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

All right. Well, thanks very much for joining us this morning. I'm Colin Sebastian, Internet and Interactive Entertainment analyst here at Baird. And we're very pleased to have with us Playtika, Craig Abrahams, who is President and CFO. Got the title right?

Yes.

And Playtika, for those who may be less familiar is the global leading pure-play mobile game company with legacy strength in social casino and then also a nicely growing casual games business. And so we'll get into the different segments of the business and what we think has been certainly now a really good opportunity.

So Craig, maybe just to start off here, helping us with some background on the company, but what would you say are some of the things that are maybe least understood or even misunderstood about Playtika?

Sure. It's great to be here. Thanks for having us. if I think about what's most underappreciated about Playtika, it's probably our overall corporate brand awareness for a company that is a leader in the mobile gaming industry with $2.5 billion in revenue over $400 million in free cash flow, 8 titles in the top 100 last year, 7 titles generating over $100 million in revenue; 5 titles #1 in the respect of genre. Given all that and given our lack of brand awareness, granted we operate games under a variety of studios under Playtika that we've acquired. I think we're very well differentiated by the fact that M&A has been our path to growth since the company was founded back in 2011. I think part of the reason why the company is probably less well known is that it was acquired by Caesars Interactive Entertainment just a year after its founding. So it wasn't a company that had a variety of high-profile funding rounds. It was a company that when it was acquired by Caesars, it was sort of buried within Caesars through 2016. And when that business was sold in 2016, it was held private until we went public in 2021. And so that was really the first time we went back out to tell our story again. And at that point, the company was much more diversified, focusing on casual as our path to growth. But in an IPO window that had thousands of companies going public, then it was obviously harder to break through the noise. And then within a year, we're actually doing alternatives and stop doing Investor Relations. And so after almost 2 years of being off the IR circuit, it's great to be back here and retelling our story. In terms of what really differentiates us from other mobile game companies, I think live operations is clearly our skill set. 98% of our revenue comes from in-app purchases, only 2% from advertising. Our games are free to play. And when those consumers engage and start to pay within the game, they stick around for a very long period of time, and we have games that have development to becoming franchises and many of them are almost 10 years old at this point. We operate in game categories where people have been playing them in the real world for 20, 30, 40 years, and they're going to play them online for the next 20 years. If you look at some of our top genres who are #1, you have bingo, slots, poker, solitaire, hidden objects -- hidden objects to be like Where's Waldo. It's the idea that you're finding a missing object on the screen. It's game categories that, again, people like game mechanic isn't hit driven. It's something that people are very familiar with. And therefore, they stand the test of time. I think the second piece that really differentiates us. I'm sure we'll talk about it a bit it's a direct-to-consumer business and the fact that 26% of our revenue is to customers directly rather than through the platforms. That business is grown 13% year-over-year this last quarter, up sequentially. All of the big titles have grown sequentially and year-over-year this past quarter and some very good progression there as well. So happy to talk more about the company. I've been with the company going back to when Caesars acquired it back in 2011, and it's been an amazing experience.

Great. That's very helpful. I think there's been a lot of attention on the mobile game industry over the last couple of years. As you guys were looking at strategic alternatives and some of the games have faced certain challenges. Would be curious to know how much of your business and the performance of the games are related to call them, industry level factors versus company or game-specific factors? And how much is in your control versus how much is related to smartphone or other industry trends?

Sure. So we focus on Tier 1 markets, U.S. being clearly the biggest market, followed by markets like Canada, U.K., Germany, Australia and we're focused on driving awareness through offline and online campaigns to further build our brands. I think we've seen -- if you look back to 2021, obviously, during COVID lockdowns in 2020, 2021, our business dramatically benefited from that. So that was an external factor economically that impacted us in a positive way. Given the iPhone was developed in 2009, and this business was formed in 2011, we never saw a real recession to give commentary on that. But I do believe that video games and specifically mobile gaming is a low-cost form of entertainment that people can play on the go. And as people look at their discretionary budgets of am I going to take a vacation or go to a casino or do a variety of other leisure activities, this is a relatively low-cost form of entertainment and that people will continue to engage. And I think because it's a business where your best consumers are the ones paying to play these games, it becomes a social part of their lifestyle that they're competing with friends. They're playing against terms -- against friends, they're meeting other people via the games. And so all those social factors are the glue that tie people into those games. And so I think quarter-to-quarter, you see volatility based on product road maps. And I think over time, you see if you look at the business annually, you see much more stable trends. I think the industry as a whole is a slower growth industry, but I do believe that mobile is the de facto platform for people to play games, much more so than PC and console. If you look at people -- they're much more tied to their phones than they were 10 years ago, right? It's become the device that people do everything with. They work with, they play with, they entertain with. So I think that is, for us, a key platform. So I think the last piece that you probably want to ask about is the marketing component and changes the platforms have made specifically as it relates to privacy and Apple's changes. And obviously, that has made it more challenging to target consumers and therefore the cost of acquisition has gone up. And we can talk about that more later, but players of scale are able to navigate that more easily than players that are subscale.

How do you evaluate -- a couple of follow-ups from that? How do you evaluate the growth of the industry maybe because of some of those factors, but also on phones, there is so much competition for time. And obviously, social media is a big part of that. I mean is this an industry that continue -- can continue to grow year in and year out despite those competitive factors?

Yes. I think what we've seen is that there's been consolidation over time. So there's fewer players in the top 100 than they were previously but you continue to see certain titles breakout where people are investing significant marketing sums and driving revenue growth. I think you see the players like ourselves and others that have been around for a long time, have a much more stable business in terms of their presence in the top 100. And it's a business where I think you will see growth, but it's a -- there's a -- depending on the genre that you're in, there's market share wars like in the casino theme games. It is a very competitive market where people are fighting out for market share and other opportunities. It's a little bit more of an open space for growth. And I think that's why historically, we've pivoted more of our marketing dollars towards casual and invested there. That's been a higher growth opportunity for us.

And then you talked about the value for consumers of mobile games and one of the bigger topics at this conference, as you can imagine, is the health of the consumer. So is your view that if consumer spending does come under some pressure that games or mobile games, in particular, would perform relatively well in that environment, somewhat countercyclical.

We believe so. I think if you were to look back at video games as a category during the last recession, I think they performed quite well. I don't think there's another data point that I can point to since kind of 2008 because as I mentioned, mobile games did not exist in its current form. But I think if you look at the cohorts of customers that were acquired over the last 10 years and how deeply they engaged over time, it's a key part of their lifestyle. And so playing games as a form of entertainment, especially in difficult times. As we saw during COVID, it was actually increased engagement. So I don't think we have a clear sense of exactly how we perform in a tough market. I think in terms of recent times, Q1 was a good quarter for us. I think because we focus on Tier 1 markets where we get the best ROI, mostly English speaking, that's what we're most exposed to. And so I think from that perspective, the consumer is healthy in that sense. But I do think that there's volatility based on road maps. So quarter-to-quarter, expect to see some of that. But over time, we expect that the market will hold up.

Great. So maybe digging in more to the company specifically I guess it might be helpful to talk about as a leader in the mobile gaming space. What -- and you touched on some of this, but what sets the company apart from your competitors? And I guess some of that is related to your technology capabilities. So if you could touch on some of the engineering and technology focus of the company.

Sure. I'll do that. I think I step back though and look at just the overall portfolio. If you look at the 8 titles in the top 100 that diversification, I think, is a differentiation. It allows us to invest in the highest returning games. And so if we're seeing that one game may not have ROIs effective, we can reinvest in other titles. So I do think that is an advantage in itself. I think what differentiates us is that we didn't focus on a pipeline of new games as our means of growth. We went out and found the best products in the marketplace and the genres that we believe will be around for the next 20 years, and we went after them via acquisitions. We felt that, that was a better model for us, given our expertise as you mentioned, in technology, in live operations, in-performance marketing, buy a great product, you've already -- it's already proven in the marketplace. You're not taking hit-driven risk, right? The product is already been adopted by the consumers. And what we are doing is supercharging their growth via live operations, which is how you provide entertainment for the consumer on a daily basis, right? What promotions are they seeing? What new content are they seeing? How is the economy priced? How are the promotions priced. All of that goes into the daily entertainment that the customer sees. And when you're good at live operations, you're converting non-payers to payers. And those payers drop in at a 70% margin, right? It's the take rate of Google and Apple of 30% now because 26% of our revenue is on our own platform, we keep 96% or 97% of that revenue. And so there's margin uplift opportunities as we continue to increase that penetration of our own platforms.

And I think part of the strategy is leveraging the live ops and obviously, you do a lot around the customer acquisition but keeping those more loyal gamers engaged. What sort of -- from a product side and then maybe just visibility what gives you sort of the confidence that those games, that those users are going to remain engaged. What's the formula?

Yes. So I think a great case study on that would be something like Bingo Blitz. Bingo Blitz is a title that we acquired back in 2012. It had times of its period of stagnation. We put that on television through various campaigns. I'm sure you've probably seen the commercials now withdrew very more on all the time, but there's been a variety of celebrities along the way where we've integrated them into the game as well as brought it on TV to raise brand awareness and reinvent these games. We don't create sequels, per se, the new content shows up in the game and the game mechanics are evergreen and that people in that example, that love bingo, it's the largest bingo game in the world. And so I think for us, the reinvention has come through and actually IDFA pushed us to be more creative and do more offline campaign and rebuild those brands, which in turn helps the performance marketing as well as we raise brand awareness. And so I think that's probably been the biggest thing we've done in terms of reinvention. Initially, it was all performance marketing and online and over time, now it's a healthy mix of off-line and online.

So you mentioned IDFA. So looking at this post IDFA world and pre cookie deprecation world. What is sort of the right formula in customer acquisition and retention? You mentioned offline marketing, but I assume there's still a fair bit of online marketing as well and then promotions within games to really drive that engagement? What are you guys finding works the best?

Yes. So the lion's share of the marketing is still performance-based marketing. That is on mobile, how we drive the highest quality customers and target them in the Tier 1 markets. I think ad tech continues to innovate. And I think those innovations will help make it easier to target consumers. We've been leveraging our own proprietary AI tools as well as third parties to be better organized in terms of how our media buyers can quickly see which channels are working and which aren't and therefore reallocate budgets. We're constantly looking at which games we're allocating marketing to and how to shift budgets based on where the returns are the highest. And so having the portfolio diversification definitely puts us in a place where we can help navigate a more challenging market. But absolutely, over the last few years, we've seen because the cost of installs is going up, and in some examples, it's less targeted. So the revenue per customer isn't as high as it was before. And so you're seeing effectively a lower return on investment. So it's -- you've seen some of the margin impact on the industry as a result. This year, when we gave our guidance, we noted that we're going to spend more and more dollars in marketing across the portfolio as well as we invest in a growth title like Animals & Coins and in [ Where's Warren ] if they like Slotomania and so there's definitely more marketing there. I think as a player of scale, though, we have the benefit of all the cash flow that we generate to reinvest there as well as to invest in M&A and continue to grow. And so I think if you are a start-up or a new game, it is much more challenging to scale. I think that's why just a couple of years back, we announced that we were no longer developing new games, and we're going to put the pipeline on hold as we focused on M&A and run a corporate for it.

And for those in the room, there is an e-mail address on the table. If you have any questions, feel free to plug those in, and I will ask on your behalf. So maybe following up on some of that strategy? And I mean, you've mentioned obviously M&A. Could you first, maybe, first of all, talk about organic growth versus inorganic growth and then how you see the mix internally between the casino and the casual games trending over time?

Sure. So organic growth is coming from us, focusing on driving both marketing and new product features to grow our existing game portfolio. I think as you look at the maturity of the industry, it's become clear to us that we need to continue to be a consolidator that the majority of the future growth is going to come from M&A. Last year, we did 2 transactions. We acquired Youda Games, which is a carve-out of a public company in the Netherlands as well as Innplay, which is a company based on Israel, known for Animals & Coins. It's more of a growth title. And so a great example of a deal where we acquired a 9-plus-year of franchise that we can improve with our live ops capabilities in a transaction where we bought something that was a growth year that required more investment but potentially more upside. And so it was a nice balanced approach. I think as we look forward and I think about what's our success going to look like in 2026, it's going to be the acquisitions we do in '23, '24 and '25. They dictate the cohorts of growth going forward because we don't have that new game pipeline driving future growth. And so I think in this environment, given all the consolidation that's taken place, it does look like the buyer universe is more limited and things are pointing more in our favor, just given the limited amount of buyers that are out there in the current market. Just as a refresher, we have around $1 billion in cash on the balance sheet, a $600 million revolver. So very well positioned to go and execute on the M&A strategy.

And in terms of maybe in following up on the capital allocation then, do you have a defined budget for acquisitions versus other uses of cash?

Sure. So we recently announced our capital allocation strategy, where we're targeting 50% of our free cash flow capital return, both dividends and buybacks and about 50% for M&A. The M&A guidance specifically was $600 million to $1.2 billion in acquisitions over the next 3 years. I think given opportunities we can be more aggressive than that. The framework was effectively just setting targets. If you look at the dividend that we announced, it's around a 4.5% yield today in the market. And we recently announced at last quarter's earnings, the initiation of $150 million buyback as well. So I think it's good that we've been able to now clearly communicate our strategy with our free cash flow. If you look at the presentation that we had posted, free cash flow has been very consistent, just north of $400 million over the last few years, and we feel good about a nice mix of allocation between capital return and growth via M&A.

And then maybe just following up on the mix of the business between casino and casual, how you see that evolving both based on current trends within the portfolio, your areas of focus and then your areas of acquisition?

Sure. So over the last few years, you've consistently seen casual become the majority of our revenues and continue to grow. The casino theme games are some of our oldest titles. I think we are very focused on improving the products and road maps to stabilize and eventually grow that business again. I think we saw an opportunity with poker with Governor of Poker 3, which we acquired via Youda Games, which nicely complemented World Series of Poker, which is the #1 game in the genre. We obviously have a playbook owning World Series of Poker and how to help grow that game. We've seen very nice growth since the acquisition. They have a larger presence in Europe as well. So it's a little bit of a different audience. But I think outside of that, the majority of our focus when it comes to M&A is really on more the casual side. And so I think that's where you'll see future growth from us, not necessarily from the M&A side on the casino side, given we're already the #1 player in the slot-themed games, and given the competitive dynamics of that market, it's probably not one that we're going to look to grow for the M&A.

Okay. Going back to the direct-to-consumer initiative. I know this is certainly a big part of the strategy. But can you talk about how you make that move away from the app stores, which games are most successful in that model? And I have a couple of follow-ups to that.

Sure. So very early on, probably 4 or 5 years ago, we made the decision that we need to own our own destiny in terms of having a platform where consumers will play games directly with us. And we started to roll that out with some of our oldest titles both web-based, mobile web-based, proprietary Android-based where people can download the app directly on Android as well and started to grow that business. I think when we went public, we're probably in the teens. We talked about at previous conferences, we're having a 30% target. We're already at 26% of revenue, and that's with acquisitions that keep growing our revenue base and making that target harder to hit. We announced Solitaire Grand Harvest and June's Journey, both getting launched in direct-to-consumer this year. So I think not only -- listen, it's obviously a higher-margin channel. You're able to invest more into your customers as a result of that and we'll continue to look to grow that over time. And I think what we've seen is it's been a nice, steady grower over time, but it takes time. It's not the easiest thing to do, given acquiring customers outside of those channels isn't this easy it is to market on platform.

And for those games where you have the direct-to-consumer channel, what are some of the metrics on retention and conversion, monetization that are perhaps noteworthy?

So the titles that are on direct-to-consumer today, they are some of the best performers or titles like Slotomania and Bingo Blitz are the largest. And then we have titles like House of Fun, World Series of Poker, Caesars Casino also that have done well. I think by nature, customers that are willing to play on these other channels, sometimes are more motivated and therefore, with better customers. But we don't have specific metrics that we know. We note that revenue on direct-to-consumer publicly, and you can see that growth and that growth is a mix of obviously, our existing players that were deeply engaged as well as adding new customers to the platform.

So we'll turn to a couple of the audience questions. There are 3 here. The first one is, could you speak to some of the ad tech related M&A acqui-hires the company has done throughout its history, what kind of first-party ad tech are you using now? And in the future, what can be in-house from third-party performance marketing channels. I know that's a mouthful.

Yes. No. So I think initially, we used -- if you kind of go way back in time, we used a lot of third-party agencies to do media buying and it made sense to bring that in-house. And we acquired Aditor run by Nir Korczak. Nir's currently our CMO. And that brought in a team that could consolidate and centralize marketing to do performance marketing more effectively in-house. We've also done 2 AI studio acquisitions as well, where they help us solve some of the most challenging problems in the company. One of them is how do you acquire traffic more effectively. And I think over time, what we realized is that it's gotten to the point now where third-party tools are getting better than the tools we can develop in-house, and it makes more sense to use best-in-class third-party tools, then they continue developing so much in-house. And so I think there's a healthy mix and it's a debate internally in terms of going forward. But I think you'll continue to see us leverage what's best-in-class to improve there. I think when you look at the success of like an Apple often and how much they've grown recently and how much they've kind of recently become a go-to platform for some of the mobile game companies that it shows you how quickly people can innovate within the space and therefore grow. So I think we're pretty encouraged with all the changes on the AI front that basically enable efficiency throughout our business, both in how we buy traffic, how we create content, how we create our -- all of those said events.

On the content creation side, is that something that's already deployed internally in some of these AI tools?

We're kind of at the start testing various tools and we're getting going there.

So next question is on whales. Is there a concentration of a small number of power users accounting for a large portion of the in-app purchases?

Sure. So I think the video game industry broadly is like any business where 20% of the consumers account for 80% of the revenue. I think whether you're looking at your shoppers at Neiman Marcus or you look at who's playing in Solitaire Grand Harvest, it follows that same rule. So I think that's a term that we don't definitely like to use, but obviously, deeply engaged payers or payers within the game and they deeply engaged. But I think it's consistent throughout the video game industry and the mobile game industry without it's genre in terms of the percentages.

Next question is just, again, the mix of revenues from advertising and who were typical advertisers on the platform.

Sure. So 98% of our revenue is in-app purchases, only 2% from advertising. Typically, it's other mobile game companies that are advertising for installs in your games. That's why we found that for most of our games, ads don't make sense. We have higher LTVs, when we don't show ads than when we do and given it's hard enough to acquire customers in that current environment let alone than showing them ads to go play your competitors' games. And so I think for some of the hyper-casual game categories, or other games where ads were endemic to the game at the start of it. So if you look at like a June's Journey, ads were core to how that game was built initially and so you'll see a higher percentage of ads in that game, but the majority of our games don't have significant ads on them.

Maybe that's a good transition to the last question in here, which is what is your hyper casual strategy?

So as of right now, that's not a genre that we've chosen to invest in. I think that market looks a lot like an ad arbitrage opportunity where you're buying traffic for a certain price and what we're looking to quickly monetize it at another price. I think where we found our expertise is in games where we can more deeply engage players and drive retention and therefore -- and then drive monetization over time and having those cohorts build on each other, I think where I struggle with some of the hyper casual businesses is that the customers that you acquire today are gone next year, and you're constantly having to acquire a new customer base almost every year. And then you also have the hit-driven nature of constantly having to develop new games. So for us, we've tried to remove that kind of volatility from our portfolio and focus on games that people are going to play 10 years from now. And then when you build those cohorts over time, it drives significant cash flow over time as well versus having to kind of restarting to be dependent on ad prices.

Is it fair to say that competition has lessened now?

I think competition has always been intense. I think there's been a realization that consumers and eyeballs on mobile are more valuable than they probably thought they were 10 years ago. And so you're consistently seeing people spending more and more on mobile. And so I do think from a both -- from an advertising perspective and a competitive intensity perspective, I think the biggest difference is because it's harder to develop a new game, you're seeing far fewer new games introduced at scale in the marketplace. And so I think for existing games, there's a little bit less choice for the consumer from a sort of quality, well-developed game perspective. But that said, it's still a competitive market in all the genres that we operate in.

What's your favorite Playtika game?

For me World Series of Poker. I always love fun poker.

All right. Everybody here needs to download, World Series of Poker. That's all we have time for it, Craig. Thank you so much.

Thank you so much for having me.

Good to see you.