Playtika Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 10 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the Plutica Q3 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tay Li, SVP, Corporate Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Welcome, everyone, and thank you for joining us today for the Q3 2023 earnings call for Placica Holding Corp. Joining me on the call today are Robert Antical, Co Founder and CEO of Playtecha and Craig Abrams, Playtecha's President and Chief Financial Officer. I'd like to remind you that today's discussion may contain forward looking statements, including but not limited to the company's anticipated future revenue and operating performance. These statements and other comments are not a guarantee of future performance, but rather are subject to risks and uncertainties, some of which are beyond our control. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future.

Speaker 1

We undertake no obligation to update these statements after We have posted an accompanying slide deck to our Investor Relations website, which contains information on forward looking statements and non GAAP measures, And we will also post our prepared remarks immediately following the call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC. With that, I will now turn the call over to Robert.

Speaker 2

Good morning, and thank you everyone for joining our call today. Before we speak about our business and financial results, I would like to take a moment to address the current situation in Israel, which has affected us all. As you are aware, Israel has recently faced a tragic and senseless Act of terrorism that has left our heart heavy with grief. Fortunately, I can report that all Playtica team members are currently accounted for and safe. However, Expense me to know that some of our colleagues are experiencing a grief of having lost loved ones.

Speaker 2

Our hearts go out to them And we offer our deepest condolences and support. We are committed to ensuring the safety of our team, The success of our businesses and our unwavering support for our community, we conduct significant Operation in Israel and most of our senior management is based in our Herzliya office with most corporate functions led from the U. S. We have approximately 1100 employees in Israel, which represent approximately 29% of our global workforce. As from this week, about 14% of our colleagues in Israel have been activated from the Israeli military reserves.

Speaker 2

As we continue to closely manage this situation, we have begun our business contingency planning and we will make necessary adjustment as situation progress. Currently, our team members in Israel are mostly working from home With support from our colleagues across the global offices of Playtica, we have moved a limited number of employees from Israel To Poland and Romania to provide redundancy in case of situation in Israel escalates. Our technology infrastructure stands as a critical pillar supporting the performance of our games, ensuring uptime and redundancy. Many of our games operate on our private clouds, which our maintenance Through 2 data centers in the U. S.

Speaker 2

And other data center in the EU, supporting corporate infrastructure. We want to emphasize that the company with a history of operating in regions facing geopolitical challenges, We believe we are well prepared to navigate the challenges with the war in Israel. We remain committed To safeguarding our operation, our employees and the interest of our shareholders, we have faced adversity before And we have always emerged stronger and more united. I will now turn it over to Craig to speak about

Speaker 3

Thank you, Robert. Before we dive into the business and financial results for the quarter, I would like to highlight our recent strategic acquisitions of in play labs and Yuta games. Our acquisition of in play offers an expansion into a new exciting luck battle genre with a growing player base. In play is an Israeli based company known for the recently rebranded title, Animals and Coins. Animals and Coins is an emerging title with high growth potential, and we structured the earn out to be reflective of our goal to fuel this growth profile.

Speaker 3

This transaction is a testament that our footprint in mobile gaming hubs around the world continues to benefit us as we evaluate local M and A prospects. Earlier in the quarter, we also announced the carve out acquisition of the YUTI Games portfolio known for their largest franchise, GOVNER of FOCR. We are encouraged by the fact that we not only acquired this portfolio at an attractive multiple, but it is also EBITDA accretive on day 1. This transaction has an earn out structure in place to incentivize the team to maximize EBITDA contribution and focus on profitable growth. This transaction also serves as a testament to our proficiency in executing complex acquisitions.

Speaker 3

In this instance, we successfully acquired an asset of another business in a region where we lacked an existing footprint, while enhancing our portfolio with a proven franchise. As we look to next year, we have a positive view of the M and A market conditions and remain committed to capitalizing on favorable opportunities. The robust free cash flow generation of our business model and large cash position enables us to self finance our acquisitions, which is a competitive advantage in the current market environment. Furthermore, I am also excited to highlight our recent partnership with Netflix, where we launched our internally developed title Ghost Detective, A hidden object game built by our logo studio. This is a significant milestone that represents our ability to deliver best in class entertainment experiences to global audiences across many platforms.

Speaker 3

Turning to our financial results. Our performance in the quarter was consistent with the seasonal headwinds we typically face in 3rd quarter and is in line with our expectation for the industry to be flat to slightly down this year. For the quarter, We generated $630,100,000 of revenue, down 2% sequentially and 2.7% year over year. Net income was $37,900,000 including the impact of an impairment charge of $41,600,000 related to Redecor, compared to net income of $68,200,000 in Q3 of 2022. Credit adjusted EBITDA was 205,600,000 down 4.4% sequentially and up 1% year over year.

Speaker 3

Our credit adjusted EBITDA margin was 32.6% in the quarter compared to 33.4% in Q2 and 31.4% in Q3 last year. We generated $161,000,000 in revenue from our direct to consumer platforms, down 2.6% sequentially and up 6.8% year over year. Our direct to consumer business now makes up 25.6% of our overall revenues, down slightly from 25.7% last quarter. Turning now to our business results for the quarter. Revenue across our casual theme games declined 2.1% sequentially and was flat year over year.

Speaker 3

The double digit growth year over year in June's journey in Saltair Grand Harvest was offset by declines in other titles such as Bingo Blitz, Best Fiends and Rita Core. Bingo Blitz revenue was $149,700,000 down 4.3% sequentially and 4.6% year over year. While we saw slight declines in Bingo top line performance, We are confident in the long term health and growth profile of this game. As the largest game in our portfolio, it was partially negatively affected by some of the largest and fastest Just growing casual games in our industry, making substantial performance marketing investments. Bingo Blitz remains the number one game in its category with a Strong community of dedicated and loyal players.

Speaker 3

Saltair Grand Harvest revenue was $79,100,000 down 3.3% sequentially off a record Q2 and up 13.7% year over year. While we experienced some normalization quarter over quarter, the studio experienced successful feature launches in September, The main contributions being the release of Team Versus Team and the release of Pets. Shifting to our social casino themed games, Social casino themed game revenue declined 1.7% sequentially and down 6.6% year over year. Slotomania revenue was $141,900,000 down 1.9% sequentially and down 5.5% year over year. Despite the seasonal headwinds in the Q3, we are encouraged to see sequential stabilization in Slottomania.

Speaker 3

And while Slottomania continues to decline year over year, We are encouraged to note this pace of decline has moderated compared to prior quarters. We have started to invest more in marketing at the studio alongside content packages released in the quarter. Turning now to specific line items in our P and L for the Q2. Cost of revenue decreased 4.3% year over year, primarily due to an increase in revenues flowing through our direct to consumer platforms. Operating expenses declined 3% year over year.

Speaker 3

R and D decreased by 11.2% year over year. The lower R and D expenses were driven by savings in labor cost from our reduction in force earlier this year and savings from various discretionary operating expenses across the organization. Sales and marketing decreased by 1.8% year over year. The decline in sales and marketing expenses year over year was driven by reduced headcount, slightly offset by increased performance marketing and other marketing expenses as we look to be opportunistic in investing in our largest titles as we mentioned at the beginning of this year. G and A expenses increased by 7.4% year over year.

Speaker 3

Savings across certain discretionary G and A categories We're offset by a reversal in contingent considerations that we booked in Q3 of fiscal year 2022 Regarding M and A retention payments related to the earn out of our Reedacor acquisition, on an adjusted basis, G and A declined by 6.9% year over year. As of September 30, we had approximately $878,200,000 in cash and cash equivalents. Looking at our operational metrics, average DPU declined 3.5% year over year to 299,000. Average DAU declined by 6.7% year over year to 8,400,000 primarily driven by declining DAU in Bethvane's, Slotomania and Redacor. Despite the decline in average DAU in Slotomania, We're encouraged to see stabilization in slotamania's DPU in the quarter.

Speaker 3

Our focus on Tier 1 DAO also contributed to the decline in average DAO. ARPDAU increased 3.8% year over year to $0.81 As for our financial guidance for 2023, we are revising our revenue range to $2,550,000,000 to $2,565,000,000 And we now expect credit adjusted EBITDA between $825,000,000 $832,000,000 We expect capital expenditures of approximately $95,000,000 While we are focused today on our Q3 performance, It is important to acknowledge the current war in Israel and the potential impact to future business performance. The ongoing conflict is dynamic and highly uncertain. While we are not providing specific guidance for next year at this point, we want to make it clear that an escalated conflict may introduce various challenges that may impact our financial performance. We will continue to adapt and respond as needed to attempt to ensure the best outcome for our company, our employees and for our shareholders.

Speaker 3

We kindly request that questions during this earnings call remain focused on our business developments and financial performance for the quarter, allowing us to provide you with the most relevant and important updates. Thank you for your understanding and support. With that, we'd be happy to take your questions.

Operator

Our first question comes from the line of Aaron Lee of Macquarie. Your line is now open. If your line is muted, please unmute it.

Speaker 4

Hey, guys. Sorry about that. Thanks for taking my question. Wanted to touch on the acquisitions of Yuto AIM PLAY. Just at a high level, can you just talk a little bit more about the overall strategy there and How much marketing support you tend to support these games with?

Speaker 4

Just trying to better understand if the opportunity is more about revenue synergies or just running these games a little bit more efficiently. Thanks.

Speaker 5

Sure. Thanks for the question, Aaron. I think both acquisitions are very different. In play is a growth asset where we see a lot of potential in A very interesting new genre. That's a title where we intend to ramp up marketing and invest, and grow.

Speaker 5

And I think if you look at The deal documents that were posted alongside the deal, you'll see that it was structured in a way to allow us to invest and grow that asset. I think when you look at a title like Governor of Poker in YUTA Games, you're looking at a much more mature portfolio that's established, and it's an opportunity to leverage our LiveOps expertise and further optimize and help grow that business. And so I think and that's a business that's EBITDA accretive at day 1. So I think each opportunity is very different. One was more attractive on a relative valuation perspective with a more mature franchise and the other one is an asset that we'll

Speaker 4

Perfect. That's very helpful. Thanks. And also wanted to ask about your The user acquisition tools you mentioned last quarter, the AI based solutions, any color on the status or impact of those tools? Are they performing how you expected or do you think it might need some more refinement?

Speaker 6

Hey, thanks for the question. It's Nir Kochak, Playtecha CMO. So basically, as we said before, this is an ongoing process that we're going to keep leveraging AI for internal tools. We do see some improvement in some of the area, but we are keep testing it parallel to the other tools. But I can tell that Going forward, we will keep using AI tools into the marketing activity on an activity basis.

Speaker 4

Great. Thank you very much.

Operator

All right. Thank you. One moment for our next question. Our next question comes from the line of Arthur Chu of Bank of America. Your line is now open.

Speaker 7

Hey, morning guys. This is Arthur on for Omar. Thanks so much for taking the question. So I have a question on the DTC platform. I think you guys probably already have The highest DTC penetration in the industry, a lot of your peers see your DTC penetration serve as a benchmark.

Speaker 7

I was just wondering like how should we think about the potential for more uptake longer term? Like do you have sort of a longer term target in mind? Just anything Can kind of help us to think about that would be super helpful. Thank you.

Speaker 2

Thank you for your question. As we spoke a few quarters ago, always we target to 30% of our revenues and till now we are on target, Growing this year, we're feeling very confident about the future of DTC. And this year we are launching a We're launching June Journey and we believe it will help to grow the percentage. But again, this is a very powerful tool of Playtica. This is a tool that we started a few years ago And it's a big advantage of us, not only by revenues, is by our ability to be more free And more independent on ourselves.

Speaker 2

Thank you.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is now open. Thanks

Speaker 8

so much for taking the question. I know it might be a little early to talk about next year, but in terms of what's being implied in terms of an exit Velocity for the business, can you unpack a little bit of the elements of acquired games, developed games internally and how should we be thinking about The growth algorithm for the business exiting 2023 against maybe a broader view of what you think the end market or the industry might grow as we

Speaker 5

on our largest franchises and investing in growth there, Salta Grand Harvest, June's Journey, Bingo Blitz, reinvesting in Slottomania, Continuing to be the number one slot game in the category. We're also working on reestablishing our leadership position in slots to our central slots strategy, The opportunity to really efficiently cross pollinate all of our titles with our best slot content and then layer on M and A. We just did 2 acquisitions this past quarter. I think The market environment is such that with high interest rates, depressing valuations, plus the more challenging marketing environment for smaller studios, Combined with our large cash position and free cash flow we generate, we're very well positioned to continue acquiring great assets. And so I think that's really Where our focus is going to next year, on the earnings call for Q4 and February, we intend to give guidance for 2024, But at least strategically, hopefully that gives you a sense of what we're planning.

Operator

Our next question comes from the line of Colin Sebastian

Speaker 9

Thank you and glad to hear everyone in the team in Israel is safe and know that you're in our thoughts. I guess first off, given some of the sequential trends in the business, maybe it would be helpful to provide some additional context Where you see the health of the broader market and what you're seeing maybe from your competitors? And related to that, regarding the additional performance marketing spend, is that something we should think that or we should expect more of as well through Q4? And is that sort of part of the stabilization plan for the core franchises? Thank you.

Speaker 5

Sure. Thanks. So Q3 seasonally is the slowest quarter of the year. So I think looking at sequential Comparisons are sometimes challenging there and best of luck kind of year over year. That said, The quarter was probably most impacted by the performance of Bingo Blitz.

Speaker 5

Bingo Blitz is our biggest title. I think as you look at sort of If you look at 3rd party sites and look at more recent performance over the last several weeks, you'll see that that title has bounced back. And so I think if you look at our guidance for the year that we provided, you'll see confidence there. And As we look going forward, we'll continue to invest in our biggest titles, where we see the best growth potential and best ROI. So I think As we look at the industry more broadly, big brands, large franchises that can invest more materially in marketing definitely have an advantage and you see perform Kind of better in the rankings.

Speaker 5

I think that positions us quite well and then combine that with our M and A capabilities in a mature market That's consolidating. We feel pretty well positioned.

Speaker 9

Okay. Anything any comments on sort of the Pace of performance marketing spend?

Speaker 6

So regarding the performance marketing, basically this was part of our strategy from the beginning, focusing more on quality versus quantity. So More on quality versus quantity. So in some of the games where we see a potential from performance marketing side, we will keep invest on that. Nothing special that we can add right now.

Speaker 9

Okay. Thanks guys. Appreciate it.

Speaker 5

Thanks.

Operator

All right. Thank you for your question. Okay. I'm showing no further questions at this time. Actually, we just had one pop up there.

Operator

This question comes from Matthew Cost of Morgan Stanley. Your line is now open.

Speaker 9

Hi, team. This is Dave Wilconco on for Matthew Koss. Thanks for taking the question. I was wondering if you could speak to expectations On any differences in performance versus social performance of social versus casino games heading into next quarter and maybe into 2024?

Speaker 2

So thanks for the question. Yes. When we are reporting, we're always speaking about social casino and non social casino. But we as a company And we said in the past, we always looking game by game. And this is our way strategic how we're running our games.

Speaker 2

So there is even in the social casino aspect, there is like Craig said before with Lotomania It's become very stable and we fixed many things in the last quarter And we see a future. We see a future and it only depends where we put our marketing money, Where we decide to put the marketing money and when we see potential of growing, it doesn't matter if it's social casino or casual or other kind of game, this is where we're doing this. So till now, we are happy with what's happening around social casino. We're happy More than happy about what happening around the Slutomania, because this is our biggest title in this genre and we see a good future for this. Thank you.

Speaker 7

Thanks.

Operator

Thank you for your question. I'm showing no further questions at this time. Like to thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Playtika Q3 2023
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