium gives us the opportunity to further solidify our industry-leading position and prove the power of the playAWARDS platform across the broader collection game types. Brainium also brings us an amazing team of talented game developers and designers, who will fit seamlessly into the PLAYSTUDIOS family. Brainium's Chief Operating Officer, Scott Willoughby, will manage the integration of Brainium's Portland, Oregon team into PLAYSTUDIOS as part of our Americas division, and will continue to lead the studio as our General Manager. Alongside our talented play makers, we believe the addition of Scott and the team will inject fresh thinking, creativity and game design practices that will benefit the entire portfolio. Transformative use of our capital has been foundational to our growth strategy. Following up on our acquisition of WonderBlocks and the Tetris mobile game rights over the last 12 months, the Brainium transaction positions us well headed into 2023. You'll surely notice the commonality of these acquisitions, which is entering scalable new game categories and diversifying our business model and our capabilities. I'm very optimistic about the outlook for these initiatives and look forward to reporting on our progress in the coming quarters. I'll now hand it over to Jason, who will discuss the transaction in greater detail. Jason?

Thanks, Andrew. Hi, everyone. Excited to be here. I'd like to take a few minutes to discuss the acquisition in more detail. First, I'd like to reinforce our M&A approach, which was the foundation for this acquisition and will be integral for all prospective future deals. When looking for acquisitions, we are very deliberate and have a specific criteria to ensure the transactions we execute are: one, accretive to our financial profile; two, consistent with an accelerative of our strategy; and three, where we see meaningful opportunities to realize synergies. We believe the acquisition of Brainium checks all these boxes. Let me elaborate on each of these points. Our acquisition of Brainium was for an upfront purchase price of $70 million, which was financed entirely by cash on our balance sheet. Thus starting today, Brainium is a fully-consolidated part of PLAYSTUDIOS. Based on Brainium's estimated 2022 adjusted EBITDA, this implies an acquisition multiple of around 7.95x. This multiple does not reflect any revenue or cost synergies, though we see considerable opportunities on both fronts. We believe this represents a compelling valuation and is meaningfully accretive to our adjusted EBITDA, our adjusted EBITDA margin and our adjusted earnings per share. It also allows us to maintain a strong balance sheet. As you'll remember from past commentary, while we have been active in the M&A market for the past 12 months, it has been difficult to execute a transaction of scale as the gap between public and private valuations was abnormally wide. By remaining disciplined, we believe we have found in Brainium a market-leading company with high margins and a large durable user base at an accretive multiple. Not only is the acquisition financially compelling, it is also consistent with our goal to accelerate our strategic road map. As Andrew mentioned, by expanding our portfolio of games and new genres and business models and meaningfully growing our user base, we can enhance the flywheel playAWARDS. Expanding playAWARDS is a foundational strategic imperative for us as we evaluate M&A opportunities, and was a key rationale for making this acquisition. By putting rewards in front of another 2 million daily active players, we have clearly accelerated our strategic objectives. We expect the playAWARDS platform to bring considerable value to Brainium players and our rewards partners. We are convinced in the power of playAWARDS and are excited to realize the potential as we continue to increase its scale and reach. The last thing we look for in acquisition opportunities is the potential to realize synergies. As I mentioned earlier, the acquisition multiple of Brainium does not include synergies. While we are not providing any specific numbers today, please do not interpret that as a lack of opportunities. Both Brainium and PLAYSTUDIOS have best practices that can and will be incorporated by the other, and collectively, the scale of the combined platform should create opportunities we plan to explore. You'll find a discussion of this in our presentation, but it can read the details itself, it's worth noting that these opportunities are multi-faceted that include opportunities to drive increased monetization and leverage our larger infrastructure to realize efficiencies in user acquisitions. Perhaps most importantly, we believe the inclusion of playAWARDS can benefit Brainium tremendously with the introduction of real-world rewards and benefits to millions of dedicated players to drive increases in engagement and retention. Before handing it off to Scott, I wanted to make a comment on how this deal fits within the broader market context. We are now competing in an evolving games market where it's becoming increasingly challenging and more expensive to find, target and accumulate new quality players. In this environment, we believe having an existing scalable network of loyal players is incredibly important. Brainium not only adds millions of such players to our existing network, but the strong organic appeal of its games should also allow us to reach new players in a cost-effective manner. We believe organic traffic is very important in this market, and with Brainium, we believe we have found an asset that has and can continue to deliver consistent install volumes for years. Scott will now spend some time on the financial implications of this deal. Scott?

Thanks, Jason. I'll share some financial perspectives of the Brainium acquisition. As mentioned in the press release, the closing date purchase price was $70 million and was funded entirely by cash. With no borrowings and a significant cash position, we remain in a very strong capital position. In addition to the $70 million, the acquisition includes a potential earn-out payment based upon the achievement of certain financial milestones by Brainium. The maximum amount of the payment is $27.25 million. While we won't know the amount of any earn-out payment until after the 2022 financial statements and year-end audit processes are complete, I can tell you that these payments are based on performance ahead of our expectations, and as such, should be viewed positively if incurred. For the full year 2022, we estimate that Brainium will generate $22 million in revenue and just under $9 million in adjusted EBITDA. However, only the last 2.5 months of the Brainium results will be included in our year-end financial statements. Additionally, Brainium results are not reflected in our current 2022 full year guidance of $270 million to $285 million in revenue and adjusted EBITDA of $30 million to $35 million. As Jason mentioned, Brainium's primarily advertising-based revenue model has substantially higher margins than our historic business, and thus impacts adjusted EBITDA more than revenues. We estimate that if Brainium's results were consolidated for the full year 2022, they would add $0.03 to $0.04 to our adjusted EPS. Again, these estimates do not include the impact of any synergies. Brainium is also a highly cash-generative business that allows us future financial flexibility. Maintaining a strong financial profile is a priority for both our strategy and growth. I'll now turn the call back over to Andrew for his closing remarks.

Great. Thank you, Scott. So before wrapping things up, I'd like to thank everyone across both companies, along with our advisers, who worked tirelessly to get this deal done. I'd also like to officially welcome the entire Brainium team into the PLAYSTUDIOS family. Given our shared passion for crafting great games and delighting players, I have no doubt that our futures are brighter now that we're together. With that, Scott, Jason and I will be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Mike Hickey with Benchmark.

Andrew, Jason, Scott. Congratulations on your deal. Just curious -- yes, just curious on your core business here. Are you still on target to hit your revenue and EBITDA guidance for the year?

Yes, we're not adjusting anything related to our guidance. And we'll obviously, in the next few weeks, be doubling more deeply into our performance for the last quarter. So we look forward to providing you and everyone else with updates then. But we're super excited about this transaction. Obviously, it's strategically significant and totally in keeping with so much of what we've been sharing about how we intend to use our capital to drive our growth inorganically, so excited.

Fair enough. Are you able to give us a pro forma look at the incremental performance from Brainium's addition to your fourth quarter? You said $22 million is your estimated revenue. It's an ad-based model, so I'm guessing most of that is in 4Q. But I guess how should we adjust our numbers, Andrew, to factor in this acquisition in the fourth quarter?

Yes, I'll let Scott address that one.

Sorry about that, I was on mute. I mean, I think you should look at it at least for the Q4 as sort of a straight line. I mean, we're in the middle of transitioning everything, communicating. We had -- we're having some conversations with the team. We're just really getting to know each other real well. I think the last 2.5 months, really, you should just assume we're a straight line in that matter.

Okay. And then on your contingent cash consideration, it's a rather short window, the $27.25 million through year in this year. So I guess, just any more thoughts on why such a short window for a fairly significant piece of your total acquisition costs?

Yes. I mean the -- it's really more of a price adjustment, right? We established and mutually agreed to where we thought they would end up for the year and wanted to have a mechanism in place that in the event they overperform, then obviously, there's an adjustment to the price. If in fact, they do, then obviously, that's good for all of us. In light of how where the business is pacing, I don't imagine that there'll be a material increase in the consideration relative to where we are today.

Okay. I guess last question. If you look at your cash consideration in the $70 million of [indiscernible], you're close to $100 million, which is over 4x revenue. You look at your valuation, you're trading 1.2x. If you look at your comp set, it's under 2x. Why is that the right multiple to pay for this asset?

Well, I mean, it implies that if there is an adjustment to the consideration, then it would be, because revenues have improved and EBITDA has improved relative to what's been assumed. So I don't think that the multiples that you decided would apply in that case, so we...

I'll just clarify -- I'll add...

Yes, go ahead. Go ahead.

Yes. I was just going to add that we looked at this from a -- on an adjusted EBITDA multiple basis. Given the margin profile of this business, we believe we're getting -- even if we don't include synergies, we're getting the deal at an accretive adjusted EBITDA multiple. When you start to consider what we think will be substantial synergy opportunities, the effective multiple of this transaction will be blended down and be very accretive to our EBITDA multiple. We didn't really focus on the revenue multiple when coming up with our valuation, just given how much flow through this business has and the effective nature of this business model, where they're able to really flow through a lot of their top line to the bottom line.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group.

Congrats on your acquisition.

Ryan, thank you.

Maybe just -- I'll follow on the last one just because we're on the topic. I guess, how do you think about capital allocation of buying your own stock at this valuation when there's pretty significant valuation gap? And assuming margins go a lot higher, the revenue comparison is quite wide. So I guess how do you think about capital allocation of buying your own stock, investing in your business versus going out and buying these guys?

Yes. I mean, I think we -- as we've said in the past, that our intention was to use the capital, our capital, to advance the business strategically, and we think that this transaction does that. And there are other opportunities that we've looked at in the past and we continue to actively pursue that are in line with this strategy. And so -- and we are continually looking at the alternatives, including acquiring our own equity, our own stock. But our primary focus has been on finding opportunities that are going to allow us to expand our portfolio and our audience, and expand the platform for playAWARDS and its reach. That's what this transaction does, and that's really our primary objective. But I will tell you, with that said, we're constantly looking at accumulating our own stock as an alternative.

Great. Just on the business, what's really the core competency kind of that these guys have -- Brainium given? I mean, I look at the games, Sudoku, Blackjack, Solitaire, I mean, it's a lot of very well-known games, so you don't have that hurdle. But what do they do so -- that has driven such a profitable and good business for them?

Look, first of all, I mean, they're -- the talented team obviously has demonstrated their ability to craft really great games. They're elegant and simple in their design and execution, and they've demonstrated their ability to appeal to a really broad audience. As Jason alluded to in his remarks, the products generate a meaningful amount of organic traffic, which means that they perform well in terms of the organic search results across the different stores. And so -- and they've been around for a long time. We like the resiliency of these products. The company was founded 14 years ago when they first introduced the Solitaire, the first solitaire game. And obviously, they've diversified quite a bit from a portfolio perspective. But the games are just really well tended to and well executed, and they feel great. And they, for that reason, have had quite a bit of staying power. So we think that we're acquiring a really great team, first and foremost, that knows how to tend to this collection of products and maintain their pace and performance.

And just what Andrew stated, as our core business, most of our revenues come from in-app purchase revenues. One of the things we really liked about the Brainium team and what they've been able to accomplish is their capabilities around advertising monetization. And so we think that they can help us as we look to exploit advertising more broadly across our portfolio as well.