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

[Audio Gap] Brian Nowak, I'm the Head of U.S. Internet Research here at Morgan Stanley. We hope it's been a productive life after COVID day for everyone zoomed in. We're very thrilled for our next panel to have, the CFO of Playtika with us, Craig Abrahams, Craig, thanks for joining us.

Thanks for having me, Brian.

So before we get started. I have to read the important disclosures, please see be the Morgan Stanley research website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representatives. I have a series of questions. I'm going to sort of go back and forth here with Craig, informal Q&A. For anyone who has zoomed in, you can submit questions to either me via email or to the web portal as well, to make sure we cover the topics that are most important to you all. And I apologize, my voice cracks at all throughout it. I'm going -- I have a little hoarse voice. We will get through it. So Craig, it's -- I want to actually -- before we talk about pre-COVID, post-COVID, it's a still pretty new company to the overall market, just having completed the IPO in January. So just sort of by way of background to kind of table set. For every one zoomed in, can you give us the summary of what Playtika is and how you're positioned in the overall gaming ecosystem?

Sure. So Playtika is 10 year old video game and technology company. We have 9 games in the top 100 app stores here in the U.S. And we're really known for our live operations and Boost platform. That's really the differentiator for us. And what we mean by that is we have long-lasting game franchises that we invest in. And when the thing -- when new product features are working, we're able to share those via our Boost platform and corresponding those learnings throughout the portfolio. And I think the result from that is that you see that 97% of our revenues remain at purchases, only 3% from advertising. This last quarter, you saw a 19.5% year-over-year growth topline. You saw over 40% adjusted EBITDA margins and over 38% year-over-year growth on EBITDA. And we had a very strong quarter sequentially coming off the fourth quarter as well. And so we feel really good about the start to our year. And then we're really differentiated in the marketplace and that historically, we weren't focused on developing new games. We bought great products and made them better. We did 7 M&A transactions over 9 years. We bought a great product teams and really worked with them on our monetization and marketing know-how and driving payer conversion, daily paying users is really the metric that we focus on. That's the engaged base of users that are paying on average in a given day. And the conversion ratio is that daily paying users over daily active users is the level of conversion. I think, if you followed us over the last 5 years. You see consistent growth in that conversion. It's consistent growth in the monetization of the users. And it really comes down to giving our customers great content that they can enjoy. And it's that content roadmap that constantly increases that engagement. And now today, the network effects that we get from having 9 games on the Boost platform in the top 100. And you have so much innovation, you have 3,800 employees around the world. So much innovation being driven into those games, that, with those successful new features being all across, gives us a lot of visibility for future success. And as a result of that, with such strong results from our Q1 roadmap. We raised our guidance for the year to $2.6 billion, up $160 million over previous guidance and raised our EBITDA guidance of $80 million to $1 billion and adjusted EBITDA based on that confidence in what we know we can bring for the rest of the year in terms of the product roadmap.

Got it. It's a very good table setting. You mentioned the most recent first quarter results, they were much better than we thought and beat our top last time by $50 million, raised the full year by $160 million. Now this is a life after COVID conference. There's a lot of discussion about gaming in general after COVID, are we going to see users' churn, is it going to be a big prop up as the world opens. You guys are raising the full year by far more than your first quarter beat. So clearly, you're not taking that way. So maybe talk to us about, first, what sort of drove your increased confidence to raise the full year that much? And then secondly, what are you seeing from a user behavior perspective through reopening?

Sure. So I think in the first quarter of the year, given 71% of our revenue in the first quarter is from the U.S., it's a great example to say, life after COVID, as people are emerging from COVID, as people are getting back to the kind of pre-pandemic behaviors, what's happening? What we're seeing is engagement of our paying user base going up. We're seeing our revenue base go up, as we have increases in monetization. And we're seeing, based on the fact that so much of our revenue, 97% is in our purchases, when we increase that conversion and monetization, we have very high flow-through rates. And so while we guided to 38.5% margins for the year, we had 40.4% margins in the first quarter. And so I think we're seeing all very positive trends, coming out as we see the emergence kind of what we saw. And I think as you look kind of sequentially, you saw April and May of last year, large increases in engagement. Consumers were playing games across all platforms much more. We saw a decline sequentially in Q3 and Q4 off of those large numbers because people were locked in their homes the way that they were in kind of April and May. But I think what we're seeing now is that our product roadmap is what's driving growth, right? New features that we're introducing indoor games. And I think what's interesting about Playtika is that we're doing it with some of our oldest franchises. Bingo Blitz is a 10-year-old franchise, it grew 40% year-over-year. And one of the key features we launched there came from the Boost platform that was previously in Slotomania. And so it's a great case example of taking a feature like clans, which worked very well on Slotomania, bringing it to Bingo Blitz, having the configuration and the algorithms behind it built-in, the teams are able to pull it down and much more quickly bring that content into the new games. And so I think that's an advantage. I also think that when we develop new games now, all the new games are developed on the Boost platform. And so we're able to take those features of what, let's say, game is commercially viable, we take it to the market. If not, we can repurpose those features across our portfolio of games. And so we feel really good about our positioning at the start of the year, and that gave us the confidence to really raise guidance.

It's really interesting. It's almost like it was, not the only gaming company to bring this up, where it's almost like life after COVID and mobile gaming sort of started in the back half of last year. And it sort of like you had your peak in the first part of last year and then -- since then, it's more -- just been more micro level innovation driving the business.

And I think it matters by genre and platform, too. So given most of our revenue is mobile and given over 82% of it is classified as mobile and then of the 18% that's web, a good portion of that is mobile web as well. And so you have people on the go playing the games. They're casual in nature. So we don't have any games that are like first-person shooters or things where you're truly immersed in the experience. They're casual. So you can be watching TV and playing our games, you could be watching your sons' or daughters' baseball game or soccer game and playing our games, it truly is that casual experience. So as people get back to getting on the bus to work or sitting around at the airport or doing things that they did kind of pre-COVID, our games can be enjoyed in all of those spaces. And so I think what we saw is people are more engaged in the games when they're at home, but now they can play them all on the go. And so we're really not seeing a change in behavior. Internally, in the company, we're really focused on the roadmap. What great new features are we bringing to our customers to get them engaged. How could we make our games more social, how could we make our games more casual in terms of the new features that we're bringing to the games. And I think that's where a lot of the discussion is, isn't really where our players are playing our games because we're not seeing those changes in behaviors like we saw in Q2, Q3 of last year.

Yes. Interesting. Okay. That's helpful. I want to go back to one of the points you made on the business mix between mobile and the mobile web. This is something that's been really interesting to us because I think it's unique relative to any of the gaming companies we cover. We think about 18% of the business, last quarter, went through your owned proprietary platform or mobile web channels. You don't have to pay the higher iOS or Android tax when you go through those channels. I'd love to hear about, give us some examples of strategies you've used to really grow the percentage of the business that goes through those proprietary channels? And how do you think about that becoming a bigger piece of the business over time.

Sure. So Robert on the vision early on, that we needed to control our own destiny in terms of having sort of direct-to-consumer channels where people can play our games on own channels. And that started with websites. And obviously, there's SEO and paid acquisition in other ways to drive people to your website. And we've had that, as we've launched these businesses. I think what you've seen now is, games this last quarter, we launched Bingo Blitz and revamped it on web and mobile web. And with that came a marketing push. And we saw a nice jump from 15.5%, and in the fourth quarter our revenue being [ by rotation and all ] , up to 18%. We haven't given guidance in terms of where the long-term target is. I mean we've mentioned and talked about, could it go as high as 30%, and could that be a target for us as a company. We've said things to that, but in terms of where we -- on this last earnings call, for this year, we talked about 18% being kind of the right number we're guiding to, for this year. I think as we look to grow it, it's about how you bring other games on to that platform. A lot of the games that are on the platform today started off as mostly games played on web and canvas, right? So they're played on a big screen. So they're perfect to get people to play on a big screen or on mobile web and in terms of marketing those folks. I think in terms of games that are now starting on mobile that don't have that web component, I think we have some interesting strategies, but it's a little less straightforward. And so obviously, there's platform rules, we're always in compliance. There's nothing that we're doing in terms of marketing to those folks directly. It's about how you bring new customers onto the platform, how do we go after folks on these other channels and continue to have own channels. So it isn't easy, it's something that we started in 2016. So if you think about the time and effort to build that, it wasn't something that happened overnight.

A 5-year process, does not happen overnight. I want to talk about different ways to sort of cut apart your growth versus sort of organic versus M&A. Let me talk about -- I want to ask you about organic a little bit. You mentioned how you guys have been somewhat acquisitive in the past, but your organic growth has actually been really impressive. It's some of the fastest we've seen in the industry. So just for everyone who is sort of zoomed in, walk us through what have been the keys to driving this outsized organic growth. I thought the example you gave on Boost earlier was a good one, but just talk us through, philosophically, how do you continue to drive such outsized growth even with some of these games, to your point that are 8 to 10 years old now.

Yes. So I think it all starts with genre selection. Now we've been very careful about which genres of games that we go into, right? What are classic evergreen areas, where you're not taking hit driven risk, right? Where game might be like a fag or you could play it for a period of time. And if you look at the categories that we're #1 in, whether it's solitaire, whether it's hidden objects, whether it's bingo. These are classic -- poker, these are classic games, that have been played for very long breadth of time in the offline world, and we're able to bring a constant stream of innovations to engage those players, and these games become platforms, like the communities surrounding these games, and the social elements around these games for the people that enjoy them, it's a lifestyle. And for us, it's about thinking of them as platforms, right? How we staff them. Bingo Blitz has over 400 employees. How it staffed? How many people are working on so many different product features to engage users. And then how we engage with those consumers is really important. So I think there's a fundamental way that we operate live ops that is a bit differentiated. And in the fact that we have the Boost platform now, we're able to bring that much more content in the roadmap to consumers on a daily and weekly basis. I think, more strategically, we started to lay the framework in 2016 for expanding the new genres, right? We started off with casino theme games and we said we want to be a major player in casual and we're going to start to make those investments. And it started with Jelly Button and then came Wooga, Supertreat, Seriously. And now today 46% of our business is causal games. The casual portfolio is growing at 30% year-over-year. And the older franchises, the casino themed games are still growing at 12% year-over-year. And so it's really a tale of 2 portfolios, and it's about continuing to find those new genres in areas where we're investing in to continue to drive growth, and that's where M&A will come in, and it will continue to be a part of our business. Obviously, this last quarter we went above like, we refinanced $2.4 billion of debt. And now we're in a place where we have $1.5 billion of liquidity, $1.5 billion of cash on the balance sheet, $600 million in undrawn revolver, and we're going to be out in the M&A marketplace and feel good about the direction we're headed there. So M&A will always be important to us as a key accelerator of growth to continue to have those high levels of organic growth down the road. Because if you think about our platform, every time we bring a new title onto that platform, it strengthens the value of the overall platform. Because we have new feature and learnings in each additional game. And then how we can cross point those learnings. We're not necessarily sharing users, we actually don't move users around from game to game. We're just testing how we can move users game to game through cross marketing. And that's something we haven't really done, just like we have not been aggressive with advertising our games, sending users off to different games. It's really been about how do we give our users the best experience within that game and continue to provide them new and engaging content to grow those games. And so M&A, new game development and the continued organic push are really the 3 drivers that are going to drive us forward here over the next few years. And then eventually, also going beyond games, the idea that we're the best in live operations, and if you think about it, player segmentation, dynamic pricing, how we introduce content, the AI teams that we have, all of that knowhow really applies to any business that's sort of high velocity of transactions, in a high engagement level. And so I think, over time, as we make these game acquisitions, you'll continue to see us make other investments as well.

Okay. A couple of follow ups on M&A. The first one is sort of around ad net. There is -- I know this is one of the misperceptions that I sort of want to clear up a little bit. There's been some recent M&A in the industry around buying that network and other players out there have a first-party content in the network. One, talk to us about the level of technology you guys have on your ad network side? And how do you think about long-term building out sort of like a first-party business along with the third-party ad network to build a platform like that.

Sure. So 4 years ago, we came to the realization that we would need to centralize marketing in the company in terms of from a UA perspective. We have Aditor, which is our largest external media buyer. And today, we have over 90 media buyers. We bought various artificial intelligence businesses, the machine learning algorithms that they have, and now working with the media buying teams directly have greatly enhanced our ability to do UA. We bought an ad mediation platform just about 2 -- in the last 2 years. And so I think we were very early on in terms of a need to own our own technology. And I think when you think about Playtika, we don't rely on other third parties. We don't -- we've taken an early view, we're going to operate our own virtual cloud, we're going to have our own servers, we're not going to rely on someone else's cloud. We are going to have our own platform. We're going to bring customers on our own platform. We're going to have our remediation platform. And we've been making these investments. And so I think we've been very forward-thinking in that sense. Others may have a different strategy and how they're thinking about it now in terms of how they monetize via ads. We believe that in-app purchases are the highest quality revenue stream, right? If you look at our cohorts, longevity of them, if you look at our margins, like there's a lot of other gaming companies that are also 10 years old. And benchmark our margins versus their margins and we're best-in-class. And so you benchmark our growth rates organically, we're best-in-class. And so we think we've designed a business model through owned intellectual property, through long-lasting durable franchises in a live operations business model to where our employees and infrastructure is set up in like Eastern Europe and Israel. And put ourselves in a position to have industry-leading margins and making those technology investments to own our own technology. And so we continue to evaluate those things. We bought a new R&D studio last year as well. We're constantly making those investments. And so I think we've never been -- I think one of the issues that we need to manage, we've never been a PR, IR-oriented company. We've always been very focused on making the right business decisions. And we think we've had an advantage in the marketplace and to keep that advantage, we haven't really told our story. Obviously, as a public company now, we need to be better about telling our story. And there's a lot of stories in the marketplace now. And so I think, overtime, our results will be what differentiate us. And we'll just keep executing from that perspective.

Okay. That's super clear. IDFA, everyone's favorite 4 letters to talk about in the overall gaming and advertising ecosystem. So 2-part question around this. Number one, what have you sort of learned, so far, in the early days of IDFA, and sort of any impact on your business and then any ways to sort of being able to manage through? Then secondly, how do you think about IDFA potentially impacting the M&A landscape in mobile gaming?

Sure. So we haven't seen an impact yet from IDFA. About 10% of the iOS users have upgraded. Opt-in rates have been better than we expected. We're a little different in that. I think, 32% or 33% of our business is iOS. And then we're on other platforms. And so I think we have -- we're a little bit less exposed to Apple in that sense. Obviously, Apple is a key strategic partner, and a very important platform. We continue to make investments. I think we have very advanced models for UA, everything that we're doing, just talking to the CMO, Nir Korczak last week, I'm seeing no impact in terms of everything that we're doing from a UA perspective. And so I think when we gave our guidance for the year, we guided 38.5% margins to leave ourselves room to be more aggressive if opportunities come out. I think that's where the opportunity could be if people do cut back on marketing. Because they aren't as advanced in how they buy traffic and therefore, they cut back. M&A landscape, I think -- I don't know that things -- I think they're probably in the ad tech world, things are probably, maybe heating up more on the game publisher side. I'm not sure how much of an impact that's going to have for some of the more mature players that we might be looking at, at the very early stage folks, it might be harder for them to scale initially. And so there may be an impact there. But I think we're very well capitalized to take advantage of both the opportunity should they arise.

That's helpful. On the new game pipeline, I think you've -- we talked in the past about you have 7 or 8 new games in development now. First of all, potentially to come in 2022. Just talk to us sort of, philosophically, how you're thinking about genre focus of the new profile -- of the new games to come. And also, I'd love to hear about just sort of things you've learned from the studios you brought in about keys to launching and really ramping any new mobile game, successfully.

Sure. So historically, new game development was not part of Playtika's DNA. If you looked at Israel, there weren't a lot of other game companies. And so there wasn't that depth and product talent that you have in other markets. I think, over time, you've seen that a lot more game companies in Israel and that product talent being there. And through acquisitions, we bought teams, whose DNA was making new games. So Jelly Button is very successful making new games. Wooga has been very successful in new games. We've built studios in London, we repurposed our studio in Montreal. So we have a lot of studios now making new games where that DNA does exist. And we've guided to the marketplace that will have one new title by '22. We've communicated that all of our M&A efforts as well as investment efforts in terms of like new game development are focused on the casual genre. And I think, we're encouraged by the results we've seen to date. And we'll update the market when there's something to update, in terms of a broad launch. But I think the biggest advantage -- I look at it and Robert looks at it, as we talked about it, as we call it the accelerator internally because it's really about R&D, it's already in our P&L. People are working and developing new games today that are going to either develop that launch a new game that's going to be commercially viable or something that we can then leverage what they built on the Bodega Boost platform to then either pull a meta game or a specific feature that was novel tied to that game and bring it to other games in the portfolio. So I feel like it's a win-win for us, whether we do take it. And that's an advantage that we have, as a result of having the Boost platform.

Got it. Okay. I have one more. And then I have a couple in the queue. One of the common questions that we continue to get is been around iGaming and just sort of the long-term structural risk to mobile casino and mobile slots, if and when you actually get more legalized iGaming. So I'd love to hear kind of your perspective on that. What you've seen historically, and how you think about the risk to the long-term mobile casino gaming?

Sure. So we spend a lot of time on this, given, I used to be the CFO of Caesars Interactive. We were the first to launch Nevada and New Jersey. We did analysis with the same Caesars brand for real money in New Jersey, as we did on social. And when that ramped, we saw no impact to our social business. We reanalyzed it again when Pennsylvania launched and saw no impact. And I think at the end of the day, it's very different product offering. The mentality of someone going to play real money online gambling, it's playing to gamble and win or lose money. With our games, it's about competing on leaderboards, playing with your friends, unlocking new content. And when a player spends that money, it's about I want to get more content and get deeper into the game. They're not going to win or lose money. And I think the mentality of it is very different. And as we've seen markets open up, we just haven't seen any impact to our business. And if you look at where our casino business actually -- significant game business actually accelerated growth, this past quarter, and you're seeing a lot of new openings in the iGaming world as well. So don't see it as an opportunity for us. Don't see it as a threat. We kind of coexist alongside each other.

Okay. That's good perspective. All right. So one question, I have -- one from e-mail and one from each screen. The one in the panel actually comes back to the proprietary platform. The percentage of the business is proprietary. So just have to differentiate. So the question is, are there any features, benefits or incentives at lower costs, they are offering users to encourage them to move away from Apple or Android? And aside from that what are your marketing strategies to move more people toward the propitiatory platforms.

Sure. So will give -- I mean, specifics because it is a differentiator for us. I think, what I would say is there are opportunities to create and to give exclusive content or early features or other things of that nature on one platform over others. But, in general, it's the same marketing strategies that we use to drive people, whether it's the Facebook or iOS or Android from a marketing perspective, right? It's just different channels. And so there's nothing else really to talk through there. I think it's more of the fact that we've built these platforms and been kind of thoughtful about it in how we're executing on.

Okay. And then the other one is on the margins and the free cash flow. It's actually, it's one I had as well. But we're kindred spirits. You talked earlier before about your strong margin profile, really good free cash flow conversion. So I guess, just sort of the question is, philosophically, as you go over the next few years, how do you sort of -- how do you manage the difference between investing for growth in new games that might not be launched or scaled yet, as opposed to maintaining healthy margins in free cash flow, which is more important to the company?

Yes. For us, it's growth. We've been growth-focused from the start, but it's been at a margin. I think we have discipline. I think Robert has said early on, and we've agreed, we had TPG and Apollo ownership in the early days of our business. And it was about how do you run a business at a margin. And I think the discipline early on in the company's DNA, if it's not there, you'll just look for the easy growth. And it's easy to buy growth from marketing in our business, it's on the marketing side, and then you live off of that. And then it's very hard to ever cut back and still have the growth. We invested in technology and analytics to build out live operation. So we be better at driving conversion and monetization and retaining paying users for very long periods of time. And those investments actually provide sustainable growth. It's not just depending on marketing, and I think, you see it in our cohort data. So I think we found a way to organically grow. And now we can leverage that when we acquire businesses and help entrepreneurs and game studios grow, leveraging those synergies as well. So I think as we look at the trade-off, yes, there's some trade-off on the margins where we tend to go towards growth. But we've also focused on owning our own intellectual property. When you pay a third-party to license a brand of a game, there's a lot of margin that flows out when you're looking at in our purchases. So for us, it's been about owned intellectual property and managing game franchises that are going to be around for the next 20 years and making those investments in the form of content, right? Content is what drives people back. Marketing is part of bringing new users into the system. And it's an important piece. And I think what you'll see from us is that the daily paying user numbers will continue to drive and you'll see probably more flattish dollar numbers as -- for us, it's about managing the right customers in the system, right? We're constantly acquiring new customers, but it's rather right people in Tier 1 markets that are eventually going to convert. And so I think that's a little bit difference in our mentality, but the overall mantra is definitely growth.

Payers drive the money. Payers drive the revenue ultimately. So great. All right. Well, Craig, thank you so much for your time. We really appreciate it. You guys are off to a great start this year, and can't wait to see how the rest of the year unfolds.

Great. Thank you, Brian.

Thanks, Craig. Thank you, everyone.