SUPERPLAY Ltd. (PLTK) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Playtika conference call to discuss the agreement to acquire SuperPlay. [Operator Instructions] Please be advised today's conference being recorded. I would now like to introduce your speaker for today's conference, Tae Lee, SVP, Corporate Finance and Investor Relations. Please go ahead.

Welcome to Playtika Holding Corp.'s call to announce that we have signed a definitive agreement to acquire SuperPlay. On the call with me today are Robert Antokol, Co-Founder, Chief Executive Officer and Chairperson of the Board; and Craig Abrahams, President and Chief Financial Officer. During today's conference call, we will make forward-looking statements related to our acquisition of SuperPlay, and actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed 10-Q and 8-K regarding this acquisition as well as elsewhere in our SEC filings for further details. I will now turn the call over to Craig.

Good morning, everyone, and thank you for joining our call. I'm excited to announce that we've entered into an agreement to acquire SuperPlay, an innovative in-app purchase based mobile gaming company with a history of developing and delivering engaging and successful casual game franchises. As Robert outlined in his shareholder letter that has been published on our Investor Relations website, the proposed acquisition strongly aligns with our strategic vision of acquiring best-in-class mobile gaming companies with potential for category-leading franchises. Furthermore, following an extensive evaluation of the mobile gaming industry, it became evident that SuperPlay was the premier independent gaming asset in the casual genre with Dice Dreams and Domino Dreams being 2 growth games in the top 100 ranked games in the U.S. and 2 additional games in their pipeline. Its impressive performance in high-growth categories, substantial scale and talented development and live operations teams made it ideally aligned with our M&A strategy. We structured a 3-year earn-out arrangement designed to reward performance while mitigating downside risk, drawing on our history of success in M&A. In previous acquisitions, we have demonstrated our ability to create value and drive growth through strategic deal structures. In our acquisition of SuperPlay, annual earn-out payments are contingent on both revenue growth and adjusted EBITDA thresholds, aligning incentives to focus on outcomes that create value for our shareholders. By tying incremental earn-out consideration to clear performance metrics, this approach is designed to create a more attractive effective purchase price multiple and a pathway to profitable growth. We have summarized the earn-out calculation in our slides we have published on our Investor Relations website. Finally, we are reaffirming our commitment to a balanced capital return strategy that includes quarterly dividends and dilution offsetting share repurchases. We remain focused on a disciplined approach to capital allocation, balancing our investments in strategic M&A opportunities with consistent return of capital to our shareholders. Thank you for your continued support, and happy to take your questions.

[Operator Instructions] Our first question comes from Chris Schoell with UBS.

You previously talked about spending, I believe it was $600 million to $1.2 billion on M&A over the -- over 3 years with earnouts, you could go beyond that with this transaction. So -- can you help us understand what drove your willingness to potentially go further with this deal? And is it fair to think further M&A is unlikely as you digest these assets? Or would you be willing to take on more deals here in the near term?

Thanks for the question. As we evaluate the industry and looked at opportunities, SuperPlay just checked all the right boxes and growth at scale in high-growth categories, 2 top franchises in the top 100 in the U.S., a new title in development with planned soft launch in 2025. And while we're paying $700 million upfront, and we're paying an earnout above a baseline of $342 million, there will be additional consideration paid in future years based on growth. And it aligns with our objectives in terms of both growth and increase profitability over time. So we will give a revised range around M&A in the future as we look at refinancing options and look at future capital needs. We are committed to continued dividends and share buybacks. So in terms of updating our capital allocation policy, we feel it's in line even though the size could be larger here and M&A continues to be a key driver of growth for us. 9 out of our top 11 titles came through M&A and will continue to be key for us. As for your second question, on future deals, there will probably be more of the bolt-on variety like we did last year, but we will be continuing to look at opportunities to continue to grow our portfolio.

That's very helpful. If I can just fit in one more. The performance on these properties has been very strong. Can you just help us understand where you see the opportunities for upside? And how do you plan to enhance the revenue performance for these properties in the coming years?

Sure. So this studio has had very strong performance. We expect them to continue to perform at a very high level. We're here to support them both with capital and our know-how. And so we're super excited about the combination, leveraging both those things.

Our next question comes from Drew Crum with Stifel.

Can you address the absence of profitability for SuperPlay? What some of the key drivers are to hitting breakeven in 2025? And the longer term -- over the longer term, what the rate margin profile looks like for this business?

Sure. So this is a company 5 years in -- it has 1 large franchise that have been investing significantly in growth historically, a second franchise with Domino Dreams that has even greater growth potential ahead of it. So they have been investing heavily in marketing. As you'll see in our deal structure in 2025, there's a threshold of minus $10 million in EBITDA. And so the company will be shifting gears and focusing more in profitability in future years, albeit with growth and growth targets. And so we're pretty excited about their ability to do that via execution, whether it be monetization and live ops as well as innovation and marketing. And so definitely a leading-edge team in terms of their ability to execute.

Our next question comes from Matthew Cost with Morgan Stanley.

I guess you mentioned that there's 2 games in the development pipeline for the studio. Is this a studio that maybe kind of like Wooga would be 1 that you would support in continually investing in new games organically? How does it fit into your strategy to have some of these studios working on new games as opposed to mostly bringing new games inorganically? And then I have 1 follow-up.

So thank you. Thank you for the question. For us, we always said in the past that we have Wooga to develop new titles for Playtika. So now the game is changing. We have SuperPlay to do it. SuperPlay showed very strong ability to develop new titles. They did launch 2 amazing titles in a short time. And yes, they're going to have a new title in the next year, and we're counting on them to develop in the future more and more. So this is going to be our place to develop the Playtika future.

Great. And then maybe, Craig, just on leverage. I think this will earn about a turn of EBITDA to your leverage ratio. I guess what's your philosophy on managing leverage from here?

Sure. So historically, we've spoken about net leverage of 1 to 3x, potentially levering up to 3.5x for the right deal. And so I think that's the range that we intend to operate within.

Our next question comes from Aaron Lee with Macquarie.

So I believe you'll be absorbing about 300 team members. Do you anticipate the integration will be any different than past ones, just given the size and the leadership restructuring from earlier in the year?

So we are not going -- our strategy with acquiring companies was always to make them to work in their autonomy. So we always did it in the past, and this is what we're going to do this time. We have studios all around the world that's working independently, automatically and without any interfering. We're, of course, controlling and doing everything, but it's still their decision, and it's going to be the same with SuperPlay.

Okay. That sounds good. And then a quick follow-up. As we think about your D2C platform, are these games that you think you can move to your D2C platform over time? And how are you thinking about the potential there?

So in your question, you already answered it. So there is a big potential with D2C, but it's not for now. For now, there is an earnout. There is -- we have an agreement to run. So for now, this is not going to happen in the coming year. But for sure, this is a huge advantage of us working together with them because as you know, our D2C platform is one of the biggest, if not the biggest in the industry, and this is what's always Playtika advantage.

Our next question comes from Eric Handler with ROTH Capital.

I guess when I look at your 2 games, I mean, Dice Dreams is significantly bigger than Domino Dreams. So when you look at these 2 games and the growth opportunity, is -- do you still see a significant revenue growth opportunity with Dice Dreams? Or is that more of an improved profitability story and Domino Dreams is more of a revenue growth story.

Thanks for the question, Eric. I think both titles are growth stories in terms of their potential to continue growing. Obviously, Domino Dreams is more in its infancy and has even more potential in terms of growth on a percentage basis. But we're super excited about both titles, unique positions in the industry. And we'll be doing everything we can to help them continue on that growth trajectory.

Okay. And then as a follow-up, can you talk a little bit about the Coin Looter category and the Board category and what makes you excited about these games in those categories?

So our first acquisition that we did 7 years around with Jelly Button, we were the first one in this category with [indiscernible]. So this is one of the growing categories today in the industry. And we always said that we're looking for the right opportunity to do M&A, and we always had the pressure to do M&A and we said that we're looking for the right deal that will really will make a game changer for us. So now with the Dice Dreams, we believe we're going to conquer this category, and this is our vision there.

Next question comes from Omar Dessouky with Bank of America.

Any information you can give us on what you think the range of entry multiples are based on your projections for the final year of the earn-out? And then one follow-up.

Craig's line has left the stage, if you were looking for an answer.

Can you hear me? I asked the question. Did you hear the question?

Our next question comes from Clark Lantin with BTIG.

[indiscernible] just curious, with a lot of [indiscernible] sort of former Playtika employees that are coming back over to management lines culturally with the broader organization now. I'm just curious if there are some benefits that I guess you anticipate from folks back into Playtika, could they perhaps oversee other titles or teams but any ordination eventually and in has been highlighted in the release compared to the additional detailed context you might be able to give us around the titles in development, the early stage, later stage are these ones that we think of it actually coming to market sooner rather than later?

So I'm sorry, I heard the question like not perfect, what I understand from your question about the culture and the DNA of the team. So -- and -- so I would like to say that for us, when you look at the history of M&As, the thing that makes M&A to fail is the different DNA, different culture. And here, in this situation, because these guys came from our university here in Playtika. So these guys are our DNA, and we are their DNA and the culture is very similar culture. And we understand each other, we know each other. We have a big confident that working together will bring Playtika to the next level and the place that Playtika should be. So we have today new 2 titles, growing titles. One of them is exploding the same culture, we understand how they're running their games. We understand their technology. We know our advantage when and where we can help. So -- sometimes it's really hard to say in words the feeling about the deal. But for us, it's unbelievable deal.

Our next question comes from Omar Dessouky with Bank of America.

Just trying in here because I think there were some IT issues. I was asking whether you guys could tell us anything about the range of entry multiples based on your based on your final year earn-out. That's the first one. And then the second is, in the past, I think you've discussed contribution as net revenue minus marketing expense. And I was wondering if you had anything to share on that metric regarding this deal?

Sure. Thanks, Omar. So as you think about the upfront multiple, this deal was negotiated based on a baseline of $342 million. And so we will pay an incremental earn-out based on revenue growth above that target based on meeting certain criteria regarding EBITDA thresholds. And so as you look on a go-forward basis, I think like we've said in most deals, when we look back 4 years from now, the goal is to get this to a mid-single-digit EBITDA multiple on an effective basis. And given the growth profile and the scarcity of these types of assets in the top 100, we feel that would be an excellent deal for us. And so -- that's how it was structured. Obviously, the revenue growth -- the revenue level of the business today is greater than that threshold, given their strong growth over the last few months. I think that Page 13 of our slide deck will give you a good sense of how the earnout payment is structured.

Got it. Okay. Any comments on the -- that other metric, net revenue minus the contribution metric?

Sure. So net -- so direct contribution will be defined in the share purchase agreement, which will be posted in the next day or so.

And I'm not showing any further questions at this time. So this does conclude today's conference call. We thank you for your participation. You may now disconnect, and have a wonderful day.