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

Good morning, everybody, and welcome to our MKM 2021 Virtual Best Ideas Conference. I'm Eric Handler, media and entertainment analyst. I'm here today with Craig Abrahams, who is the CFO of Playtika. Good morning, Craig. Welcome.

Good morning, Eric. Thanks for having us.

All right. Let's jump right in. So let's talk big picture first. Playtika has an enviable organic growth track record over the last several years. A lot of credit has been given to the Boost tech platform. All of the large-scale mobile gaming companies have their own data analysis capabilities that people talk about. What separates Playtika and Boost from the other industry players?

Sure. Thanks for the question, Eric. We've always seen ourselves as a technology company since the beginning. And I think what we realized early on in our company's life cycle was that the business scales as we add additional titles to the portfolio as well as growing our existing titles. And when you grow your existing titles, a lot of the times, that growth comes as a result of increases in R&D head count and marketing dollars. But as you add new titles to the portfolio, and then you want to continue to add people, eventually, we realized that, one, the business model wouldn't necessarily scale effectively just adding people. And second, M&A was a big part of our strategy and still is. And when we acquire the companies, a lot of what we want to do is introduce some of the know-how that we have. And what we realized was instead of taking a consultative approach with every acquisition or every time we wanted to advise a product team on growth initiatives, it was taking people. And by building out a technology platform that we call Boost, we're really able to build a core set of feature sets. And a lot of the things that every game has to face, we wanted to build modules. So whether it's game economy management, how to buy media, how to introduce content on an ongoing basis, how you run a tournament, how you do a collectible album, so any number of features now, when successful in any one of our games that's built on Boost, we can then cross pollinate that feature to another title in the portfolio; or for an acquisition, let's say they need help with the game economy, we have a module for that. They need help how they -- introducing new content and rolling it out or site running hundreds of different segments or players with our player journey tool. And so there's a lot of different things that we can offer that takes -- one, it takes a lot of time in terms of introducing additional headcount to go build those features. And second, it enables us to have something that's perfectly configured and optimized when we bring in that future. And a great example of that is Bingo Teams earlier this year was an extremely successful feature that was taking Slotomania's clans, which was built on the Boost platform and bringing that in very nicely configured and optimized so that when we actually put it into Bingo, it was even more successful than it was in its initial iteration in Slotomania. And so there's a number of case studies with that, that really demonstrates the power of the Boost platform.

Great. Looking at some of your games. Solitaire Grand Harvest appears right now to be your fastest growing game. Revenue was up 45% year-over-year in the third quarter, and that followed 60% year-over-year growth in both the first and second quarters. What's occurred with this game to drive such a high level of growth? And can any of these learnings be transferred to any of your other games?

Absolutely. I think Solitaire is a great case study for us and that it came through the acquisition of Supertreat in 2018. It was a game that was relatively early stage. A small team in Austria was running it, and we saw the opportunity to partner with them. And what we ended up doing was acquiring the game, but the team stayed behind. They wanted to go on and make their next game as a team of serial entrepreneurs that have been very successful in the past. And what we did was they trained us over a 6-month period, and what we did was migrate the title from Austria to Israel. And the team that had -- operating the Solitaire game had never run a solitaire game before. They were a team of people throughout Playtika custom -- hand selected to basically go and run that game. And what we've seen is tremendous success, taking the know-how across all of our various disciplines in the company and really applying that growth. And what we've seen has just been tremendous. I mean, again, I think it comes back to our initial thoughts around genre selection. We saw the opportunity and solitaire really is a blank slate in terms of the lack of innovation in the space. And obviously, it's a category that's been very popular for a very long period of time in the off-line world and in the digital world. And I think one of the breakthroughs there was that the power of the meta game, which was a farming feature that was integrated, and we see the opportunity to do a lot and really scale that. And we've done that through various albums and new levels. That game is undergoing a transition now as we migrate to the Unity platform. But as I look to the back half of next year, we're very excited about the features that are coming there and expect to see very strong growth.

Okay. Speaking of some of the things you're doing with Solitaire Grand Harvest, it seems -- it sounds like you're making a number of infrastructure investments to several key games that did create a bit of a headwind in your third quarter results. What are some of these various infrastructure investments? What do they consist of? Why now? And what are the implications for these games going forward?

Sure. So we view all of our games as 10-year plus platforms, right? These are games where people are really passionate about the particular genre they play in the game. And we give our customers content on a daily and weekly basis that makes the entertainment experience as good on day 360 as it was the first day you played the game. And that's our -- one of our missions, is really to give our consumers kind of infinite ways to play throughout our portfolio. But what we see is, whether it's every 5 years or so, there's a need to upgrade the technology of the underlying platforms, right? These games, as you introduce that content and they get more and more technically complex as these products evolve over time, there's a need for that upgrade. I think the other type of upgrade there is, effectively a brand refresh, right? How do you completely reinvent the game to keep that consistent levels of engagement? And you're seeing that in a game like Bingo Blitz. Bingo Blitz is 10 years old and still growing very nicely and 1 of our top-performing titles. And I think the need to constantly reinvent yourself whether this quarter was revamping the bingo engine, over the next few quarters, you'll see a complete rebranding of the game. And I think that type of constant effort to push ourselves to keep these games fresh and exciting require sometimes some technological upgrades. I think if you look at Slotomania this quarter, it just wrapped up an 18-month technological upgrade. We had some other titles that we did a full revamp on, Caesars Casino, which was very successful. And I think that -- there's that constant need to do those upgrades. Now the challenge we have with 10 titles is that how do you balance those out throughout the year so that you're not having it where 1 quarter has more upgrades than it does new feature enhancements. And that's something that some quarters can be heavier than others, but in general, we do our best to try to spread that across the year.

Okay. So you just mentioned a couple of the social casino games. You had some softness with these titles in the third quarter. Was it a function of just being able to have -- having fewer live services events? Or there is a larger -- is there a larger structural issue playing out here as we emerge from the pandemic?

I think for the casino business, 2020 is a really tough year for comps. If you look at Q2 of last year, we saw pretty explosive growth for the casino portfolio and that faded out, strong growth as well in the third quarter, and then it seemed to normalize in the fourth quarter. So I think as you look at second quarter and third quarter comparables, you have tough comps. If you look back to 2019 and look at the ramp of that business, you're looking at -- and look at a CAGR for a 2-year perspective, you're looking at mid-single-digit growth across the portfolio. So I think you're still seeing that growth. I think the growth, obviously, is that of a more mature profile and then one that we expect to be in the single digits. So I think that it's more a question of the comparable period. I think next year, obviously, is a key year that people are going to look towards we envision growth. Just last week, we had our 2-day off-site for all of our GMs, and I saw the presentations for casino and very excited about the innovations that they planned for that portfolio and what's coming next year. So our anticipation is still growth throughout that portfolio. I think the industry has matured. It's been around now for 10-plus years, but again, very sticky cohorts of users. We look to the oldest cohorts from 2011, '12, '13. They still represent almost half the revenue for that business and very, very durable.

Okay. That does bring up an interesting point as you think about the business plan for some of these games. I have noticed some TV advertisements. I have a daughter that watches the Game Show Network on TV. You've done some TV ads with Penn & Teller for one of your games, Ty Pennington for another of your games. What are you finding with these sort of celebrity tie-ins with these games and actually, going the TV advertising route?

Sure. So a couple of years ago, we started to see -- well, more than a couple of years now, you've seen CPI trends go up for performance-based installs. And we saw the need to think outside the box in terms of how we're going to continue to acquire customers in an accretive manner. And what we saw was an opportunity to really run marketing from a 360-degree perspective as it relates to the consumer. So television, influencers, online, social media, all at once and really wrapping in that content from not just running TV ads but actually taking that content from TV and incorporating into the games. And you mentioned Penn & Teller. I think it's a very innovative example we just launched last week, which is we actually created episodic content within the game that consumers can unlock as they play through. And so now you actually have a series of content inside the game. So having, I think, the integration with celebrities, I think that's been around for a long time as it relates to run TV ads. But I think the idea of actually incorporating them into the game play, we've done it with the announcers of World Series of Poker. We've done it with a couple of other games as well. And I think that tie-in and integration has really given us a nice lift. And it's -- whether it's a promotion that lasts for a period of time, it's something that drives engagement. Then we move on to the next promotion. But I think we've got a bunch of fantastic partners we've been working with and expect to continue to do that. And we've also done it -- in terms of localization around our games, we did it in Germany with Solitaire Grand Harvest, and now we're looking at other localized influencers as well in key markets we're looking to launch in.

Yes. actually, along those lines, too, I have seen Solitaire Grand Harvest actually integrated within the weekday Jeopardy! programs. And I imagine that's a very high-profile type of promotion.

Yes. No, it's been fantastic and another great example of a tie-in.

Okay. You recently launched your first internally developed game in Switchcraft. How's that launch performed relative to expectations? And what's the plan to scale that game?

Sure. So Switchcraft is a game from our Wooga studio. It's a Match 3 narrative-driven game, a very diverse set of characters, a game we're very proud of. The game has been scaling very nicely. We continue to monitor that and focus on growth going into the first quarter of next year. I think everything is going as planned in terms of how we plan to scale that game, and I think we'll continue to push marketing dollars into that game in the first quarter of next year as CPIs sort of normalize a bit from the holiday season here in the fourth quarter. And then as we continue to drive LTVs and optimize the game, we'll continue to scale from there. So everything is on track from our perspective. And actually, a lot of the retention and monetization metrics are even ahead of where we anticipated before launch.

Great. You've also announced that there's 2 other new games in the development pipeline. What has accelerated their development schedule? And how do they fit within your portfolio?

Sure. So 2 weeks ago, we soft launched Merge Stories, which is a title from our Jelly Button studio in Israel. Very excited about that title. We've got great feedback from our platform partners and the -- also retention and monetization metrics have been very good thus far in soft launch. We anticipate a global launch in the second quarter of next year. It's sort of a build, battle, merge game. It's an interesting genre going after a new demographic that we think can be pretty broadly appealing and really excited about that. And then another title as well that we hope to talk more about at Analyst Day in early March that we plan to soft launch into next year. So from my perspective, really excited about the overall growth initiatives that we have planned going into '22. I think if I look back 6 months ago and I look to where we are today, the progress that we've made with both adding Redecor into the portfolio with the Reworks acquisition and now having 2 titles that will be in a global launch next year as well as a potential third title in soft launch and so much more advanced than I think we thought we'd be in 6 months ago. And a lot of those things, I think with the new game rollout, the cadence we had anticipated was about one game a year. But a game like Switchcraft, that game has been in development for 4 years, and it was getting to that -- to a point where it was optimized for a launch, getting those retention numbers to a place where everyone felt good about it. And same thing with Merged Stories, that game has been in development about 2 years. And so it's hard to say at times when those titles will be ready. It's being very patient and optimizing. I think they're going after big genres in terms of big opportunity. When we look at a genre, we're really thinking about can this be a $100 million a year title. And if so -- and it has the retention and monetization characters that make sense and a great product, we're going to soft launch that and then hopefully globally launch it.

And you just mentioned $100 million. Is that sort of like -- is that the goal for a game that as you -- in your development process, that's how you're thinking about scaling it?

I think that's the 3-year target in terms of is it worth taking out there, right? If it's not -- we don't see the market opportunity for that game is $100 million title, we're not going to green light it. And I think that's the mentality. I think we're very carefully selecting genres. We're very carefully analyzing what categories we're choosing to build games in. And then we have fantastic creative teams in all of our -- in a variety of our studios, whether it be in Berlin, in Helsinki, in London, in Montreal, in Tel Aviv and all of those studios are working on some fantastic concepts. And then when those concepts start to become reality and they're ready for a closed beta or a soft launch, then we really started looking into the data.

Okay. Now Reworks, that's your first post-IPO acquisition. What did you find so attractive with its Redecor game? And how are you thinking about the opportunity in not only scaling that title but also thinking beyond gaming with the app?

Sure. Reworks is an acquisition we're really excited about. Redecor is, right now, the #2 title within design entertainment. And design entertainment as a category, I think throughout the pandemic, is one where -- has done really well in terms of engagement. People have either wanted to redecorate their home or dream of redesigning their home, and this application really gives people an opportunity to compete in contest where they can redesign everything from a bathroom to a living room to their bedroom. And the idea that when we ask those consumers are you playing a game or an application, the majority of them say they're playing an application. And we see that application as something that can be completely gamified in terms of adding level progression, adding the idea of whether it be team-based or competitions or tournaments and the idea that we can bring all of our live ops know-how. We can -- we think we can dramatically increase retention, which drives LTVs, which means we can scale marketing. And with that, we can really drive growth in that game. And then I think as a category, if you look at [ Elk ] and the team there, their background was in coloring apps. The idea that you're basically redecorating this room is almost the same concept as a coloring app. And whether it's fashion or autos or a number of other areas that we create platforms for in the future that are very similar, we see that road map in the future. So I think there's a very nice road map for both Redecor in terms of creating a true design enthusiast platform. And then I think, over time, that can be -- the idea that you can reskin that into a number of other genres provides additional growth opportunities as well. So something in terms of a new growth vector for us. Extremely excited.

Well, as I think about that game, there's a lot of sponsorship or embedded advertising opportunities. That would seem to go well with that. You think of something like a Home Depot or a Lowe's or a furniture store. Does that -- would that help the game? Would it hinder the game? How do you think about these integrations?

So I think that our first priority is scaling the game, right, growing the audience, increasing the monetization, creating an opportunity to really add and deepen the entertainment experience so that we can increase that long-term retention. I think once we've done that and we have a large audience there, absolutely, you're right that there's opportunities in ads and e-commerce potentially down the road. I think our focus right now is how do we give consumers the best entertainment experience for design enthusiasts. And with that experience, that game will scale. And with that comes other commercial opportunities for revenue growth.

Yes. You guys have said you want to look at more acquisitions and you've got a very strong balance sheet and deep pockets now with a lot of dry powder. But there's a lot of companies in the industry right now, both public and private, that are flushed with cash, chasing acquisitions. How would you describe the state of the M&A market right now?

Sure. So the market is absolutely competitive. I think especially as you're looking at the traditional casual mobile game studios, we're seeing valuations in the private markets that don't necessarily match the public markets. I think where we see a lot of growth valuations are some of those more justified, and I think we're really excited about some of those opportunities. As we look to Israel, in particular, it's where we're headquartered. It's where, I think, we have a lot of deep relationships. There's a lot of innovation happening around the gaming ecosystem, and we're making investments there and in discussions that I think are interesting. I think as we look beyond Israel, there's a variety of other new verticals that we think are interesting as well. And so I think we plan to showcase a little bit more of our strategy in terms of where we're headed at Analyst Day in early March of next year, so excited to talk more about it then. But I think, from my perspective, if you're going to pay a higher multiple, it better be something that's more transformative and that it's going to continue to drive growth over the next 5 to 10 years. Paying a high multiple for something that doesn't create a bunch of equity value over the long run, I think is something we're going to avoid. So I think Reworks is a great example of something that we believe that we can further grow and transform that's going to create real equity value and drive cash flow over the long term. And I think those are the types of acquisitions we're going to look to do in this type of environment.

So I mean if you're going to do -- let's say, you go with more internal investments and you need to beef up your -- number of people you have, is it easy right now to find incremental people to hire around the world? And are you experiencing any type of wage inflation?

Sure. So it is a challenging environment from an HR perspective. I think in most key markets, I think what we're seeing is that there is some wage inflation in that salaries in some markets will be going up into next year, and it's absolutely competitive for great people. I think it's always been competitive for great people, but in this current environment, that is a challenge. So I don't think that's unique to us. I think it's a challenge for anyone in technology and media, and it's something that hopefully will sort of normalize over the next 2 years. But I think in the interim, we're doing everything that we can to retain our best talent.

Okay. When you look at some of your -- you've got multiple new games coming out. You've got Redecor, which is in the process of scaling. A lot of this happening in 2022. How will user acquisition spending impact margins next year? And should return to a positive growth trajectory be anticipated for margins in 2023?

Yes. So I think next year, you'll see a couple of unique things from us in terms of investment. I think the first one is in Reworks. Reworks has a large minimum marketing plan as part of that transaction to help scale that, and they're in an earn-out year, and we're there to support them for growth. You have multiple titles scaling and launching that are organic, both the Switchcraft and Merged Stories. So I think you'll see that as well. And then as we scale some R&D talent and some salary increases, I think you'll see some impact there as well. So I think next year, I feel very good about the top line growth. I think you'll see some impact overall on the margin side. We'll highlight our '22 and long-term forecast at Analyst Day and probably give the '22 forecast on our earnings at the end of the fourth quarter. So not too much more I can say there in terms of guidance, but I think there is -- as we invest in growth, you will see that impact the margins.

Okay. So then as we look ahead to 2022, what do you see as your biggest opportunities as well as your biggest concerns?

Next year is probably the year I'm probably most excited about in terms of the organic road map, in terms of both the casual portfolio and the casino-themed portfolio and a lot of the innovative stuff the teams have planned. So that is a key driver of our growth, continuing to drive organic growth throughout the portfolio. I think the second big thing we're excited about is Reworks and scaling that. And I think in the first quarter, you'll start to see us take over marketing and really help drive growth. I think come second quarter, you'll start to see some of the revenue synergies, the things we're doing with Boost. And I think the back half of the year, we'll expect to see a pickup in growth there. And then as we look to the new titles, scaling those as well into next year. So it's a year of pushing our newly developed titles. It's a year of pushing Reworks, and it's a year of driving growth across the portfolio organically. And then as always, looking at new business verticals and M&A is always going to be an augmenter to growth as it's been for us. And so I think what we plan to do on Analyst Day is give people a breakdown of that growth so they can understand where the contributors are coming from both next year and longer term.

And the biggest pitfalls that you want to avoid next year or concerns?

I think, obviously, the industry is concerned about IDFA and the CPI increases. I think we've navigated that pretty well and continue to push our diversified approach to integrated marketing around everything from off-line to influencers to performance-based and making adjustments where necessary. But I think next year is the year trying to compare a more normalized year to a more normalized year and citing the comparisons where we passed a lot of these tough COVID comps. So I think a lot of the headwinds that people have talked about this year will be past us. And hopefully, the environment around valuations in the private market starts to normalize a bit.

Okay. Well, I think we are just about out of time. I've exhausted my questions. So Craig, thank you so much for participating, and we look forward to your Analyst Day next year.

Good stuff. Thank you, Eric.

Thank you, Craig. Take care.