Playtika Holding Corp. (PLTK) Earnings Call Transcript & Summary

Okay. We can start it. I'm Jason Kim, high-yield media, telecom and cable analyst here at Goldman Sachs. And it's my pleasure to welcome Craig Abrahams from Playtika to our Credit and Leveraged Finance Conference today. Craig serves as President and Chief Financial Officer at Playtika, overseeing the company's corporate and financial strategy, M&A and capital markets activities. So Craig, thank you so much for joining us today.

Thank you, Jason, for having us.

So to get started, you're coming off a very strong first quarter results where you beat expectations and raised your full year guidance. So talk about the momentum you're seeing in your business right now, even in the midst of tougher year-over-year comparisons and your key strategic priorities for the balance of the year.

Sure. So Q1 was a great quarter for us, great momentum coming off the fourth quarter, year-over-year growth of 19.6% top line with a sequential growth of 11.5% just quarter-over-quarter, EBITDA growth of 38% year-over-year. And so tremendous flow-through as well. Our business model is around Live Operations of mobile games. And when your focus is on Live-Ops, you have a very high flow-through. And so when we were able to grow our franchises, we see tremendous EBITDA flow-through. And so as a result, we raised our guidance for the year, $2.6 billion in revenue, up $160 million from our previous guidance; $1 billion in adjusted EBITDA, up $80 million from our previous guidance. And so really excited about the start of the year. I think there were a lot of questions investors had around COVID and coming off of lockdowns, what would mobile gaming trends look like? Our games are really casual in nature. They can be played anywhere on-the-go. The types of games that we have can be played as a primary or secondary screen experience. So whether you're watching Netflix or you're on-the-go on outside watching your kids' baseball game, you can still enjoy our games. And I think it's a little bit different than a truly comprehensive experience like playing in a metaverse or in first-person shooter, where that's really the dedicated experience, it takes a lot of dedicated time and effort. I think you're seeing that even when you leave the house, people are still playing. And so I think for us, it's a great trend going into the year. We had a very strong product road map. Titles that were old, 10 years old like the Bingo Blitz, was up 40% year-over-year. Some of our recently acquired titles like June's Journey, our Solitaire Grand Harvest were up meaningfully year-over-year. Solitaire Grand Harvest was up almost 60% year-over-year; June's Journey, about 40% year-over-year. So really, really strong trends, even some of our older titles, like World Series of Poker, up over 23% year-over-year. So I think for us, across the board, 6 of our top 9 titles grew over 20% year-over-year. So real depth in terms of the strength of the portfolio, and it's a real testament to the product teams, the fact that they're back in the office and working together and collaborating. I think there's a lot of energy there and feel really good about the road map for the rest of the year.

That's great. For investors that may be less familiar with the Playtika story, can you talk about how you differentiate from your competitors? For example, what's your approach to new game development versus acquisitions? And what do you consider to be some of your biggest competitive advantages over your competitors?

Sure. So I think a little bit of history is important here as we kind of talk about our differentiator. So Live Operations and analytics and monetization are probably the 3 key themes around how we're differentiated. And then that's all layered into the Playtika Boost platform, which is our underlying technology platform. So if you go back 10 years, we had one game on one platform, which was Slotomania on Facebook. And then took that to mobile. And I think we quickly early on realized that the games business is a hit-driven business in terms of new game development. And in order for us to build sustainable long-lasting franchises, we need to focus on evergreen categories. That was categories of games that have been played for the last 20 years and will be played for the next 20 years to mitigate that product risk. And then what we found was acquiring great product teams and then leveraging our marketing, analytics, monetization know-how really helped grow those games and really took away that product risk around is this game going to be commercially viable. And so what you saw from us was 7 acquisitions over the last 9 years. I think initially, we took a consultative approach, which is bring sort of great people throughout the organization to help grow these various businesses. And then what we realized was in order to scale, we needed to start investing in technology. How do we productize that know-how? How do we have a system where if we have a great feature that's working in one game, how do we cross-pollinate to that the rest of the portfolio? And so building out over the last few years, the Boost platform has really become an advantage for us. And with each acquisition that we've done now, we're able to sort of bring that consultative approach, but also bring technology. And so I think what we saw this last quarter, you had features something like clans, which is very successful in one of our games and be able to introduce it off the Boost platform into Bingo Blitz. And I think we're now seeing the benefits of that scale. Now we've also put ourselves in a position with the recent IPO as well as refinancing our term loan B that we have $1.5 billion of available liquidity, about $1 billion in cash on the balance sheet, $600 million in revolver. And so we're set up very well now to continue that M&A trend as we look to bolster our portfolio. And with the last few acquisitions, if you look at acquisitions like Wooga, like Seriously, like Jelly Button, they all have great product teams that as part of their DNA is making new games. And so we've inherited many new titles in our pipeline for new game development. We now have promised the marketplace that we'll have one new game by 2022. And I think as we continue to do M&A and we buy great product teams, that will continue to bolster that part of our business as well and be a new growth vector for us.

That's great. A lot to unpack there, but let's stick with the M&A team for a moment. So for a long time M&A has been a core competency of yours. So what qualities are you looking for when you make deals? Is the M&A marketplace becoming more competitive? And if so, like how are you differentiating yourself as an acquirer?

Sure. It's a great question. So yes, I would say the market is getting more competitive. I think there has been a realization that mobile games are here to stay. I think if you look at the early days of mobile games, there are questions around will these be long-lasting franchises, will there be consistency in the sort of top rank games. I think what you're seeing now is that there are established leaders who continue to provide great content to the consumers, and these games are run like platforms. And we look at each one of our games as a platform, and we continue to invest in content. And so I think with that sort of -- and people seeing that and seeing sort of people like ourselves execute on our strategy that the M&A market has gotten more competitive. With that said, I think as I look over the last 2 years, the 3 acquisitions that we've done, Wooga, Supertreat and Seriously, we've been able to grow those businesses dramatically. And even though we paid probably the highest multiples in the company's history for those businesses, they're all at sort of single-digit multiples today based on our ability to grow EBITDA. And so I think for us, Live-Ops is our sort of core competency and differentiator. When we go into a process, we're able to go to the entrepreneurs and say, here's the skill set that we bring. You're a great product team with great entrepreneurs who've basically built something very quickly. But then the next few years of their journey is going to be building out live operations and technology platforms, which is a lot less fun than building out great product features. And so partnering with us, you're able to focus to us on the creative side, making really fun and engaging games. And we help sort of on the monetization side, the analytics side. How do you do game economy management, how do you do player segmentation, how do you do customer support, all those things that we bring to the table can really help grow those businesses and help entrepreneurs hit their earn-out targets and dramatically grow those businesses. And so for us, we feel like we do bring something differentiated when we come to the table. Obviously, we've been busy this last quarter with an IPO and a refinancing, but happy to be back in the M&A market. And we'll update when there's something to update.

What's been interesting to sort of learn about the company is that your older titles are still showing growth year after year after their launch. So for example, Slotomania was launched in 2010, I believe, and it's still growing. So what is driving the growth of these titles? Is that just more people becoming mobile gamers, new features in your games? What's the typical life cycle of a game app you acquired?

Sure. So again, it goes back to our approach that each game is a franchise and we're investing in content on a daily, weekly, monthly basis to keep that experience fresh. And when we have product features that work really well, we're able to cross-pollinate those features from one title to another title in the portfolio, which really keeps people engaged. So you see -- I mentioned Slotomania is still growing, it's our largest title, 29% of revenue and continues to grow. If you look at Bingo Blitz, it's our second biggest title growing at 40% year-over-year. House of Fun and World Series of Poker, 2 also titles that are over 8 years old and both growing over 20% a year. And so I think you really see that strength in the portfolio. The casino-themed portfolio is some of our more mature titles growing at 20% -- 12%, year-over-year. Our casual portfolio, some of our newer, more exciting titles we recently acquired, that portfolio is growing at 30% year-over-year. Casual now makes up 46% of our portfolio. And so we really feel good about where we're making investments, and casual is really where our strategic focus has been and where we see future growth opportunities for us. So we'll continue to invest in these titles. And I think because of the fact that we're not focused on so aggressively new games and how do you take players from old games to new games, we don't do cross-marketing from title-to-title very aggressively. We're still testing that and it's in its nascent phases in our business. And it's really about how do you continue to grow these franchises, make them appeal to more people, get more engagement, get more paying users. And I think as you see it in the healthy metrics for us is daily paying users. That's the metric that really demonstrates how engaged is your player base paying on a daily basis. And there you saw a little over 9% growth year-over-year this past quarter and strong sequential growth. And so I feel really good about the underlying trends that we're seeing. And we'll continue to make large investments in the games within our portfolio. But when I say large investments, it's really investments in people and content. I think what we're seeing on the margin flow-through, we had over 40% margins this quarter. So when you have these older titles that already are developed, already are in the marketplace with engaged user base, so much of that Live-Ops and new product features results in increased margin flow-through.

So that's a good segue into some operating metrics. So you mentioned daily paying users or DPU. So what are you seeing in terms of trend across different markets? Are you seeing differences in the DPU and engagement levels in various markets, depending on COVID-related mobility restrictions easing? And as a related question, as the economy reopens, how do you think about some of the tougher comparisons that are coming up for you in terms of people staying at home and playing more games? You touched upon this subject a little bit in the beginning, but how do you see things playing out as the economy more normalizes going forward?

Sure. So the U.S. is our biggest market. We actually saw a little bit of acceleration in market share in the U.S., up from 70% to 71% of our revenue. And so I think as a market that is opening up, is our biggest market and seeing sort of that increased engagement, it's a very positive sign. So I don't think that we've seen anything that would suggest that people are -- their behaviors are changing as a result of sort of the life resuming the sort of normal pre-COVID behavior. I think players are more engaged in the games, and we're seeing that activity continue as folks roll out. And I think it's really more of an effect based on our road map. So we're seeing really strong product road maps to start the year, really engaging content that are getting consumers engaged and not seeing so much externalities sort of controlling the business, the way that we saw in sort of Q2 of last year into Q3. And so I think a lot of that is normalized. I think we're sort of past sort of behaviors that were sort of driving the business. And now it's more based on our own product road maps. I think we're also looking to do things in other international markets. We spent some major investments in Germany this past quarter with the launch of some new features in Solitaire Grand Harvest. We did something with Verona Pooth in terms of some interesting influencer campaigns. And so I think there are opportunities to go sort of new international markets and localized in ways that we haven't before. And whether people -- I think with mobile gaming, whether there's lockdown or not lockdown, I think at this point, it's really about the product, the product features and the fact that consumers can take these games with them anywhere they go.

In terms of the international markets, like how translatable is success you may see in the U.S. market to the other countries? Are there a lot of synergies that you can sort of bring to the table? Or is the market fairly localized?

So I think as we expand into casual, we're seeing that the opportunities for us are much bigger. For the casino-themed titles, I think we're relatively set in U.S., Canada, U.K., Australia being kind of the primary markets where those games are played. And we haven't seen much growth in other international markets. I think now as we've expanded to casual, we're seeing a lot more growth overseas and opportunities there to play these games as they're more casual in nature in a variety of new game genres, whether it's solitaire or whether it's hidden objects, whether it's match 3. So I think there's a lot of new and interesting things that we're doing in the company. And then with those learnings, the advantage of having such a large portfolio, 9 titles in the top 100, we're able to kind of replicate that success of one title with others.

So recently, your growth rates have been driven by casual portfolio, which grew, I think, 30% in the first quarter. At the same time, the bulk of the revenue and EBITDA still come from established casino-themed games, which are showing more modest growth rates, but obviously, with very low following. Going forward, you touched upon your emphasis on casual as an area of emphasis. How are you thinking about the opportunity sets in both of these segments? And as a follow-up to that, are there any margin impact that we should be thinking about as the business mix changes in the future?

Yes, and that's a good question. I think for us, the way we see it is the margin profile is real. And then sort of the -- what we look at is conversion, which is daily paying users over daily active users in terms of the engaged payer base. We see the maturity of the title under our ownership really being the driving factor. And I think initially, there was a sort of thought that casual titles perform at lower margin because a lot of the public comps were in casual and King, obviously, has high margins, but a lot of other game companies did not. And so people kind of made an assumption that, well, King has Candy Crush, it's a big title. Maybe others -- maybe these other categories don't have a margin as high. And I think what we're seeing is that the margins aren't capped because of the genre that they're in, it's really how they're operated. And if we look at our -- the fact that we own the IP of all of our casual titles outright, we don't license any brands from third parties in terms of the brands of the games. There's an advantage there. As we look where our employees are based, 800 employees in Israel, very strong analytical talent, R&D in Eastern Europe. We have a great employee base that's very analytical that helps with Live-Ops. And as we grow these games via Live-Ops, 70% margin flows through on a third party platform. We are unique in that 18% of our revenue was on our own proprietary platforms, where we have just 3% fees for payment processing. And so growth on those platforms drops in a 97% margin. And so because we're not so dependent on needing to grow our daily active and monthly active user base to drive growth because so much of our growth can come from driving monetization, driving conversion as well that we're seeing that these titles can have much higher margins under our ownership. And so I think we have an advantage there. And I think as we see the portfolio continue to mature, we'll see those casual titles continue to sort of increase their margins.

You mentioned the -- having more people on your proprietary platform, just a bigger key driver of your margin performance. So how do you get more people to come to your own platform? I think you said that 18% at the moment? Like, how do you grow that figure going forward?

Sure. So I think for us, early on, we wanted all customers to be able to play in all channels, right? We are on all social networks, all mobile opportunities, whether it was on Amazon, Apple, Google. And now with web and mobile web, we've been making investments, so customers can play on a large screen on web. If they want to play on mobile web, they have that opportunity. We made some investments this past quarter and revamped Bingo Blitz. So I think we saw a big jump on Bingo Blitz on our own proprietary platforms as well as overall growth due to the road map. And so I think for us, it's -- all of our third-party channels on mobile are growing. And we're making investments in marketing, ROI decisions on all channels. But I think we have an advantage in that we have the opportunity to be more aggressive on web and mobile web to drive more customers to our own platform.

That makes sense. You mentioned previously that you're also working on some new titles. So what are some of the -- what's your overall strategy behind new game development? And as you develop those games, what are your expectations around timing and the genre as we look forward?

Sure. So we've said publicly before that our focus is on casual, all the titles in the pipeline internally are casualty focused. We look for areas where we believe that we bring an area of expertise to the table. Some where we have a hypothesis around a real view around kind of what meta game on top of an existing category might make sense, whether it's a new category or existing category. And then go out and test it. And we're doing a lot of testing on all the titles in the portfolio. I think we have the confidence, based on looking at the portfolio, to get the guidance. So we'll have one global launch by '22. We could have more depending on how it goes. But I think for us, that's just a piece of the strategy. Historically, it's been really about a deal a year from an M&A perspective. And I think what differentiates us is that you're seeing core organic growth, right? We grew 19.5% organically, year-over-year in the first quarter. And I think that is a real differentiator in terms of sort of looking at same-store sales, how are you growing these franchises title-by-title. And so for us, we really have those 3 vectors for growth plus international upside. So I think we feel really good about the road in front of us as we kind of keep going into '21.

Switching gears a little bit. Just talk about the regulatory environment, especially with respect to privacy. So how do changes in privacy policies affect your ability to acquire new users?

Sure. So the recent IDFA changes with Apple, obviously, has been a hot topic that people have been discussing over the last few months. About 10% of the user base now in iOS has the new version. I think what we're seeing is really no impact on that first 10%. The opt-in rates are actually higher than we would have thought initially and not see an impact. I think our business is more insulated in general in that we don't have this constant new pipeline of new titles that we have to market and launch. The fact that on a lot of our titles, around -- at least the older titles, 90% of the revenue is from older cohorts of users, right? They are already engaged in the game, already playing the game. It's about reengaging existing users more so than it is acquiring new users for a lot of those older titles. And for those users, there's no impact. I think also, the last thing I would say is that only about 32%, 33% of our revenue is on iOS. And the rest is on Android or proprietary platforms or other platforms. And so I think we're insulated for all those reasons. But again, we haven't seen an impact to date. And I think we gave -- as we gave guidance for the year, we're thoughtful around how can we be more aggressive from a marketing perspective. If others pull back and there's more opportunities to acquire traffic, we can be more aggressive. We spent a lot of time investing in marketing technology over the last 3 years. We acquired Aditor years back. Nir Korczak, our CMO, who was the founder of Aditor. And we have a big media buying team in Herzliya. We've also invested in technology on the mediation side where we do sell ads. We're differentiated in that 97% of our revenue is from in-app purchases, and only 3% from ads. So there is an impact there. On the ad revenue side, we're very well insulated as well.

Got you. So data has been central to the company's success, and the management team has often talked about Playtika as more than a gaming company, but as a technology company, more broadly. So what's your vision for the company to go beyond video games? Over the medium to long term, what does Playtika's business look like beyond gaming?

Yes. So our core technology platform is the Playtika Boost platform. And all of the things that Boost enables, whether it's player segmentation, game economy management really applies to the games, but conceptually, everything around how we market, how we interact with customers, how we leverage artificial intelligence and machine learning, all built in to Boost. And so when we look at other genres outside of games that are similar to games, they can monetize a virtual currency or they have high levels of engagement from a transaction perspective. I think anything where you see transactions that happen once a year, that's not something in e-commerce or something, it's not an area where we can be successful. Where you see people engaging daily, weekly, monthly transactionally, that's where we can really help, whether it's dynamic pricing or how we run analytics. I think there's a real advantage there. And so there's a variety of categories that we're looking at. And I think longer term, you're going to see us -- just as we've expanded, if you look at concentric circles around our business, we started off in slot-themed games and bingo-themed games and poker-themed games. And now all these various genres within casual and you are seeing success at every turn. So I think for us, we've started to realize that the genre doesn't necessarily matter. It's how we run Live-Ops. And I think as you look to a lot of these other categories, we're not getting into dating per se, but like if you looked at a dating app and how it monetizes, it's very similar to a game. And so I think there's a lot of other areas like that without kind of giving away exactly where we're looking, where we think we can be successful.

That's great. And we are at a Leveraged Finance Conference, so I will end the session with a question on balance sheet. So you have $1 billion of cash, $600 million of undrawn revolver. Leverage is low, 2.8% gross, 1.75% net. Talk about your outlook for your balance sheet. In the context of your M&A strategy, how do you envision financing your acquisitions, debt versus equity? Perhaps tolerance for upticking your leverage for the right deals? And how do you to want to manage your balance sheet or leverage profile over the long term?

Sure. So the guidance we've given is 1 to 2x net leverage is sort of the ideal place for us to be, and that's where we are today. We'll oscillate up as we do acquisitions using debt, but I think we're going to be conservative in how we use debt. 3.5x net leverage is sort of the outer realm of where we'd ever want to be. And then obviously, given $1 billion in adjusted EBITDA, we can delever quite quickly with the cash flow through as well as, now that we're a public company, use equity for deals or go to the equity markets as well, if that makes sense. So I think for us, we'll look at cost of capital and what makes sense. And there are limits to where we'll push leverage. We're sensitive to ratings as well and wanting to sort of have access to capital the way that we've had these past few months. And so for us, there are all things we're considering. But I think 1 to 2x net leverage is where we want to be.

That's a good place to end. So Craig, thank you very much for joining us today.

Thanks for having me.

All right. Thank you, everyone.