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

All right. I think we're going to go ahead and get started. Stephen Ju from the Credit Suisse Internet equity research team. Sitting across from me is Craig Abrahams, who's the CFO of Playtika. So welcome, great to see you in person. Thanks for coming.

Thanks for having us. Great to be here in person.

Awesome. All right. So let's kind of start at the top. I think Playtika, right, as an organization has been around for a decade. It's been a fairly long time. And you recently completed a public offering earlier this year. So for those investors that are a bit newer to the story, can you provide a little bit of the history and overview of the company?

Sure. So Playtika is an Israeli games and technology platform. We've been around since the company was founded in 2011 -- sorry, 2010 by Robert Antokol and Uri Shahak. Slotomania was our first game, first launched in 2011. Caesars Interactive acquired the business in 2011 and grew the business to be the biggest game company within the casual social casino games market. In 2016, sold it to Giant Interactive, which was a consortium of investors backed by Giant Interactive, which is a large games company based in China. And they gave us the mandate to be the biggest games company in the world and to go out and start with mobile and go from there. And we've since grown the business pretty dramatically, expanding the casual. Casual now represents 50% of our revenue. And we have 4,000 employees around the world today. And it's been a tremendous journey. And we went public in January of this year. And so it's been fun doing it on the public stage, although not so fun this last month.

Yes, I hear you, but I'm sure things will turn around.

Yes.

But I mean, I think we probably first met probably like almost 4 years ago now. And I think one of the things that we were astounded by was the organic growth rate of the company, especially relative to some of your peers. So to us, that suggested pretty strong stewardship of the underlying franchises there. So can you talk about what you might be doing differently versus some of the other mobile game publishers who might not have such a high organic growth rate, especially over the last decade?

Sure. So I think what differentiates us as a games company is our investment in technology and our focus on live operations. We realized early on that for these games to have very long life cycles, it was important to pick game genres that were effectively evergreen in nature, right, the kind of games that people have been playing in the real world for the last 50 years, that they're going to keep playing for the next 50 years. And that was the mindset in terms of the genres we selected. And then how we operate the games was really thinking of the games as a platform, right? How do you continually add to that games experience through additional meta games, through additional content, tournaments, team-based events, collectibles, all the things that can really drive engagement over very long periods of time? And then we realized in order to make that sustainable was how can you use technology, right? Because if it's just people developing products and sharing those learnings, that doesn't scale. But by developing the Boost Platform, we're able to do it in a way where when we have learnings around a product feature that really works, we can then cross-pollinate that feature to the rest of the portfolio. And so that's really been a key driver of organic growth. And so I think a differentiator for us is that over time, you'll see that we have consistent durable organic growth. Some of it is also by the fact that we were a first mover in a lot of these categories and have very strong early cohorts of users, which drive very strong retention and cash flow as a result.

Got it. You touched on this earlier, but beginning in 2016, Playtika started to foray a little bit more into the casual genre. So what made you decide that, that was the genre that you wanted to do?

Sure. So when we started off in the casino theme portfolio, whether it was poker or slot-themed games, these are games that have been around for a long time in the real world. And we're very careful of thinking about what other categories within casual would exhibit similar player characteristics. And we looked at things like Solitaire or hidden objects or Match 3 even at this time. Even though when Candy Crush came out 10-plus years ago, there was a Bejeweled Blitz probably 10 years before that, and so it wasn't necessarily a new game mechanic. But some new -- some game mechanics are short term in nature, right, and we see them spike. And there are categories that are more hit-driven in nature that we chose to stay away from. So we've been very careful in selecting game genres. And now we're even going into areas where we see broader entertainment trends like home design. Through the pandemic, home design has kind of gone through the roof with people redecorating their homes or even just wanting to explore in Pinterest or other places how to redesign their home. And now they're seeing them do it through applications, so whether it's redesigning a kitchen or bathroom or living room, people can compete with other people with those designs. And that effectively for us is a platform that needs to be gamified. And we know how to give level progression. And with that level progression provides higher levels of retention and LTVs and it will allow us to scale. I also think that in the long term, there's a model there for things like fashion or automotive or other ways where you can design effectively a scene. And so for us, it was a key opportunity to even explore the TAM even further beyond just casual games to other forms of entertainment.

Got you. You touched on the Playtika Boost platform as a key contributor to the success. And looking at it from the M&A front, though, right? So can you explain what this platform exactly does, allows you to do for the acquired studios that you might be looking at? And furthermore, if you can give us some like specific examples for some of the past acquisitions you brought it in and you fed it through the Boost platform, and it generated x amount of value. So if you can give us some tangible sort of like outputs in terms of what you've been able to achieve?

So with our early acquisitions, we took more of a consultative approach, right, the idea that you come in with a team, we'll bring an expert in media buying, an expert in monetization, an expert in UA and our expert in technology and bring them to the table and have a collaborative conversation of how we can drive synergies. And what we realized was that doesn't really scale, right? You're pulling people away from their day job, and they're now focusing on the acquisition. And while they're doing that, you can't do anything else. So we realized how do we centralize kind of that learning and that know-how was to build out all the key modules that we see around how you manage a game economy, which is critical to managing any game for long periods of time. How you introduce content? How do you personalize that content and run A/B testing, so that you're running hundreds if not thousands of segments within a particular game to personalize that game experience. If you have a feature set or a meta game, let's say for example, like a tournament feature or a collectible album feature, how that's built on the platform and optimized with the appropriate algorithms that when you introduce it into a new game, it had the same success that it did in the initial game. And so when we now acquire something like we did with Supertreat in 2019, what we did was there was a team of entrepreneurs in Austria that had created a fantastic game but they wanted to go on and build their next game. So what they did was migrate that game to us over a 6-month period of time, taught us how to run the game. They went on to go build another game. And we took the game and scaled it in Eastern Europe and in Israel. Today, it's the fastest-growing game in our portfolio. Just this last quarter, it was up 45% year-over-year. And a lot of the features that we have within that game are pulled directly from the Boost platform and how that game is managed is through the Boost platform as well. And so it's a great testament to the success of using that platform. And I think as we look to Reworks, that integration is underway, and hopefully will be done by the end of this year. We'll take over media buying for them in the first quarter, and then we'll start to see synergies in the second quarter of next year.

All right. I think it's probably important to remember, I guess, that a lot of these studios that you're looking at and partnering with or eventually acquiring, they are not like 200-people studios. I mean they probably don't have a data scientist or Chief Marketing Officer or even a Revenue Officer. So this is where that mechanized process comes in with Boost. And would you say that this is -- this has now become a key core competency for you guys? And I guess hopefully, this is sustainable, repeatable on a go-forward basis as well.

Yes, that clearly is our differentiator. It's clearly when you meet an entrepreneur, most of them are passionate about making games, right? They love the aspect of creating a great product. They love engaging their consumers with it. The idea of building back office tools to run 10 different segments on an A/B test for a new feature, or to understand how to rebalance the game economy, or to run like a specific campaign like those with a campaign manager that comes with it, they don't want to build that. They want to build features that consumers see. And so the idea that they can partner with someone like us and scale their business by leveraging Live-Ops and making more as partnering with us in an earnout than they could on a stand-alone basis is really intriguing and exciting. And that's been really the genesis for a lot of the transactions that we've done. So it's taken a long time to get here on that platform. We started building about 4 years ago. As we look at Slotomania and a lot of the older games where a lot of the monetization skills were honed, that game has been out for over 10 years. So this isn't something that can be replicated overnight. And I think that's where you see, if you were to benchmark any of our titles against some of its competitive titles and look at that core organic growth, you'll see that we outgrow them.

Okay. Got you. So let's talk about the last month and how you weren't having as much fun recently. So -- and let's address the recent sort of share price movement. So I mean you called out the headwinds in 2 particular titles, right, so World Series of Poker and Board Kings. On the first one, there were some feature delays. And I think on the latter, there were some management changes, right? So how have you dealt with these temporary setbacks? And how do you feel about the long-term prospects for both titles?

Sure. So I feel really good about the long-term prospects for both. Historically, if we go back, it's interesting because people don't have as long a memory as we do because we're a newly public company. But Bingo Blitz from 2014 to 2016 was pretty stagnant. The game was not growing. The game since 2016 has grown 4x. So I think we definitely have seen in times of our history that certain games stagnated for a period of time. There's a time to make management changes, or time to reassess the road map and realign it and drive it back to growth again. And so all games when you're thinking about 10-plus year franchises, go through some of these growing pains as a game studio. So I don't think there's anything there that's new to us as a company. I think the challenge of the World Series of Poker, we're missing a release deadline, and we'll get that out in the fourth quarter. We had a lot of infrastructure changes we're working on in Slotomania and Bingo Blitz, which had comparatively fewer new product releases as a result, which impacted results. And then Board Kings, obviously, we had to make some changes and they had some product features that didn't go so well. So I think that one will take a few quarters to get back on track. But I think that it's our 10th biggest game, and it's not a concern for us.

Okay. Got you. Now it does sound like by what you're saying, it's like mainly an issue of Live-Ops and sort of the cadence of the events and when they show up. So how do you feel like the pipeline of events across your entire portfolio on a go-forward basis, are your titles properly resourced at this point? And are there any -- do you anticipate having to make any sort of head count additions for R&D as we head into next year?

Yes, so we've been scaling R&D throughout the year, adding head count. I think as we go into next year, there are some teams that we're adding. But I think in general, we have a pretty good sense of our resourcing in terms of having the product teams. We have great road maps for next year. I just sat in the '22 reviews for all of the games and feel really excited about what's coming next year. I think as a public company now, we'll be better about appropriately resourcing and splitting titles out by quarter versus a lot of features. I think last year, we had a very large jump in the first quarter with a lot of features in the first quarter and comparatively fewer features in the back half of the year, so trying to be better about that. But I think overall for us, we view it as a great year. We started off the year expecting 3% growth off a tough comp, and now we're guiding to 8% growth over last year. And the casual portfolio is still growing at double digits. And so still, I think, if I think about strategically where we are today versus where we were 6 months ago, we got the Reworks acquisition done and very excited about what we can do with Redecor. We've announced that we have 2 new titles coming in the next -- one just launched, it was Switchcraft, one of which is Merge Stories, which is in soft launch and we're planning to launch globally in Q2. And then we also have another title planned for soft launch by year-end. And so strategically, we're in a situation where we're expecting to have one title in '22. We now have 2 titles launching in end of '21 and '22 with Switchcraft and Merge Stories, and then continuing to look at M&A opportunities as well. A lot of exciting stuff happening within our ecosystem and in Israel and making investments there as well, so an exciting time.

Yes. You touched on the pipeline there for a second. So looking beyond just this immediate quarter and longer term, like you said, you recently launched Switchcraft [ on Wooga ], right? And are there any sort of early indications or trends that you want to call out here? And are you looking to scale on user acquisition into the fourth quarter? Or are you going to pause and wait for the new year?

Yes. So for Switchcraft, we had anticipated only a small spend in the fourth quarter. Just given how expensive marketing is in this quarter, I think we're going to ramp that up into the first quarter. The results, from both a retention and monetization perspective, have been very good for that game. And so it's -- I'm very excited about what we're seeing. Same with Merge Stories in soft launch, very excited about the trends we're seeing in both the monetization and retention curve. So I think for us, while it's new as a public company for us now, launching games on this stage, we've always been very data-driven in our approach and very ROI-focused and looking at payback periods and scaling appropriately and optimizing those games. And so everything that we're seeing right now, we feel really good about. And we've guided that we're only greenlighting a new title when we see the potential for it to be $100 million run rate in 3 years. And I think we still feel like all of the games that we've put in soft launch are launched on that trajectory.

Got it. You just talked about Merge Stories also, and that's on a soft launch right now. So when a game is in soft launch for you guys, like what kind of KPIs do you need to see to -- before you are comfortable for turning the doors wide open for a full-on commercial launch?

Sure. We're very focused on day 1, day 2, day 7, day 30 retention numbers and really getting that right, seeing that the product is engaging. We focus more on monetization when the game is at scale. So it's really about getting that game where you're getting consumers to really fall in love with that game and their engagement with that game. And so that's our first order of priority. And then once we get beyond that, it starts to shift more from product to Live-Ops. And that's about how we scale it.

Okay. So you're watching up to day 30 in terms of retention rates. So I guess games minimum will spend at least 30 days in a soft launch phase, maybe even longer. So is there a typical time period where you might keep something in soft launch?

I mean soft launch, I mean, I think about Switchcraft and Merge Stories, you're thinking about anywhere from 3 to 6 months in soft launch. But our global launches are a bit different than others in that we're not spending blitzes of large amounts of marketing until the game's sort of ready for that or we're in a period where we ramp consistently. I mean a good approach would be if anyone wants to look at the history of Solitaire Grand Harvest over the last 3 years. Today it's our fastest-growing game, but it's been consistently growing quarter after quarter as we make investments and tweak and optimize. It's never been something that we just throw $50 million, $100 million in marketing at, hoping to get it spike and then watching it drift down. It's like we think about building. We're here to build a 10-year franchise. If we're building a 10-year franchise, we're going to do it in a very responsible way where we have an ROI that makes sense.

Got it. Versus what might have been in the case at the time of the IPO, the pipeline for new releases seems to have accelerated, right? And with a new title this year potentially, maybe 2 next year, how does this change your outlook over the longer term in terms of the pipeline? Or are you still pretty comfortable launching and developing new games? And should investors be thinking maybe that 1 to 2, almost every year on a go-forward basis?

Yes, I think a title a year has been our historical plan about how we think about it. Obviously, that's moved up with some of the games that actually have performed better than we expected and to have the metrics to just going live. I think for us, we have organic growth, and then we're going to layer in new games, we're going to layer in M&A to drive that additional growth. And I think part of our Analyst Day beginning of March is going to be to lay out that long-term growth profile and where we expect to see growth both organically and inorganically on a go-forward basis. And so I think that will be an important walk-through as a new public company, so people get that understanding.

Got it. At this point, if there's any questions in the audience, feel free to. If not, I'll just keep pressing. All right, no takers. All right, so we'll keep going. So on the M&A front, you've been pretty successful executing the M&A strategy throughout the entire history of the company. Now you recently closed the acquisition of Reworks and Redecor. So in terms of plugging that into the Boost platform, right, so you previously did not really have a design game, right? But you touched on this earlier, like what kind of learnings or events are you thinking of in terms of cross-pollinating into what is effectively a new genre? Is it all that different?

Yes, I think what we've seen with each additional new genre we've entered is that it's not that different, right? How a game is managed from the perspective of managing a game economy, right? How you dynamically price something for consumers based on the level they're at and as they progress through the game? How you get people to want to compete with each other? How do they get people to partner with each other? Like it's a lot of the same themes. And I think what we saw that was so exciting with Reworks was that if you -- we did a survey to those customers. And 75% of the people that play that game identified it as an application and not as a game. And when you look at it today and even the app developers, their history is making apps, not games at Reworks, Ilkka and his team. So I think when you look at the opportunity there to really increase long-term retention, it's how do you gamify it. And that's what we know how to do best is really gamify something. So the idea that we had level progression, there's a reason to keep coming back to extend on that experience. And I think there's a lot of things that -- the game economy, how do we improve on that? How do we do marketing the way that Playtika does marketing? They were buying from just a few number of sources with a very small team. You take it to a big team that buys from a variety of sources. So there are so many ways to drive synergies there. It was for us an amazing opportunity to get that. And then second, we see a real road map there of other opportunities beyond just design entertainment.

Yes. Now we talk about what learnings Playtika have had in its history and exporting that to newly acquired properties, whether gaming or otherwise. Like what do you think you can learn from Reworks, right? Is there something that you can pull away in terms of like learnings from what they're doing well?

Yes, so we've learned from every acquisition. And I think if I look at Wooga and their story-driven games, we've learned a ton about how they're operating. And they've -- they're in Berlin and operate a little more autonomously than some other studios. If you look at Seriously and how they've done off-line marketing, we learned a ton. And actually, they are the driver of us experimenting more with off-line marketing and now being much more aggressive with podcast, with influencers, with TV campaigns. And so I think with every acquisition, there's something there. I think here, it was really one of they have a lot of really engaged consumers that love the platform. And how they manage that consumer base and how they monetize that consumer base, it was a bit different. And there was a mutual learning of how their business model works and how we can help them. And with every acquisition, a key component is not only what we can bring to them, but what we can take away. And every additional game that we bring onto the Boost platform, the rest of the portfolio can benefit from. And that's a huge advantage for us. The platform becomes that much more powerful with that many more applications on the platform.

Yes. I think when you -- not -- I don't want to put words in your mouth, but when you -- and Robert, I think, talked about Redecor, it's not necessarily a game per se, but it's really an app, right? And I think this was at the time of the IPO, you guys were talking about the opportunity beyond games, right? So should we think about this particular game as sort of the line in the sand in terms of your foray into other genres, other forms of entertainment, right? Is this directionally where things are headed?

I think it's proving out this hypothesis that we can grow and gamify app entertainment experiences like a game to grow engagement, retention. And therefore monetization is a game changer for us. And so I think this is the first step in that direction. I also think there's a lot of other interesting game categories that we're either not in or there's white space where there's limited competition. And so there's still a lot of other categories we're excited about, but this for us is an important one strategically.

Okay. Got it. Okay. And I think you mentioned at the -- this was -- this might have been a couple of quarters ago in terms of the M&A landscape, right? So with what Apple has done with the deprecation of IDFA, some of the maybe smaller developers are probably encountering greater problems in terms of user acquisition and general management of their business. So with that happening, have you seen some general M&A market start to cool down a little bit? Or is it still kind of where it was before?

Yes, so I think we've seen some interesting opportunities. We're based in Israel. That's where a lot of the sort of business development and corporate development efforts are focused right now. I think that's a place where we have differentiation in terms of presence and relationships. I think this in the market is disconnected right now, right? The private markets are much more expensive than the public markets. And that's the time period that we're in. Will it last? Who knows? But I think we've been very creative over time to do very accretive deals given how much synergies that we can drive. And I think that will continue. And we're continuing to look at interesting categories that we believe can transform the business so that our portfolio of games 5 years from now has a high-growth portfolio. Just like the portfolio that we put together over the last 4 years is today our high-growth pool. And so we still have that same mindset. I think we're just looking in a lot of different directions right now because there's a lot of exciting things within games happening and trying to make investments and pick the horses that we want in the areas that we want to make our investments in.

Got it. The unavoidable topic of -- and I kind of touched on this on the prior question, but Apple and the deprecation of IDFA, right? So what was the impact on Playtika, if at all, right? And what have you done to adapt so far?

Sure. So we're a little bit different than a lot of other game developers, in that 97% of our revenue is in-app purchases, 3% is revenue. So from a top line perspective, there's a muted impact. From a UA perspective, we're a little differentiated in that we buy from such a wide variety of sources. We weren't overly dependent on any one. And so we're pretty nimble when it comes to reallocating budgets. We've made commentary that we've shifted more budget to Android, more budget to ad networks away from social networks. And in the end, we did a lot more off-line campaigns, TV and influencers that ended up driving an effective CPA that's been flat the last couple of quarters. So we haven't seen an impact from that perspective. I think the other big differentiator that we have is that 22% of our revenue is from our own proprietary platforms, both web and mobile. So those are consumers that buy directly through us. We pay a 3% to 4% payment processing fee. We're not paying a 30% platform fee. And in those channels, we own that consumer relationship, whether it's on Android or on web outside of iOS. And so that for us has also been something that helps further insulate us.

Got it. You mentioned 22% of the platform is -- the revenue is coming from your own platform. What have you done over the years to incentivize the consumers to -- so you can establish that direct paying relationship with them as opposed to having them filter through [indiscernible], yes.

Yes. So we started off on every platform. So I think a mindset that we had wasn't just a mobile-first strategy. It started off we were on [indiscernible] and Facebook. And then we started expanding to -- at one point, I remember we're on 14, 15 different networks. Now the majority of the revenue is centered between iOS, Android, Facebook, Amazon and our own platforms, and it's really consolidated. But I think that mentality and mindset and muscle memory of being able to operate on websites and on mobile websites and having games that were built with stand-alone websites. We just revamped in the first quarter this year, BingoBlitz.com on mobile web and web, and we saw a pretty dramatic pickup in terms of proprietary platform. And so for us now, it's giving consumers choice, right? They have a game experience that is almost the same as playing it on an iOS device or an Android device and a web browser. So they have the option to play there. And then we have a lot of consumer relationships that were before they were playing on mobile, right? They're playing on web initially, and then you're able to market directly to those folks that can play with us in these channels. And so I think we have a variety of tools that's allowed us to do that. And then we'll see what happens with Apple here go forward come December with the Epic-Apple lawsuit.

Yes. Got you. Now I think we only have a couple of minutes left. So let's fast forward a year, and once again we're sitting here, right? And what do you think we're going to be talking about in terms of what you've been able to accomplish throughout the trailing 12 months?

Sure. So I think next year is a big year for us to prove out organic growth and continue to execute. Obviously, we had tough comps last year with the big jump in Q2 and Q3, which made for more difficult comps, but obviously still showing good organic growth. So I think that is a key component that we need to execute on. I think the second thing I'm really excited about is Reworks and the synergies there and proving that out. I think it shows that we can gamify an application and really open up a new addressable market from an M&A perspective. So that's really exciting for us. I think proving out new games, new games, we don't have a track record there, given it wasn't really part of our history. But we acquired great game studios that have been very effective at launching new games. And with a couple of games being launched by the end of next year, we'll have good visibility as to the success for at least for 2 of them. So that's really exciting as well. And then other M&A opportunities, investments as well as acquisitions and executing there and having a story to tell. So I think a lot happening, exciting time for us. Obviously, a difficult environment from a public market perspective. But we've been with this business for 10 years now, and for us it's just another year for us to execute and grow.

Got you. And with that, we are out of time. Well, thanks very much. Yes.

Thank you.