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

Hello. I am Doug Creutz, senior media and entertainment analyst here at TD Cowen. I'm pleased to have with me here today Craig Abrahams, Craig Abrahams, President and CFO of Playtika. Craig. Thanks for coming.

Thanks for having us.

Yes. So I guess we'll start. One of the highlights of your Q1 was you grew DTC revenue 13% year-over-year and 6% quarter-over-quarter, it also helped you grow gross margin to 110 basis points quarter-over-quarter. How do you accomplish that? Is it a function of driving the new players to the DTC platform? Or are you able to convert existing players over as well?

Sure. So our direct-to-consumer platform is a variety of channels that we use to allow customers to play directly on channels owned by us. I think if you look back at our history, going back to 2011, we started off on 10 different platforms around the world, and we always wanted our customers to play our games on any platform anywhere, any screen size, whether it be a tablet, a PC, mobile device. And I think we started investing 3 or 4 years ago in the direct-to-consumer channels to allow our customers to go to play with us directly. And so I think when you look at titles like Slotomania, World Series of Poker, BingoBlitz, some of the oldest titles, you'll see that we have very good penetration there. All 5 of the titles that are on direct-to-consumer today grew both sequentially and year-over-year. And I think when you look at how you convert those customers on whether it's a proprietary Android app or in a mobile web app or on the web itself, how do you have that pipeline flow such that the customer has the least amount of friction is extremely important. Just so everyone knows, when you're on Apple or Android, the customer makes a dollar payment. We pay $0.30 to Apple or Google. When it's on our own channel, we're paying $0.03 or $0.04 to the payment processors. So it's a significant advantage from a margin perspective and that allows us to invest in that direct relationship with those customers. And so we're constantly looking at ways to invest more there and grow those channels, both in terms of new customers coming to the platform as well as growing revenue with the existing customers. As we look to the road map for the rest of this year, we have both June's Journey and Solitaire Grand Harvest further launching their DTC initiatives, and we'll keep pushing there as well. So pretty exciting to us, pretty unique to us in terms of our overall penetration on direct-to-consumer. Historically, we've said that we have a 30% target in terms of where we want to get to, and we're starting to near that.

Yes. I think June's and Solitaire Grand Harvest to your third and fourth biggest titles by revenue. Like what kind of a ramp would you expect to see with those on DTC over time?

Sure. Well, we haven't given guidance there, but what I would say is that they will start out more slowly in that we're looking to maximize both organic traffic on platform as well as acquire new traffic off platform. And so we're pretty conservative in how we initially ramp that. But I think if you look and track our DTC revenues over time, you'll see that, that growth has been very consistent.

Talking about Solitaire and June's, they've been extremely successful acquisitions for the company. I think revenue from both came up about 4x to 5x since you acquired them. What would you say it's been about those games in particular that have made them successful acquisitions? And how does the experience there form your M&A priorities?

So just a bit of background in terms of M&A we're a little bit different than most game companies in that if you look at our top 10 titles today, 8 of them came through acquisitions, two of them were titles we developed ourselves. I think very early on, we realized that the video game industry is a hit-driven industry and developing new titles takes on risk as well as a lot of capital. What we found is that our expertise was in live operations and marketing, and we were able to find great products that we can then innovate on and leverage our monetization capabilities to grow top line. And in this business, 70% of that top line drops to the bottom line. And if in your own channel, you're looking at 96% to 97%. And so that's been our model that we've embraced going back to our first acquisition in 2012. We've done 11 acquisitions since then. I think if you look at that cohort of acquisitions kind of the '18, '19 time frame, Solitaire and June's Journey were both great acquisitions. In that they were categories that are evergreen in nature. June's Journey is a hidden object game, which is very similar to Where's Waldo, if you think of like the gameplay mechanic and going back historically. Solitaire is one of the oldest card games played by tens of millions every single day that was traditionally played as more of like a green screen Solitaire, where it's traditional Solitaire, where Solitaire Grand Harvest was innovative. It really laid out a meta game where people had a farming mechanic tied into Solitaire and there was progression. And I think what we saw is that our investment on live operations and investing in marketing there was able to grow us the #1 category leader, both in Solitaire and in an object. So today, when you look at our overall portfolio, 8 games in the top 100 in the United States, 5 of those games are #1 in the respective leadership category, including both June's and Solitaire.

More recently, you acquired Youda Games at Innplay. And how would you say those two studios fit in, in the context of the last question?

So we've always taken the approach that we want to invest in categories we believe are evergreen, games that have been being played in the offline world for 50-plus years that people are going to play in the online world for the next 20 or 30 years. That's always been our approach to gaming, not taking sort of the hit-driven risk around a game mechanic itself. I think when we looked at categories like Youda. Youda is in poker, we already have the #1 game in poker, World Series of Poker. They had a larger presence in Europe, and the ability to kind of grow there as well as our help on the live op side. What we've seen there is consistent growth since we acquired it and acquired at an attractive multiplier. And when we look at Innplay, it's a different style acquisition -- well let me just take a step back, just to wrap up on Youda. That transaction with a corporate carve-out of a public company, proprietary transactions, so I think it also shows our ability to kind of find assets hidden within large companies and just carve them out. Then when you look at Innplay, it's a very different type of asset. It was a growth business in Israel. Obviously, Playtika is based in Israel. We have good relationships there, have been tracking Animals & Coins, they're a leading game for some time, and that's an opportunity for us to significantly invest in marketing and scale that game. And we had good progression there as well. So two different types. One is more value-oriented, the other one more growth oriented, and it kind of plays to our overall portfolio approach.

When you're when you're approaching a target for M&A, I mean when I think about the video game industry M&A, typically, there is an upfront price and then generally, there's an earnout based on success. Obviously, you guys have had some very big success with studios you've acquired, I would think that might give you a competitive advantage in terms of talking to acquirers and saying, "Hey, look, like you've got the potential earnout. We've had a great track record of helping studio grow, you should come with us." Does that feel like that's a competitive advantage for you?

That is part of the pitch and part of what I believe that our competitive advantage is that we can help businesses grow more quickly being the part of the Playtika umbrella rather than on their own, and obviously, risk sharing through an earn-out is a way of doing that. It also helps mitigate our risk as well as maximize their upside and so that benefits both parties.

Talking about Social Casino for a minute. The performance there has been a bit challenging. You were down high single digits in '22 and '23, though the last few quarters trends seem to be getting better. Do you think that's a market segment that can get back to growth? And what will that take?

So when I look at the casino fee segment, specifically the slot themed games, it's a very competitive market, but what you do see is that there are a couple of the growing and taking share from others. And so I do think there's healthy competition. If you look back at our strategy in the last few years, we pulled back on marketing in those slot themed games to invest on casual titles as we're looking to grow those titles. And so some of that, I believe, is our own strategic decision and now looking at it, obviously, we've lost share. And now we need to defend that share. I think when you look at our last quarter and talking about increasing marketing in Slotomania and trying to stabilize Slotomania as well as the other slot titles. I think on us, there's a couple of things we need to do, invest further in product be more competitive there as well as invest more in marketing and gain back some share. So I do believe that we will stabilize that business and we'll make the appropriate investments. I think as you look at those businesses, you have to look at it kind of on a year-to-year basis. Quarterly, given the root gains road maps and strategic initiatives, it does take time. But I think as you look at trending year-over-year, you will see more stability in that segment. And I think that -- while that part of the business is more mature, I mean if you look at the rest of the business and the growth potential of the rest of the business it's the benefit of having a large portfolio.

Your revenue mix is around 70% U.S. and 30% rest of the world. Do you think there's room to expand the international contribution of your current portfolio? And what are some of the things you can do to achieve that?

So I think there's always room to expand internationally. If you look at the business we started with, it was mostly on casino themed games, mostly based in the U.S.. When you look at the overall business, we do focus more on Tier 1 markets. So U.S., Canada, Germany, U.K., Australia or certain -- are our top markets. And I think when we've done geo takeovers in places like Germany, in local language with local celebrities and influencers and TV campaigns, we have been successful there, and that's something that we'll continue to pursue. I think when you look at just how much of our business is domiciled in the U.S., it's hard to move the needle there. But I think we're always looking at further overseas expansion. I think Youda is another great example. You saw the bump up in the revenues as it came from Youda and their acquisition and their market share.

Is casino just more U.S. slanted in general? Or is that specific to your games?

I think we're swapping games, it definitely is more U.S. centric, when you look at poker, it is more of a global game.

What are the 2 or 3 things that you are focused on to get the company back to a more consistent growth trajectory? Is it just finding M&A targets and executing? Or there other things you can do?

As we mentioned earlier, M&A is a critical component in terms of levering on growth. When I look out in 2026, I think what will define our growth. We'll be looking at the acquisitions we did in '23, '24 or '25 in terms of layering on growth. So that is a key component, but also taking our core portfolio investing in marketing, driving efficiencies and expanding the portfolio through other strategic initiatives, I feel like is where our focus is. But in terms of where we're going to get the most return, it's definitely M&A. And I think when you look at our capital allocation strategy, we recently announced half of the free cash flow dedicated to M&A. So I think that's where we are differentiated for a lot of our competitors and that they're investing in new games, probably have lower margins as a result, they have a growth driver. We're taking -- we have higher margins, taking that free cash flow and investing in M&A.

How is the market for M&A right now? I mean, obviously, we've been through a period in the last couple of years where there's been a lot of layoffs in the industry. Mobile had to stretch there or it was growing, it does seem to have gotten back to your growth trajectory I think. So kind of just reported it was double-digit mobile growth in the U.S. in April. Is it an attractive marketplace are people looking for a home? Or is it getting more bubbly again?

I think 2021 was obviously a very bubbly year and that was a tough year to try and get deals done. I think since IDFA was passed and companies have seen more challenges growing via marketing. It's created more opportunities for M&A. And I think that's where last year, we were successful in two transactions. I think as we look forward, I think we still see it as an interesting market. I think we're well positioned and that we have $1 billion in cash in the balance sheet. We have a $600 million revolver, and if you look at most of the other competitors that were doing acquisitions, there's since been consolidation. And so a lot of them are now out of the market. If you look at some of the undercapitalized companies that are smaller, it's not as attractive a market to raise financing. And given the significant amount of free cash flow we generate every year, that helps us continue to be in a position to continue to do transactions.

There's been a lot of discussion about regulating, you mentioned Apple and Android, whether it's through allowing third-party app stores, creating other payment mechanisms, lowering take rates. I think Microsoft just said they're looking to create their own mobile app store and there's been some discussion that Sony may be moving in that direction as well. Obviously, a significant amount of your business is already DTC, but you still are driving a lot of revenue through the mobile app stores. Is this an area where you see the potential for improved economics over the next few years?