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

Yes. I hear you perfectly well.

Okay. Well, I don't know. I'm just going to ask my second question, but maybe you want -- might try and...

We can repeat it, yes.

Yes. Sort of a little bit. So in terms of -- I guess my question is if growth is the main theme, and I love your answer, what would you say to investors that say, "Well, the best days of growth are behind us.?" We've had this growth in a number of mobile devices, and engagement levels are up. So how can we sort of underwrite that growth continuing for industry or for Playtika, yes.

Yes. So I mean, I think, for us, we continue to see high growth in our casual portfolio. We continue to see solid steady growth in our casino theme portfolio. And I think, as you look, going forward, when you think about key trends that are further driving growth, I think you're seeing more and more direct consumer relationships. And as we engage with our consumers directly, not only their margin benefits, but there's also that ability to drive further engagement in the platform. If you look at us today, around 20% of our revenue is on our own proprietary platforms. And I think we've guided in the past that, that could be as high as 30% in the future. So with that, you see a high margin and high growth as well from those consumers. And I think that is another positive trend that's happening. Obviously, there was interesting news on Friday from the Apple-Epic case, and I think that could provide even more tailwinds to that direct-to-consumer relationship. And so I think that's another positive trend. You're seeing, obviously, 5G, increased bandwidth, improved technology on handsets. Having a console in everyone's hand is going to result in better content, more engaged content with larger screens. And you've been seeing that trend for years, and you'll continue to see that driving growth. And then for us, it's Live Operations. I think for us, it's how do you take the consumer experience day 1 or day 7 and as exciting and engaging that is on day 90 or day 360, the consumer will be just as excited and just as engaged in our game. And 10 years later, how do you keep them tightly engaged? I mean, if you look at our business, on our 4 oldest titles, 45% of revenue is from the 11, 12 and 13 cohorts of users for those 4 oldest titles. And so having that much revenue coming from consumers that have been playing our games 8, 9, 10 years old is really a testament to how we're able to engage them through live ops.

That's great. So I think -- I can't remember the exact phrase you just used, but I think you made a reference to 5G putting a console in everyone's pocket. Is that the phrase that you used?

Yes.

Yes. I like that. How do you think about the risk, though, of -- the way I think about the world is that game developers will make a game that is robust enough to use up all of the processing power of the device, right? And so mobile games are sort of, by definition, simpler today than they are in the console/PC world. When this world sort of smashes together with 5G, where all of the processing is happening sort of not on the device, but in the cloud, how can an investor be confident that the simple games won't lose share with the more complicated games? Does that make sense?

Yes. So I mean, for our audience -- I think everyone goes after a different audience. Our audience is primarily an older female audience. The games that we go after are things like solitaire, things like hidden Objects, things like Match 3, things like bingo. These are games where our consumers have played them for 10, 20, 30 years in the off-line world in some examples. They're very engaged in the content, and we'll continue to make that content more engaging. We haven't made games that are first-person shooters or mid-core, hard-core games. Not to say that we wouldn't go there, but I think the game experiences that we acquire and build for mobile are tailored for that mobile experience, right? What's a 5-, 10-, 15-, 20-minute game experience that you want to play quickly on the go versus a much more deeply engaged experience that someone is playing on a VR headset or in front of a large TV at home? That's very different. And I think the audience that we have is a very sticky, loyal audience, and the genres that we select, I think, are selected very carefully, right? Or think about what are entertainment experiences that people are deeply engaged in that we can innovate on and through how we offer it through a mobile device. I think a great example of that is just the acquisition that we just did with Reworks and Redecor. They have a great product that is a nice blend between a design entertainment application and a game. And seeing that convergence happening in some of these other categories and taking advantage of that is a trend that we also expect to see in the future.

Okay. That's super helpful. When investors -- at least when you internally think about your top line growth algorithm, is there like a rule of thumb where you say this is the amount that we want from M&A. This is the amount that should come from brand-new games. These are sort of opportunities within our existing portfolio to enhance monetization? Or is it just much more sort of organic, and you just sort of see what opportunities are out there and how your games are developing and in maybe less dogmatic way?

Yes. Algorithm feels a little fancy, but we do have a framework that we think about the most. And the -- I think we're really differentiated in that organic growth has been a consistent growth driver for us, right? Historically, we didn't have new games driving growth. It was growing our organic franchises, and it was acquiring new great franchises that we can then grow. And so I think the formula has expanded to include new games with the acquisitions that we've done. The DNA of some of these studios is making new games, and they did come with pipelines of new games. And we just announced recently that Switchcraft is coming out in the fourth quarter, and we're also going to have another new game in 2022. I think all of this, we're going to give a lot more detail on December 6 at our Analyst Day that we're hosting in New York City. And I think you'll hear from us a lot more about our plans over the next 3 to 4 years in terms of what's driving growth, and so I don't want to spoil too much of that today. But it's definitely a combination of the organic growth, which is driving daily paying users and driving that ARPPU over time. The combination of the 2 really drives that organic growth, launching new titles, enduring new markets, and then we have M&A. And M&A for us, we've got 8 acquisitions over the last 10 years, is a key part of our strategy. The Boost technology platform we've built over the last few years really gives us an advantage in M&A when we acquire a studio in terms of really offering them the technology and tools to help grow their businesses post acquisition. So -- as well as help cross-pollinate learnings amidst our organic portfolio. And so both those things are real strategic benefits for us.

That's helpful. So some of the other firms that started out as sort of ad tech platforms has sort of moved into this sort of partnering with developers to help them publish their game. Is that something that -- would you sort of say your Boost platform is sort of in the same -- like, in theory, could do the same thing? And is that something that's interesting to you? Or you just really think about, no, we develop and publish. We don't really want to partner with people and use our Boost platform to publish someone else's game that was developed. Does that make sense?

Yes. Our primary focus is giving our consumers the best entertainment experience possible and our proprietary tools we've developed to use them in-house. We haven't looked at licensing with third parties. I think that is sort of our differentiator and advantage and want to keep those in-house. I think we are open -- whether we invest in a company, whether or not we give access to some tools, I think that's something we might be open to. But otherwise, it's really about keeping those tools internal. In terms of -- and I know you mentioned ad tech. I think we -- years ago, we realized the opportunity to build out ad tech internally, whether it was the acquisition of Aditor, where we acquired our -- a team, our CMO and a media buying team there; to technology where we acquired our mediation tools. So we do show ads. We don't have to use third-party mediation software and then numerous artificial intelligence acquisitions over the last few years as well to really enhance our processes around buying traffic. And so I think we've been very focused on M&A, not only for acquiring new studio content but also to acquire tools and teams to really help drive that organic growth, whether it be our R&D team in Eastern Europe to a piece of marketing technology.

Okay. Your payer conversion rates are good, high 2s, right? And we saw some sequential improvement. Do you think that sort of -- should investors think about that as sort of the ceiling that's like reasonable? Or are there opportunities to get those conversion rates up even more as you get more data and who gets larger and more effective?

That's a great question. People have been asking that question for the last 5 years. We've continued to drive that daily payer conversion. I think when we look at our portfolio today, having multiple titles over 4% really gives us the confidence that we can continue to drive the overall company there as well. And those continue -- those titles also continue to grow over time. And so I think as we think of payer conversion, we still feel like it's early days. If you ask me -- if you show me a business where only 2.8% of the users pay in a given day, how much upside is there to that experience, I believe there's a lot of upside, and then we're going to continue grow. And so live ops is our differentiator and core competency. And I think when we have a product feature that really helps drive conversion, we're going to leverage that throughout the portfolio and leverage it quickly using the platform. So I think we're going to continue to see that grow.

Okay. You mentioned earlier about these 8 acquisitions you've done over the last 7 years. When -- how should -- like if something comes across the table where you've made some sort of acquisition, how should investors sort of frame sort of the risk/reward for any sort of given deal? Is it something where you've done enough due diligence and have enough data where you know, a priori, this will probably be a good deal for you? Or is there always some risk that the game melts or something changes in the marketplace where what you thought was going to happen doesn't really pan out? Maybe just some historical context for maybe hits or misses in that list of 8 acquisitions.

Yes. So I think we've always been very thoughtful around genre selection, what are the categories we're going to enter and how sustainable are those categories, right? Are they hit-driven categories? Are the categories where you've seen games in that category last the test of time? And fundamentally, are the game characteristics in those categories, is there a community of users around those categories, right? So if you look at something like solitaire, solitaire has been played for 50-plus years, and people will continue to enjoy playing solitaire. And so how we've innovated on solitaire and have a passionate group of people around solitaire, they're now like playing solitaire with various meta games and collectibles and other things and tournaments down the road. It feels like there's a lot of things that can happen within that environment. And I think you've seen that with bingo and slots and categories that you'd think that there's only so much innovation that can happen, and we drive that innovation over time. I think in terms of what we're looking for is great teams of people that have made great products with consumer bases that are really engaged. And then the combination of those things, the genre, the games in, plus that team -- operating team, can they create a franchise that's going to be here 10 years from now and still growing? And that's kind of the lens we take when we approach something. And I think when we looked at something like -- and then also using Boost platform to grow. And I think when we looked at something like Reworks, which we just acquired, what we saw was a great team in a very interesting category that sort of blends design entertainment with games, and the opportunity to really bring our skill set around Boost to drive everything from basic things and games like level progression to a much more personalized entertainment -- entertaining experience for the consumers there. And also, the team there has great experience with other types of applications historically. And so I think in terms of also augmenting our future pipeline, there's also a lot of excitement there for us. Helsinki also is a hub for us now. We have a studio there with Seriously, so I think our second studio there is also great, tremendous gaming talent and technology talent in that city. And we're really excited to recently close on that.

That's great. So can you unpack that stake, that 80% stake or investment you made in Reworks? Like what is the asset that attracted you to Reworks? What is the genre? I think it's a brand-new category for you guys.

Yes. So Redecor is their game, an application. It is the #2 design entertainment application in the marketplace, and so I think we see it as an opportunity to go after that #1 spot. I think it's a game where -- it's an application, where, basically, it's almost like a contest you enter, where you design a room, and then other people vote on your design. And based on how you do in the voting, you can progress within the game and earn points. And so I think there's a lot of opportunity to go into whether it's fashion or other categories that are quite similar from an underlying game mechanic and application mechanic perspective. And I think it's -- if you look to the future, this integration of is it an application or an entertainment platform, or is it a game, we're able to gamify that application and really make the entertainment experience that much more engaging. Because I think what games do is they really give you a reason to come back and come back often. And so the better that we can be about taking entertainment experience and gamifying it, we're going to see better retention metrics and better engagement metrics.

Is there a logical sort of competitor to this genre or something that you sort of saw in the data that said, "Oh, wow, this category is really taking off," this decorating category?

Yes. I mean, if you look on [ Appian ], I mean, there's a host of other competitors in the space. There's probably 5 or 6 other companies in there. And so it is a category that others have been in for some time, but it's also one where if you think about, if you look on Pinterest, it's one of the top categories for people. If you look just in general search, it's one of the top categories. If you look at what's happening in our economy in terms of people remodeling and upgrading their homes right now, design is definitely a popular trend. The amount of television shows and reality shows dedicated to home design and flipping houses and those types of things, people really enjoy that, and not everyone can do that in real life, but you can do it on your phone as part of a game and have other people vote on your designs and see how you're doing.

That's great. So a lot of investors have been, I guess, a little bit surprised at the strength of just sort of the broader market. I assume some of those same sort of valuation dynamics have trickled down into the private market as well. Is that sort of a new impediment as you use your framework to sort of think about acquiring assets? Or do you think still seeing reasonably priced in the private market that isn't really an impediment for you as you actually execute on M&A?

Yes. No. I think if you look over the last few years, you've seen multiples continue to trickle up, and we've had to be very disciplined. I think as we look at valuations, recent comps are anywhere from 5 to 7x revenue. We recently acquired Reworks at 4x, a little over 4x revenue. So I think from that perspective, even though it's one of the more expensive transactions we've done in the company's history, it's definitely relative value to what we're seeing in terms of transactions done in the space. And we have an EBITDA earnout for the final 20%. If it's -- if the -- if EBITDA is over $10.3 million, we pay 6x up to a cap of $200 million. If EBITDA is less than that, we just pay $1 to acquire the remaining 20%. So I feel like it's a very good structure in terms of aligning us to really grow the business. There's a large new marketing commitment of $75 million to really invest in the asset and grow it. And there's a great team there, and it's our job to sort of maximize that earnout and go beyond it, and that's why there's a cap there. So we are already working with the team and really excited to make that game and application one of the biggest in home designs.

That's great. You talked about Switchcraft launching in the fourth quarter of this year. When you guys sort of are developing a game and have this prototype, what are the steps you take to sort of develop some confidence interval around what a game could be? And is it sort of an iterative process where you sort of might think it's X, and it launches, and it doesn't quite live up to expectations, but you find you can sort of tweak the game dynamics or whatever it is to sort of get it up to where you want? Or is it just inherently riskier than that when you launch a new game? Have there been failed games that you've launched, as an example, where you're very optimistic about a game and just never materialized in as much revenue as you thought prelaunch?

It's a good question. New game development for us is a new growth vector. It's one that, historically, we did not focus on new games. But I think as I mentioned earlier, through the acquisitions that we've done, acquiring great teams with great pipeline of games, we now have a robust pipeline. Switchcraft is a game that -- actually, it's not new. We had it in development when we acquired Wooga back in 2000 -- November '18. So it's a game that's been around for some time in development. There's a lot of content there, and the retention metrics just weren't ready to go live. But the team has been working very hard on tweaking the game and optimizing it, and there were some breakthroughs that really got the retention metrics to say, okay, this game is ready for launch. And I think some games, you realize that you can kind of tweak it until the game is ready. And some games are in the pipeline, and they end up not making it to commercial viability. I think because, on a go-forward basis, all of our games are built on the Boost platform, we're able to take a meta game or a feature from a game and apply it to other games so that even if something doesn't work out, there's still something that we salvage there in terms of the innovations that were in that game. And so we're very selective around the genres that we're picking and are very strategic in that sense. And having a narrative-based match 3 game and Wooga is amazing at anything that's story-driven, and so I think that it's going to be exciting for us. But it's just a part of -- another piece of the puzzle for us. It's about bringing those games out each year. It's about -- and hopefully driving them to be franchises. I think what we guided to was the idea -- when we green-light something, the idea is that it could be $100 million revenue game in 3 years. If that's possible, then it's going to get a green light from us. If we don't see it having that type of commercial viability, it's not going to get commercially lit.

I've heard that $100 million figure from others as well. Why is that sort of the magic number? Is it just because it's a round number? Or is there something that really undergirds that in terms of the revenue and sort of the ultimate duration of that game that sort of...

I think, for us, that's sort of the qualifier to get into the top 100 around there. And it's sort of as we envision when we greenlight a game, that's sort of our vision is going after something that's material and going to move the needle. And if it doesn't have that at our scale, our precious resources can drive more revenue in other games, right? If you think about it, if you could just add more content into June's Journey and have another 50 people working on June's Journey, how much can that drive revenue? And are we better off just using resources? So as we prioritize resources, it has to be -- when we're thinking about overall revenue growth and cash flow growth and creating original IP over time. And if we can't do that with a new title, then we'll use those resources, additional resources and use our capital efficiently to drive revenue and cash flow into our other existing titles.

That makes sense. So you recently announced that about 20% of your revenue is now sourced on your own platform, up from about 13% a year ago. And you've also suggested you think you can get that to 30% eventually. Is that just a pure financial goal that's just designed to get your sort of margins up? Or is there a strategic sort of angle to this? Or if you can get more of your revenue from your own platform, it confers some other benefits?

Yes. No, I think it's been strategic since day 1. If you look back 3, 4 years ago, when we started to really build out our own proprietary channels, it started with dot-com sites and then mobile websites and then our own proprietary Android store. And we were looking at how do we increase that opportunity to market in new channels, acquire customers in new channels, create that one-on-one relationship. And I think there was a view as a company was that we needed to have our own proprietary payment systems and direct relationships with consumers because we never knew in the future what could happen with platforms. Will they have rules that became overly onerous? Will they give us opportunities to link directly to our own payments? And I think as we're seeing with the news on Friday is that this day may have arrived, and we may be able to more directly drive consumers in the future directly to our own payment platforms. And so having that capability, having spent years kind of fine-tuning that experience and reducing friction, I think we're very good at it. And we're going to be very well positioned, should there be rule changes in the future to take advantage of those.

So can you talk a little bit more about that ruling that seem -- that Apple ruling that seem to certainly be a modest positive and maybe potentially a bigger positive for your firm? Can you just talk about what happened? And what you think it means from a [ pivotal ] point for your firm?

So I think it's a positive for mobile gaming and a positive for Playtika, and that, going forward, it seems like there's going to be more flexibility. But listen, it was 185-page ruling, and I'm not going to comment on other people's legal cases. So I think just reading the high-level terms in terms of what was asked by the courts to take place in December in terms of allowing folks to link to their own stores, we'll see what happens. But I think that is a step in the right direction. And how it ends up working on the end, I don't think we can comment on, but I definitely see it as a positive for us and one that we're uniquely positioned to take advantage of, should the rule changes happen.

That makes sense. So you guys have quite a large amount of liquidity. I think it's $1.4 billion of liquidity today. How do you think about the cadence of deploying that? Is that something where you feel like, "Well, we're not earning anything on the money. We should go put this money to work as long as there's good opportunities out there?" Or is it more, "Hey, some of these valuations are a little bit high, let's just keep our powder dry and wait until the market sort of normalizes," if you will?

Yes. So we've always been opportunistic. We'll be aggressive when we see the right strategic opportunity for us. Obviously, we've been disciplined around price, which has made it a little trickier in this environment. But as you see, I think Reworks gives great insight, a new transaction that we just did, and the valuation that we paid. So if you look historically, as a company, we've done 8 acquisitions now over the last 8 years or so. And the right cadence for us is probably around an acquisition a year historically, but that was before Boost. Now with Boost, I think probably 1 or 2 acquisitions a year is probably the right cadence as we have technology to help us integrate, technology to help drive new features and the acquired assets and the team dedicated to this. We used to have, if we go back 5, 6 years ago, we were pulling the best person in managing game economy, the best person in marketing, the best person at technology and bringing them to the acquired company and spending time thinking about how we can help grow their business and work with them. And now we have a technology team and a platform that can come and talk about what Boost brings and strategize around the best way to help augment the road map and grow the business, and it's much more scalable. And so while we have over $900 million in cash and a $600 million revolver, I think we are -- we'll be aggressive with where we see those opportunities, but we want to maintain that liquidity. So when opportunities come, we're well positioned to take advantage of them.

Okay. Can you talk a little bit about localization? Like what that means when you use that phrase? And sort of how it can manifest itself on the P&L?

Sure. So localization for us has been something that recently new, which is kind of surprising for a company that's 10 years old. I think we just had so many growth opportunities in front of us in Tier 1 English-speaking markets. we never really took the time to really look at localization seriously. And now that we are, we had Solitaire Grand Harvest last quarter, which was -- because it was an Austrian team we acquired -- or a game we acquired from Austria, they had already built the game out in German. So Germany was a great test market. But by truly localizing Live Operations, doing local television, working with a local influencer, localized customer support and having that 360-degree experience around the consumer, we drove Solitaire Grand Harvest to be a top 25 game in the market in Germany. So I think for us, it's a great testament and provides a road map for how we can do it and how we can replicate in other markets. And obviously, it's not as easy is just turning on performance marketing in a local market. It's really about that 360 approach to that market. And so I think there's upside as we look at Solitaire Grand Harvest in new markets. I think there's upside as we look at taking our other casual titles into the market, casino-themed titles to Germany as well. So I think, for us, it was a really exciting project and endeavor that we took on, and we can now go and extract some value there.

So you're not localizing the actual game itself? It's more about the influence or the customer support, the...

Oh, the game. So I think originally, different games are available in different languages, but there was no real localization that you're still seeing a Thanksgiving holiday promotion in Germany. So it's like how do you truly localize it where there's a -- we had -- we did there with [ Monika Booth ], who's our influencer, but going with someone who is famous in the country with TV ads, with localized customer support, promotions that actually are local and feel German. It's not just a U.S. promotion that's translated in German. So some of this stuff may be basics, but it's things that we just hadn't done and hadn't really executed on historically and now is real upside for us and so something we're excited about.

What -- is there a rule of thumb in terms of when you sort of go through this localization process, you sort of see X or Y uplift in the game's revenues? Or is it too early or...

I think it's early. I mean, I think what we saw was a pretty dramatic lift for that title. Obviously, Germany is one market relative to -- if you look at U.S. today, it's 71% of our revenue, and so it's going to take a few of these markets to really start to move the needle more materially. But I think having that case study and having that blueprint now go and execute in other markets is fantastic for us.

That makes a lot of sense. So you mentioned at the very beginning of our discussion that you didn't want to take the thunder away from that December 6 Investor Day. But do you mind just circling back to that and just giving us the buckets that you think investors should be -- can expect for you to address without giving the specifics?

Yes. No, absolutely. So December 6 is -- will be about a year since we went public. We went public January 15 of the year, so it's a great opportunity for Robert to give an update on the business. And so general update, really probably double-click on our growth vectors and where all the exciting things happening within Playtika. I think Live Operations and our Boost platform are areas where -- are real differentiators for us as a company, and it's important we articulate to investors just how different they are and really deep diving there. That will be important for us. We just acquired Reworks. And so giving an update on the Reworks acquisition and double-clicking there will be great for investors. Our new game pipeline. We got a lot of questions since announcing Switchcraft, what the rest of the pipeline looks like. So I think giving more visibility to that pipeline will be important; and lastly, giving updated financial guidance for '22 and beyond. It's -- will be a good mix of all that.

Okay. Growth vectors, differentiations of your firm vis-a-vis others and long-term financial guidance. All right. Super helpful. Well, this has been a great discussion. Craig, I really appreciate it. Thank you for the time.

Thank you for having us, Jason. It's great.

Yes, yes. All right. Be well. Thank you.

Okay.