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

Good morning, everyone. Thanks so much for being here. I'm Nathan Feather on the Morgan Stanley U.S. Internet team, stepping in for Matt Cost. Pleased to be joined by Craig Abrahams, Playtika's CFO and President. Thanks so much for joining us.

Thank you for having us.

Before we begin, a quick housekeeping item. Please note that all important disclosures, including personal holding disclosures, are online at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, let's kick it off. Craig, I think it'd be helpful for people that are maybe less familiar with the story to give an overview of Playtika, the business and the evolution of strategy here.

Perfect. Well, Playtika is one of the largest public independent mobile gaming companies. It was founded in 2011. Right now, we have 9 out of the top 100 franchises in the App Store. 12 of our 14 top titles came through M&A., and I think that's what differentiates us in terms of our initial strategy. We kind of took the viewpoint that we are experts at monetization and retention of customers. We love to find great entrepreneurs and products that are already established in the marketplace and further growing them, leveraging our technology and live operations capabilities. And over the last 13 years, we've executed on that strategy. We went public in 2021, kind of post the COVID and IDFA changes. I think you saw the market become a bit more mature. And I think for us, as a large player, it's been a great opportunity to continue consolidating. We acquired Innplay and Youda Games in 2023, and we just completed the acquisition of SuperPlay in 2024, our largest acquisition in the company's history. I definitely feel like it's a name that's misunderstood in the marketplace. I definitely feel like we are currently undervalued in the marketplace. When you look at the strength of our biggest franchises, the depth and breadth of the portfolio, the free cash flow that we generate, both the organic new game development pipeline as well as the recent acquisitions and the growth there, you look at the dividend yield that we pay, almost at 8% right now, definitely feels like an opportunity for investors.

Okay. Great. Really helpful overview. Maybe to kick things off, I'd love to discuss Playtika's game pipeline. The team mentioned that there are 3 games slated to release in the next 12 to 18 months. What can you share with us about these games? And which is most exciting for you?

Sure. Well, it's exciting for us because there's a bit of a shift in strategy. Historically, we did not develop new games internally. I think what changed is we acquired companies with core capabilities in development of new games, and we've seen very specific market opportunities. The first being when we acquired SuperPlay, they had 2 games in the pipeline. This is a team that has developed 2 games thus far in the market, both very successful, both top 100 games, Dice Dreams and Domino Dreams. And the third game in the pipeline we recently announced is Disney Solitaire. Disney Solitaire is going to be launched in the second quarter of this year. It's obviously in partnership with Disney, taking the Solitaire genre, which we know very well. We're currently the #1 player in the Solitaire market within app purchases with Solitaire Grand Harvest. And we see an opportunity to dramatically expand that category. It's a big category when you look at traditional, what we call, green screen Solitaire, we know there's tens of millions of players that are playing those style games. And we think, as we've seen in some other categories with a big brand, an opportunity to really expand the category with Disney Solitaire. So excited about that. The other opportunity is with social casino and slots specifically. We've seen that our initial titles were developed in kind of the 2011 to 2014 time frame. And so as those titles are mature, the complexity in the games and managing those games and the first-time user experience isn't what it is in a newly developed game. And we see an opportunity to bring our best content, our best features into a new game that we can bring to market that will have a better return on investment in our view. So excited about that. We have not given a time line other than said that all 3 titles will be out in the next 12 to 18 months. And the third title is Claire's Chronicles from our Wooga Studio.

Okay. Great. Well, I want to touch a little bit more on Disney Solitaire. As you mentioned, plan to release in 2Q. Talk to us about what you're seeing so far in the test phase and the potential uplift for releasing this game given the strong brand recognition relative to the category.

Sure. Well, as we mentioned on our earnings call last week, the game is in soft launch in a number of international markets. The initial metrics are very strong. We have not committed to the actual release date publicly, but we have said the intent is to launch in the second quarter. And I think what's really exciting for me is that leveraging a big brand and the portfolio of over hundreds of characters within the Disney portfolio is that there's new international markets that will become available to us that historically have not been available. I think when you look at markets like Japan or others in APAC, the Disney characters resonate extremely well. We've seen Disney titles move up the charts there. And so I think for us, the opportunity to not just be big in the United States and Europe, like with the rest of our portfolio, the opportunity to really move into APAC and some other markets is really exciting.

Okay. Great. Now I want to talk a little bit more holistically. Given these new titles in the pipeline, one thing I'm curious about is what sort of framework the company uses when assessing the go or no-go decision as it relates to launching these new games. Anything you can quantify or thoughts you could share would be helpful.

Sure. I think there's a couple of different gates that we look at. I think there's the prelaunch phase, which is when you're deciding what category you're entering, how big can it be, what is the competitive environment, what's our differentiator, why are we going to be #1 or #2 in that respective category and can it be a $100 million franchise. Those are some of the thoughts that come to mind when framing that decision. And then once the game has been green lit and it's in development and you go to soft launch, we're very focused on retention metrics, right. Everything from day 2, day 7, day 14, day 30 and the kind of on and on, and monitoring those metrics. And then after retention becomes monetization, not only retaining customers, but are they paying within the game. And then third -- the third layer is what's the return on ad spend and can that scale. I think what's exciting about leveraging a brand is the opportunity to really rapidly grow via organic traffic as well, given the awareness and the organic traffic you get through the app stores. So definitely, those are some of the frameworks we use when evaluating the launch of a new title.

Okay. I also want to talk about social casino games. Been under a little bit of pressure lately. How does management view the opportunity around this game genre as a whole? And how has that view and the opportunity evolved over the past few years and post IDFA?

Sure. So historically, it's one of the largest and most attractive categories within mobile, and I think you saw intense competition there. I think when you look at a lot of the categories we're #1 in, you'll see pretty significant market share, and it sort of becomes almost like winner take most given the liquidity characteristics or other gameplay characteristics socially in those genres if you look at Bingo, or in June's Journey with our narrative-driven game or Solitaire. But then when you look at slots, it's much more competitive. And even as the leader in the category, you'll see that our market share there on a per title basis isn't as high, probably more like anywhere from around 10% to 12% or so. So when you look at the competitive intensity there, I think there's a different dynamic. I think when you look at the last few years, we've seen the slot manufacturers bring real-world content and be successful in deploying that. We saw that as an opportunity in our recent partnership with IGT to bring their content to market across our top 3 slot games. That content started to roll out the last week of December. So we're just at the initial phases of that partnership. And then I think we see the opportunity with the development of a new title. Given there really hasn't been that many new titles brought to market there that are meaningful, we think there's a big opportunity to bring consumers something new and fresh and exciting. And so we're excited about that.

Okay. Great. And putting a little bit of a finer point on that, how are you approaching stabilizing this side of the business and really returning it to being a growth category?

So I think -- well, let me be kind of honest. When you look at the category over the last few years, it's stagnated and matured. So I think the idea that you're going to grow the category or grow, I think, is something that probably isn't realistic. And I think that's why we made strategic decisions years ago to further grow our casual business. We saw casual as an opportunity to be much bigger, much higher growth, bigger TAM. And that's why we've made such a concerted effort to kind of strategically transition. And you look at the majority of our recent acquisitions, they're all in casual. I think the exception there was poker, which we had a great acquisition of the Governor of Poker franchise to add to our World Series of Poker positioning. So I think when you look at the strategic steps we've taken, it's been to kind of diversify away. That being said, we're very focused on stabilization and regaining market share. And so that's through improved content, upgrading technology, all the things that we're doing in the new game to get a better return on ad spend. And we continue to do well within that category on our direct-to-consumer channels. And I think that's a differentiator for us and something that's helped support the margins in that category as well.

Right. And you mentioned the company is developing a new slot game. How do you think new launches fit in the overall strategy?

I think for us, it is -- unlike most game companies that have huge R&D budgets focused on a new slate, we still stick to our core knitting, which is leveraging M&A as a path to kind of buy proven franchises, but we see new game development as an opportunistic way to attack specific opportunities where there isn't necessarily an M&A opportunity or something that we believe strongly we can do in-house. And I think the difference in mobile versus AAA and console is that the development budgets required aren't nearly as big. It's the marketing budgets. And so for us, we have an opportunity to test various genres with organic development. And we're not putting capital at risk unless we know or have a strong belief that it's going to be successful based on early metrics.

Yes. Are there previous instances in which you've done something similar that provides a playbook to replicate the reactivation of dormant players in the category?

I think that is a big -- a big focus for us is constantly how do you reactivate consumers when you think about a big title like Slotomania that has historical revenue over $5 billion and 100 -- over 100 million downloads, you're really focused on bringing people back to the game. Most customers in this segment aren't hearing about the title for the first time. And so the question is how do you make customers aware of all the new and great things that are available in that game, a unique promotion. I think we saw we did very well with reactivation, bringing people in with Cleopatra II and with the IGT content. And so I think we're definitely working on a variety of strategic initiatives to bring people back.

Great. Now on the casual side, Bingo Blitz has been growing consistently for many years at this point. In your 4Q report, you reported year-over-year growth of almost 6%. Understanding that the natural lifespan of individual titles plays a role, how do you think about the durability of growth for this title?

I think Bingo Blitz is one of the most impressive titles in the marketplace. We acquired it in 2012. It was probably initially launched in the market in 2010. And when you look at it kind of 15 years later, fourth quarter was still up 6% year-over-year. It's our biggest franchise. We have significant market share in that category. It is very challenging for others to launch from both a technical perspective and sort of liquidity perspective. There's so many Bingo players competing with their friends, chatting with friends, sharing collectibles that if anyone -- the switching costs are very high for someone to decide to go and find another Bingo experience. And we bring so much content to bear, spend so much in the marketing that it really has a high barrier to entry. So I think for us, it's one of our strongest and most stable franchises and one that we feel very confident in as we look at future growth.

Right. Really helpful. Switching gears, direct-to-consumer, clear opportunity for Playtika that you've been discussing for a while. And it's encouraging to see the revenues from the segment up 8% year-over-year in 4Q. What are some of the puts and takes investors should be aware of as they consider Playtika's plans to expand this offering to more of the titles?

Sure. So direct-to-consumer for us has always been a differentiator. This last quarter, it represented 27% of our revenue. Historically, we've given a target of 30%. I think that target is constantly moving as we acquire titles that are off the platforms. The recent deployment of direct-to-consumer for both June's Journey and Solitaire Grand Harvest has been going quite well and gives me a lot of confidence that we're going to be able to execute on direct-to-consumer with other recently acquired titles. I think for a long time, people questioned, you're successful with some of these older franchises that took many, many years and started on web with these mobile-first titles, can you be successful? And I think we're proving that we can. And obviously, SuperPlay is the largest addition to the -- sorry, the largest addition to the portfolio. And as we look at the road map down the road, the idea of bringing those titles on direct-to-consumer is very exciting for us.

Okay. Great. Now have a track record of using M&A to effectively enhance Playtika's portfolio, SuperPlay, a great example of that. How should we think about your appetite for M&A in 2025 and then more broadly long term?

Sure. So as I mentioned earlier, M&A is a key part of our DNA in terms of how we look at expanding the portfolio. SuperPlay was an extremely exciting acquisition for us, not only the top 100 franchises that we brought in and help drive further growth and diversify the portfolio, but the future pipeline of games that they bring. I think we were very careful on how we structured the transaction, so that we're fully aligned in terms of growing, but growing in a profitable way. They have a structure where to be eligible for the earn-out in 2025. They can't lose more than $10 million of EBITDA. And then as you look out to '26 and '27, those margins need to scale as well. So very consistent with how we think about the games industry and focused on profitable growth. And I think as we look at expanding the portfolio further, last week, we just announced that we're going to deploy $300 million to $450 million in M&A over the last 3 years. Historically, we gave a target of $600 million to $1.2 billion. Obviously, we did the large SuperPlay transaction with our capital allocation strategy, really assessed our free cash flow and targeted around 50% of free cash flow towards M&A, about 50% towards capital returns. And so I think the idea of a studio a year in the $100 million to $150 million range as bolt-ons to really strategically address key growth opportunities and genres that we see as exciting additions to the portfolio to continue to drive future growth. I think it's important to be very consistent with our M&A execution because when you look at the cohorts of transactions over time, you'll see that, that shift to profitability can take 18 to 24 months. And so to continue to drive EBITDA going forward, we need to continue to execute on those. I think when you look at like an Innplay, for example, we guided last week that, that studio will turn to profitability in 2026. And so -- sorry, we'll drive to EBITDA positive contribution in 2026, and same thing with the SuperPlay acquisition. So having that as a systematic part of our strategy for us is important.

Okay. Now given how active you've been with M&A, one thing that investors wonder about is Playtika's potential for organic growth. And so help us think through what sort of organic growth is embedded within your outlook for 2025. And then how should we think about organic growth in the long-term cadence?

Sure. So we didn't actually split out what's organic versus SuperPlay in terms of our guidance for 2025. But what I can say is that we have our biggest franchises, whether it's Bingo Blitz, June's Journey, Solitaire Grand Harvest, that we are confident in our ability to continue to execute and grow over time. I think we have our recently acquired titles like Youda and Innplay and, obviously, SuperPlay that we believe will be growth drivers in the years to come. We have titles like World Series of Poker, which are #1 in respective category and has been very steady. And I think in terms of the social casino portfolio, for us, the key focus there is stabilization, and the smaller titles that you see are kind of on a managed decline as we pull back marketing dollars and manage cash flow contribution. So I think as you look at the portfolio as a whole, with the M&A activities and the acquisitions that we're doing, we foresee getting back to growth in the years to come. Obviously, there's a mix shift, and the impact of the mix shift this year impacts the EBITDA margins, but we're focused obviously on increasing the margins of the acquired studios over time.

Okay. Now focusing a little bit more on that margin pillar, how should we think about the investments required to scale these new games in your pipeline?

So as you look into the guidance, all of the development activities are built in, in terms of the people that we have working on them and how we think about it. The actual marketing dollars that you have to deploy to execute and launching them is probably the biggest growth driver. And I think we're deploying that with success. The payback periods on a new game can be very quick. And so you may not see it as a big investment driver or we'll basically reallocate marketing dollars to try and maintain our margins. And so I think we're very careful. We have a lot of tools that we have, given we have such a large portfolio. But it definitely -- the idea of having these higher-growth titles and launching new titles does impact our margins in the near term, but we think it's going to pay off in terms of revenue growth and changing the trajectory of the overall business.

Okay. And anything to call out as far as the shape of margins as we work through '25 and '26 given some of those puts and takes you mentioned?

Well, I think you see it in the guidance. You see that last year, we're closer to 30% margins. And this year, we're a few hundred basis points below that. So I think in terms -- if you look at the range of guidance that we've given. So there definitely is an impact, and we're focused on driving that top line consistent growth to be in a position to improve margins down the line.

Okay. Great. And then on to a topic that's been top of mind for many investors here at the conference in AI. Talk to us about areas of the company where you're most excited about AI's potential impact to the business.

Sure. So I think throughout the video game industry, I think there's probably a variety of impacts. I think if you're in AAA or console and you have massive budgets related to art and the creation of games, there's probably a much bigger impact and obviously lowering maybe barriers to entry and development of those games. I think within mobile gaming, the biggest barrier to entry for someone isn't on the development side, it's on the marketing side. And so I think when I look at the opportunities with AI, it's really about it's going to help us be more efficient in the development of games, it's going to help us be more efficient in how we manage live operations, how we deploy marketing dollars. So I definitely see it more on the efficiency side than maybe helping out on the top line side, but I definitely see it as a positive impact. I think the question for us is really timing, when are these tools going to be ready to really deploy en masse across games. I think now we're doing a lot of testing. We've always been very close to investing in sort of internal AI tools. I think now we're seeing a lot of excellent third-party tools, and it's something that we're really excited about.

And then can you help us think about from an investment standpoint, where are those concentrated today and what the timing of that might be as you see some of these tools continue to improve and create more efficacy?

I think we'll see towards the end of this year. We're hopeful that in terms of the generative AI tools that we'll be able to deploy more things there. It's hard to say specifics. I think as we think about it, it's really about how can we bring the best experience to our consumers. And if we can optimize content and bring them content that we can A/B test faster and that they can get to things that resonate that much faster, it's a win for everyone.

Okay. And as a follow-up, how are you evaluating the ROI and revenue incrementality from these investments? And any difference compared with the traditional kind of investments just given the earlier portion of the tech curve we're in?

I think for us, it's -- we're always evaluating what's the lift when we do anything. It's A/B testing, a control group versus the test group and seeing what kind of lift do we have top line, are we seeing -- where are we seeing on the expense side in terms of savings and what's the -- what are the returns there. So I don't think it's any different than any other initiative that we take on. I think what -- it's just obviously an area where there's a lot of focus and a lot of excitement. And I think we're trying to do it in a way where we're mindful of giving consumers the best experience we can to the gameplay.

Okay. Great. Now interested to hear your thoughts on the mobile gaming market's growth and what we can expect to see from here over the medium to long term.

Sure. So if I was on stage probably 4 years ago, you probably saw high single digits in terms of market growth. I think the latest market projections I've seen has about 3% market growth. So it is definitely a maturing market. It's been one that's consolidating. And I view us as a consolidator. So I think that from an M&A perspective, there's going to continue to be strong opportunities for us. I think it has become kind of post IDFA, it's been more challenging for newer start-ups to scale, and that's where we can come in as a partner and help them scale. So I think that has been something that's been good for us. I think that there has been kind of a void of new games relative to, if you look sort of 5, 10 years ago, the amount of new games deployed in the marketplace. There was a lot more new games that were scaling and successful. I think the challenges in the market has had fewer new games coming to market. So I think the idea that we're bringing new titles to market is really exciting for consumers to see some new and exciting things that they can play on their device. And I think it's going to give it a better chance of success in the current market.

Okay. Great. And interested to hear some of the trends you're seeing. What are potential catalysts for industry growth above that current low single digit or so range?

Listen, I think international penetration into new markets is something that people have talked about for a long time, but you haven't really seen from Western developers going kind of beyond Europe and the U.S. So I think that idea could -- if we're able to penetrate further in some of these markets, you'll see growth beyond that. I think the market as a whole, you're not getting handset penetration or increased bandwidth or increased screen size, all the things that were sort of tailwinds for a long period of time. And so I think now where we're seeing a lot of the growth is coming from increased conversion. Consumers are just getting that much more adept at and used to paying in games. And I think that driving conversion, you've seen our conversion numbers go up, now over 4% on our payer conversion. So I think when you look at growth going forward, that's another area of opportunity. And I think the other growth will be on the margin side. As you continue to offer opportunities for more direct-to-consumer channels, that creates margin opportunity for growth as well. So not necessarily on the gross side, but on the net side.

Okay. Great. And speaking of conversion, mentioned the 4%, what are the levers you think you could pull that could bring that, continue to increase over the next few years?

I think as we look at our conversion rates, it's probably tied most closely to the maturity of the game since we've owned and operated it. So it's something where it just takes time, where it's constant optimization, constant new feature launches. It's not something that you do quickly. It's not -- consumers have to really make that decision that they want to become a payer in your game and the experience is worthy of that. And so for us, it's just continuing to develop great content and new features and being innovative, and that innovation is what drives the growth.

Okay. Great. And then same question, but on the flip side, a revenue per payer metric. Where do you think that can trend over the next few years?

I think that is mostly driven by conversion. I think when you look at -- there are games where -- especially games that we've acquired, where the entrepreneurs were very product focused and didn't have the understanding around monetization that we do and the opportunity to kind of give consumers truly personalized offerings that are really tailored to their personal preferences. And so I think with that, we do a better job at increasing monetization. But I definitely don't think that, that's something you have to be carefully managed because you're trying to retain users for a very long time.

Okay. Great. And on the marketing environment, interested to hear, as the mobile game market has matured, how have you seen the marketing environment evolve? And then any kind of key changes as we think over the past few quarters?

It's definitely a much more dynamic market than it had been historically in that there's constantly new channels to explore and evaluate. We're constantly moving dollars from one channel to another for the best ROI possible. It's differentiated by game, by platform. And so I definitely think that if you look back to it kind of pre-IDFA, I think there's definitely more consistency to how you deploy marketing dollars. We've done a good job leveraging off-line campaigns, influencers, international market takeovers where you really can concentrate the spend and really drive your app up the app rankings in that particular market. And so I just think it takes more creativity and more continued focus on return on investment than it did historically.

Okay. Great. And on the international side, kind of outside U.S. and Europe, interested to hear where you see the biggest opportunity, where you're most focused as we think about '25 and '26 and where you think you can really drive that incremental penetration.

Sure. So historically, we were biggest in Tier 1 English-speaking markets. I think with the Youda acquisition and the SuperPlay acquisition, we really grew our European base. We've done some European takeovers that have done quite well, especially in markets like Germany. So I think that localization and continued penetration in Europe is something that we're always focused on. I think the big unlock, as I referenced earlier, is if you can break into a market like Japan within our casual portfolio. It's definitely something that we think about all the time. The question is what content could resonate there and what could scale. You don't see many Western game makers scale up those charts. But when you do, it's pretty tremendous.

Okay. Great. And then I know we talked about capital allocation a little bit earlier. I want to put a touch of a finer point on here. More holistically, how do you think about your capital allocation philosophy? And what would cause kind of updates or diversions from where you currently stand?

Sure. So at the start of last year, we came out with our capital allocation strategy, which was 50% of free cash flow towards M&A and 50% towards capital returns. We currently pay around $0.10 a share per quarter in dividends. And the rest is really around a share buyback program. We authorized $150 million share buyback, and that's really intended to offset dilution from the vesting of employee equity awards. So that framework is still intact. I think when you look at the historical free cash flow, it's been around in the $350 million to $400 million range of free cash flow. And so that's kind of how we sized the opportunity to kind of deploy half for M&A and half for capital return. I don't think there's anything that I can think of in the near term that's going to kind of change that thinking. I think we're -- we feel pretty good about that and are executing under that plan.

Okay. Great. Well, a few minutes left. I want to wrap up with a little more of a high-level question. What do you think are the 1 or 2 things investors most underappreciate or misunderstand about the Playtika story?

Sure. So I think the -- I think first would be the value of the franchises. I think when you see these long-lasting franchises like Bingo Blitz and June's Journey and Solitaire Grand Harvest and World Series of Poker and all these franchises, the fact that the stability and the growth potential and the cash flows that they generate and the consistency over time, I think, is something that is unique. I think our market leadership in 6 categories is very unique. And I think the fact that we just recently acquired 3 games -- 3 studios and 4 games that all are on a very impressive growth trajectory, I think -- I don't think people really understand just SuperPlay and 2 games that were growing historically over 100% a year, and you can track them in third-party app stores, continuing as a portfolio, continuing to grow at a clip far beyond the industry. And so I think when you have -- we view it as we acquired the crown jewel within the industry with 2 titles in the top 100 that are combined growing at a clip much faster than anything else that we've seen in the marketplace. And so I think the last layer would be just the evergreen nature of the categories that we operate in. Those games, whether it was in the Coin Luder, but Dice, Domino theme, Solitaire theme, these are games that have been around in the real world for the last 30 years and will continue to be around in the gaming world for the next 30 years. And so I think the -- just the stability and consistency there with our portfolio is pretty unique.

Okay. Great. Craig, on behalf of Matt, myself and the whole team of Morgan Stanley, thanks so much for being here.

Thank you.