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

Good morning, everybody. My name is Eric Handler. I'm the media and entertainment analyst here at ROTH Capital. Thank you so much for coming. Our next presentation that we have here is Playtika. And we're very happy to have Craig Abrahams, the company's CFO. Craig, before we get to Q&A, why don't you give a little synopsis of everything going on.

Thanks so much for being here. Playtika is one of the largest mobile gaming independent companies in the world. We went public back in 2021, founded back in 2011. We have 8 of the top 100 games across iOS and Android, 12 out of the 14 games were acquired via M&A. M&A is a critical part of our growth strategy. Last year, we did the biggest transaction in the company's with the acquisition of SuperPlay and happy to talk about all of that here with you today.

Excellent. Let's start big picture first. So -- from an industry perspective, can you give me your view on sort of the state of mobile gaming right now? And how do you think about the overall growth for the industry over the next 2 to 3 years?

Sure. So mobile gaming is still the biggest form factor within video games bigger than console and PC combined. I think when you look at the growth rate, top line wise, the industry has matured, it's not growing at high single digits like it was 5, 10 years ago. I think most projections I see has the market growing around 3% a year. I think what we've seen is post IDFA, the marketing environment has been more challenging. I think players with scale like ourselves have had the ability to navigate that much better than some of the smaller players. But that's where it creates M&A opportunities for us. And I think also opportunities to launch new games. I think we took a break from that, as you know, a couple of years back. Right now, we have 3 games we're intending to launch over the next 12 to 18 months. And I think from a consumer perspective, there's a real appetite to see more new content in the App Store.

Great. Now looking at the big picture for yourselves, 2025 looks like it's setting up to be a bit of a transition year. Revenue is growing, but that's attributable to the SuperPlay acquisition. How should we think about your organic growth trajectory of the business over the next couple of years? And similarly, adjusted EBITDA is expected to decline this year. What needs to happen to get adjusted EBITDA back on that long-term positive growth trajectory?

Sure. So we've always had some of the highest margins within the mobile games industry. And I think at some point, we had to make a decision that we're going to invest in growth and investing in growth comes through acquisitions and some growth titles. I think you saw us do the acquisition in '23 of Innplay with Animals & Coins. And then obviously, SuperPlay is a bigger acquisition. And as we've structured that deal, the company is going through its inflection point towards positive EBITDA over this next year in order to be eligible for their earnout, they can't lose more than $10 million in EBITDA this year and then have margin thresholds, both in '26 and '27. So definitely, it was a deal we structured to be mindful of investing in growth, but doing such in a profitable way on a go-forward basis. They just announced that they're going to be launching Disney Solitaire in the second quarter this year, and we're really excited about that. Obviously, the launch of new titles impacts margins, but we're investing in growth. I think when you look at the portfolio and the mix going back to our kind of 2018, '19 timeframe, the acquisitions of Wooga and Supertreat, we started to invest in diversifying into the casual business. And we think that those casual titles have much broader appeal and have bigger growth prospects for ourselves. And these recent acquisitions, other than Youda, are all kind of similarly positioned in that way. And so we're making that transition to growth, and we think it's important for the long run.

Okay. So let's talk about the new games that are being launched. You mentioned Disney Solitaire. There's also Claire's Chronicles and an untitled slots game. What's changed with your philosophy regarding new game launches? And how challenging has it become to successfully launch a brand new title and are there genres where you believe there are significant opportunities to steal some market share?

Yes. So I think each example of our new games, we're very specific thinking about what the market opportunities are by genre. And I think we'll start with slots. When you look at our own maturity of our portfolio, when you look at other competitors in the marketplace that have been successful, a lot of those titles are newer games. And I think if you look at the complexity of our games that are 12, 13, 14 years old, it's time to put something out there that has a much fresher game economy, takes advantage of newer technology and takes our best features and know-how around monetization and puts it in one new product. And so I think for slots, we've seen other competitors be successful and take market share with some fresh content. We've licensed and partnered with IGT to put some of their content out in our games. And Cleopatra II was the first title of rollout in Slotomania and that's going well. So I think for us, it's addressing content as well as putting new title out and regaining market share in the social casino side. I think when you look at the other categories, Wooga is an independent studio that's always had new game development as part of their DNA. We've embraced that and continue to support them. And when you look at SuperPlay, listen, they're probably one of the only companies in the industry that's put out 2 titles in the last few years, both very successful and now putting on a third and fourth title. And that was a big part of the thesis around the acquisition. It was not only getting high growth titles like Domino Dreams and a big franchise like Dice Dreams, it was about also getting what is now Disney Solitaire in the pipeline as well as their fourth title, which we have not yet announced. So I think for us, new games is definitely going to be a part of the story. I think the next part, obviously, will be continued M&A like we've been doing. We just recently announced we plan to deploy $300 million to $450 million in M&A over the next 3 years.

Okay. And now as you think about your strategy of like what games should be receiving the most marketing or investment support and how do you think about breaking that down between your various games right now?

Sure. So I think when we look at the return on investment, that clearly is what drives who gets marketing dollars, where we have the highest ROI, more dollars get allocated. I think the biggest franchise is within the portfolio, things like Solitaire Grand Harvest, June's Journey, Bingo Blitz will continue to be the franchises that continue to garner the majority of ad dollars. And obviously, all of our high growth titles whether it's Animals & Coins and Dice Dreams and Domino Dreams, they'll continue to get significant marketing dollars supporting that growth. So I think where we see the best ROI, where we have significant market share, where we think we can defend significant market share, I mean Bingo Blitz is a great example of that. It grew 6% year-over-year in the fourth quarter. The title's 15 years old. They have over 50% market share in that industry within Bingo and are by far the dominant player #1 globally. And so when you're in that position, I think investing in content, investing in the product, investing in marketing has built such a big moat around that business. We intend to do that in other categories as well.

Let's talk about Bingo Blitz for a second because. It is -- the title has been around for 13 years -- 12, 13 years. It is the dominant game within its genre. Like what are you doing to sustain the interest in the game? And do you still think there's a lengthy runway for growth?

Yes. So I think it is a great case example of how you can extend the longevity and lifetime of the game far beyond what people originally thought in mobile games, similar to what you see more in PC and console franchises. Clearly, this is a place where millions of people come together to play Bingo, communicate, compete against each other. And I think when you have that type of liquidity, it's where your friends are, it's where kind of the fun is and it's very hard for someone to gain that type of liquidity and compete. And I think it's a great use case that we show with our other studios around how you can leverage live ops, introducing new content and promotional content every day, every week, every month. And again, another great example of direct-to-consumer of how you get those players to play directly with you and grow that part of our business as well. Just for the room, when we have people on our own platform, we pay 4% to 5% in payment -- sorry, 3% to 4% in payment processing fees versus a 30% platform fee. This last quarter, around 27% of our revenue is on our direct-to-consumer platforms.

Now looking at some of the other games within the casual segment, Solitaire Grand Harvest, June's Journey had definitely been 2 games that you've successfully scaled higher. Are these still growth titles? Or are you turning your focus more at this point to the acquired titles, Domino Dreams, Dice Dreams, Animals & Coins?

I mean those are some of our biggest casual franchises and titles will continue to invest in, and I believe that they will grow. I think when you look at any game and its road map, it will have ups and downs depending on how the product features did. Did the consumers adopt it and love it or did they not? And then how you tweak the road map from there. Obviously, for those titles, the road map wasn't as strong as we would have hoped. But I think we're very confident in our execution there with June's Journey and the Wooga team and everything that we're doing there as well as Solitaire as a genre in Solitaire Grand Harvest. So definitely making investments in both of those teams.

As you think about some of the newer titles that you have, the new acquired titles and some of the new titles that you're going to be launching, how do you think about the life cycle of a game? Like what's like do you need for a typical ramp to scale higher? And then when do you think -- when is the right time to sort of toggle back on marketing to drive greater profitability? And how does that life cycle work?

Sure. So I think what's differentiated about us is we focus on evergreen classic games that you're not taking hit-driven risk with the game genre, right? These are games that people played for the last 30 years in the real world, they're going to play them for the next 30 years in the digital world. And so when we pick these franchises, they're in those types of categories. So I think by nature, they have much longer life spans than other types of games. I think when we think about as we scale a game, it's all based on the return on investment. So if the payback period starts to get extended or the return on investment isn't as high as it should be, then you pull back and you focus more on margins and optimization of the game. I think when it's in its growth engine, a lot of those in the growth part of its life cycle, we're investing mostly in product features and just trying to grow the audience as quickly as possible. Anything as it starts to mature, then we start to focus on direct-to-consumer and other things, which can then help margins longer term. So I don't think there's a specified formula. I think we view that these games should have very long lives, as you see with Bingo Blitz and other big franchises. And these are 10, 15-plus years that these games are going to be top 100 titles.

So along those lines, your Social Casino titles have been operating for quite some time. They've been in decline in the last couple of years. Like what needs to happen for this segment to stabilize? And is the new unnamed slots title, is that really sort of like the inflection point, hopefully, where you get things back on that positive growth trajectory?

Yes. So I think within Social Casino, it's been a market share war in that we've lost market share over the last few years. I think we really kind of audit that and look at what's going on in the industry, we saw content being a key differentiator. Obviously, the land-based slot manufacturers are the ones that have gained market share. So that was a key driver in partnering with IGT to start to bring their content in. The first title we licensed was the end of December, so it's just happening now. And then I think we saw the need to bring a new title to market. And so I think we will be investing in the category. We will be putting another title out there. And I think that shows our commitment to the category.

And maybe can you talk a little bit about -- you talked about Cleopatra II for Slotomania, your relationship with IGT and sort of the initiatives that you can push forward with IGT.

I mean I can't really disclose the terms, but it's a partnership to license their titles that we can bring across Slotomania, Caesars Casino and House of Fun, and we're really excited about bringing their content into those titles and engaging customers, both from a customer acquisition perspective on the marketing side as well as having their content within our games and the product side.

Okay. Now M&A has been a big part of Playtika's growth strategy. You mentioned there's several hundred million dollars that you're willing to deploy over the next 2 to 3 years. Like how are you thinking about financing these transactions? And what type of games or what sort of -- is there an ideal type of studio that you're looking for at this point?

Sure. So I think if you look through the history, as I mentioned earlier, 12 out of the 14 titles that we operate came through M&A. So it definitely has been a view that we'd rather buy great products that are proven in the marketplace that have an audience that we can better market and monetize and grow. I think we have an excellent track record of doing that. I think when you look at the current market environment, obviously, with SuperPlay, they were 2 of the fastest-growing titles in the top 100. It was probably the only independent studio in the top 100. So we feel like we acquired the crown jewel within the mobile gaming landscape. And obviously, their growth is something that was a key driver in our rationale to acquire them. And I think the idea of having high growth studios, complementing our more mature studios that generate a lot of free cash flow is going to set us up for consistent growth on a go-forward basis. And so I think when we look at layering in deals, in '23, we did Innplay and Youda; in '24, was SuperPlay. And so I think each year, layering in those cohorts, we set ourselves up that if these studios don't hit profitability for 12, 18, 24 months from the time we acquire them, that year's out, the cohorts that we acquired in '23 are now generating significant cash flow. And same thing with if you look at how we model the earnout for SuperPlay, you start to see more significant cash flows in '26 and '27 from them as well. So I think that's generally how we think about it. But I mean Youda was a more mature studio. The studio has been around 12 years, growing, and we acquired it for an attractive multiple. So I think there it's generating EBITDA. So I think we will look to add franchises that we believe we can grow. And I think that's just -- I think we're category agnostic, but obviously looking to enter new categories that we're not in today.

Now what about -- I mean it seems like -- relatively speaking, it doesn't take a lot of money to make a mobile game. But it does take a lot of money to market it and scale it. It seems like in the last 5, 6 years, particularly during the pandemic, mobile studios were getting funded left and right. And it seems like there's just thousands of independent mobile studios out there. How would you view your acquisition pool like how many are really worthwhile M&A candidates?

Well, I think as you referenced, the barriers to entry to enter this space is actually higher than it's ever been given the challenges in the marketing side to scale. So I think because of that, it really is important to find great entrepreneurs with great products that are scaling in the marketplace that really just lack our live ops know-how or they lack the ability to kind of execute on the marketing side and scale their business. And so I think there are businesses that we constantly see that are interesting. But I think the question for us is really is there a cultural fit? Clearly, SuperPlay, [indiscernible] who live in Israel that we know very well that we've been tracking closely as they've grown, it was a great fit for us. I think as we look at other acquisitions, typically, we're looking in Europe and typically, it's really just around the mobile gaming ecosystem.

And it seems like these days, I mean, you could pick a country almost, and you're going to find a big glut of mobile companies. I mean Israel's very successful, Turkey, a number of parts in Europe. It really is one of the global phenomenon that you're seeing right now.

Yes. No, I think Finland, Berlin, Israel, Turkey, all big mobile gaming hubs right now. I think you'll continue to see that growth in Europe. In the U.S., you're not seeing as many, but there are a few mobile gaming studios.

Okay. Let's jump back to -- you talked a little bit about your DTC business. You plan to add more games to that platform. How long will it take to get all of your games on the platform? Is that the goal? And you talked about getting to 30% of your revenue from DTC. How long do you think it might take to get there?

Sure. So I think the 30% target we set out at the time of the IPO, we keep acquiring new businesses that don't have it. So I think we probably would have been there had we not kept growing the acquired base of companies. We recently launched both Solitaire Grand Harvest and June's Journey on direct-to-consumer, both are scaling nicely. So I think it's a real proof point that we can scale games that just weren't that were mobile-first games, not just necessarily the legacy titles that started on Facebook. I think you're seeing that other competitors are trying to scale their DTC platforms and don't necessarily have the type of scale that we have. And so I think we're very good at it. And it definitely is a key margin driver for us as we look at acquisitions as well.

What does it take to -- take a company that has been in the traditional mobile ecosystem and then bring it on to a DTC platform? Is there any particular characteristics that you want to see to bring in? Or is it just knowing how to market it and bringing people over to the DTC platform?

Listen, your most engaged customers want really content. And so if you can give them that content something differentiated on your own platform, then you're going to motivate them to kind of go there. So I think it's really been our thinking through how can you give an experience to a customer that's differentiated and make them obviously have to jump through the hurdle of using their own credit card versus having it through the frictionless payment systems of iOS and Android.

Okay. Now looking at your balance sheet and cash flow statement, you do have very good EBITDA to operating cash flow conversion. You don't have a lot of CapEx, so you do have strong free cash flow characteristics. Can you talk a little bit about your capital allocation strategy and where -- what you want to do with your cash?

Sure. So a little over a year ago, we announced our capital allocation strategy, which was approximately 50% of free cash flow in dividends and share buybacks and the other 50% on targeted M&A. We have a dividend yield today of around 8%. That wasn't the target when we initiated the dividend, but obviously the market has been so kind to us. I think that -- we recently announced a part of last quarter's earnings that that dividend obviously is going to continue for this quarter. It's -- I think nothing has changed from our capital allocation policy. We still intend to have a dividend and intend to purchase shares from employees equity that's vesting to help offset that dilution. And M&A is -- we announced that we intend to deploy around $100 million to $150 million a year over the next 3 years. And I think that's about a studio a year. So I think we're definitely still in the marketplace looking to grow, but it's a balanced approach between capital return and M&A.

And what is the net leverage on your balance sheet right now? And what's sort of your comfort range?

Sure. So today, we have around $2.4 billion in debt. And I think our target leverage range is probably around 2x. I think we said we'd lever up on that side up to 3.5x for the right acquisition. And so we kind of play in that 2% to 3% range, and we'll look to lever up for deals, but we're very thoughtful around leverage and not pushing it too far.

Great. We have a couple of extra minutes. Is there any from the audience that has a question for Craig? Always get silence with that.

[indiscernible] casino, where are you going?

Yes. So we have not -- don't have an update to get in the real money gaming. Obviously, we have a background coming from Caesars there, but no interest.

All right. And with that, Craig, thank you so much for your time. It's great having you here.

Thank you.

Thank you, sir.