Playtika Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 14 speakers on the call.

Operator

Day and thank you for standing by. Welcome to Playtecha Q2 2023 Earnings Call. At this time, all participants are in 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 Tay Lee, SVP of Corporate Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Welcome, everyone, and thank you for joining us today The Q2 2023 earnings call for Playtecha Holding Corp. Joining me on the call today are Robert Anzakal, Co Founder and CEO of Playtecha and Craig Abrams, Zateca'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, You should not rely on them as representing our views in the future.

Speaker 1

We undertake no obligation to update these statements after the call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC. We've posted an accompanying slide deck to our Investor Relations website, we will also post our prepared remarks immediately following the call. With that, I will now turn the call over to Robert.

Speaker 2

Good morning and thank you everyone for joining our call Before we dive into business and financial results for the quarter, I would like to highlight our recent announcement to acquire The Government of Poker franchise. Overall history, we have successfully executed various acquisition that have played an important role in establishing Playtica as an industry leader in mobile gaming. We are consistently searching for promising game franchise that we can optimize and monetize using our operation excellence And best in class live ops. Governor of Poker is a well established franchise with a lower player base, Generating most of its revenue from Europe, when combined with our unique expertise and tools in game operation, We see it as a good opportunity to further expand our leadership in social poker market. Turning to our quarterly results.

Speaker 2

This quarter we generated net income of $75,700,000 And credit adjusted EBITDA of $215,000,000 which marks a 6.7% growth year over year. This demonstrates our focus on running more efficiently while continuing to invest in developing better tools and technology. As a result of our early investment in AI and the efforts of our team, we are now strategically Integrating these AI driven tools into our studios, which should provide opportunities to support our margins in the future. In addition, we are seeing how our internal developing tools combined with our industry leading expertise in LiveOps is creating new opportunities Of growth for our games, while providing a platform to support any future M and A. I will now turn it to Craig, who will walk through the financial and discuss the quarter in greater detail.

Speaker 3

Thank you, Robert. Our performance in the quarter was consistent with our outlook from the beginning of the year, where we expected the industry to be flat to slightly down. Throughout the quarter, we saw positive year over year revenue trends for our casual portfolio, whereas our social casino portfolio fell slightly below our expectations. Our casual portfolio now represents 56.8 percent of revenue, a new record for the company. Coming off strong sequential growth to start the year, we saw normalization in Q2.

Speaker 3

For the quarter, we generated $642,800,000 of down 2% sequentially and 2.5% year over year. Net income was $75,700,000 compared to $36,400,000 in Q2 of 2022. Credit adjusted EBITDA was $215,000,000 down 3.5% sequentially and up 6.7% year over year. Our credit adjusted EBITDA margin was 33.4% in the quarter compared to 33.9% in Q1 and 30.5% in Q2 of 2022. We generated record revenues of $165,300,000 Our direct to consumer platform, up 9.1% sequentially and 7.6% year over year.

Speaker 3

Our direct to consumer business now makes up 25.7 percent of overall revenues. Turning now to our business results for the quarter. Revenue across our casual themed games declined 1.4% sequentially and increased 3.7% year over year. This year over year growth was driven by strength in Bingo Blitz, Saltair Grand Harvest and June's Journey. Bingo Blitz revenue was $156,300,000 down 1.8% sequentially and up 6.3% year over year.

Speaker 3

In the quarter, we saw positive results from Gems and Canon features released in May. This is significant economy change for the game as the focus of Gems Generate revenue through gameplay enhancers and the Canon feature is also an example of gameplay enhancer that has resonated well with our players. As part of our global growth plans for Bingo Blitz, the studio achieved a significant milestone by successfully launching its market penetration campaign in Germany. The success of this launch can be attributed to its focus on in game localization and a well executed marketing initiative featuring Drew Barrymore. Bingo Blitz is the largest title in our portfolio and the number one game in this category with a strong community of dedicated and loyal players, And we are looking forward to the content release slate throughout the back half of the year.

Speaker 3

Saltire Grand Harvest revenue was $81,800,000 down 4.2% sequentially off a record Q1 and up 26.2% year over year. While we experienced some normalization quarter over quarter, we saw sequential stability in the studio's most loyal players. The studio experienced feature launches, including new seasons of My Farm 2, strong Easter collection monetization and the special set campaign addition. Shifting to our social casino themed games. Social casino themed games revenue declined 3% sequentially and 9.9% year over year.

Speaker 3

Swadamania revenue was $144,700,000 down 1.3% sequentially and 9.9% year over year. We are encouraged to see slotamania revenue stabilizing for the 3rd consecutive quarter. Turning to marketing. As part of our Digital Studio initiative, we also introduced an innovative AI based solution, scaling up user acquisition for World Series of Poker on iOS. This new capability uses the new attribution framework of Apple's ATT and allows campaign optimization amid the challenging market environment.

Speaker 3

After seeing strong initial success for WSOB, we plan to roll out this new user acquisition solution to additional studios by the end of 2023. Turning now to specific line items in our P and L for the Q2. Cost of revenue increased 1% year over year And operating expenses decreased 17.4% year over year. Profitable performance remains a core tenant for us. As a company, we prioritize profitability and operational efficiencies resulting in industry leading margins and robust free cash flow.

Speaker 3

R and D decreased 19.9% year over year. The lower R and D expenses were largely driven by the reduction in force that we announced at the end of the Q4 as well as provisions for certain retention bonuses that we had in Q2 2022. Sales and marketing decreased 7% year over year. Savings and sales and marketing expenses were largely driven by the reduction of user acquisition expenses in ReDecor As we noted last quarter, we started to pull back on some of our UA spending in ReDecor during the second half of twenty twenty two. G and A expenses decreased by 29.6% year over year.

Speaker 3

This was partly due to savings from the reduction in force and primarily from certain provisions for contingent consideration that we had in Q2 of fiscal year 2022. As of June 30, we had approximately $955,100,000 in cash and cash equivalents. Looking at our operational metrics, average DPU declined 1% year over year to 307,000. As we continue to focus on marketing efforts in Tier 1 markets, average DAU declined 12.2% year over year to 8,600,000 ARPDAU increased 12.2 percent year over year to $0.83 As for our financial guidance for 2023, we expect to end the year at the low end of our full year guidance of revenue and towards the higher end of our guidance For credit adjusted EBITDA, we're revising our capital expenditures guidance and now expect capital expenditures between $100,000,000 $105,000,000 down from $115,000,000 to $120,000,000 previously. In terms of the M and A landscape going forward, we are witnessing an increasingly favorable market With a strong track record of generating substantial free cash flow, we have the financial capacity to pursue value enhancing deals.

Speaker 3

As Robert mentioned, we are committed to focusing on our core strengths and executing value accretive transactions that will drive long term value for our shareholders. With that, we'd be happy to take your questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Matt Kost from Morgan Stanley. Please go ahead.

Speaker 4

Hi, everybody. Thanks for taking the question. Maybe I'll just start kind of right where you left off, Craig, on the Increasingly favorable M and A market. Obviously, you executed a deal recently. It's the first one in some time, not just for you, but kind of at the market level.

Speaker 4

I guess, What is changing that's making it more favorable? Like why lean in now? And has the playbook Change at all in terms of what you're looking to target in terms of M and A potential acquisitions? I think this is a casino game, which I think is a little different than

Speaker 3

what you've done in the past.

Speaker 4

And then I have one follow-up. Thank you.

Speaker 3

Sure. Thanks, Matt. I think what we're seeing is that consolidation in the industry is continuing. We have a differentiated technology platform and live operations expertise that allows us to acquire established franchises And improve their operational metrics and therefore the business. And that's giving us an advantage in this type of a market.

Speaker 3

I think what we're seeing is Smaller studios have trouble scaling, given what's happening in the marketing landscape, and that's an advantage for us. The fact that we did a carve out also demonstrates our ability to do more technically complex transactions. And whether it's a well established Franchised or a high growth studio, we have our eyes on a variety of opportunities and we'll continue to be Opportunistic and going forward and executing.

Speaker 4

Great. And then just on the comment in the prepared remarks The new user acquisition solution, I think you mentioned for World Series of Poker. Can you just go into a little bit more detail about what you're doing differently there? What the results of the new campaign, where the new solution were and then how long it will take to roll out to the rest of the studio?

Speaker 3

Sure. Nircore Chuck, our CMO, will take that one.

Speaker 5

So basically, with the WSOP In Q2, we did several things. Also, we launched the Thrill Team campaign and also we did the things with the iOS. So basically, What we are doing there, we are leveraging our AI capabilities and our technology in order to have a prediction and to understand better The quality of the traffic that we are buying, we see good results there and we plan to apply these activities also to the rest of the game in the coming

Operator

Great. Thank you. Thank you. One moment for our next question. Our next question comes from Stephen Ju from Credit Suisse.

Operator

Please go ahead.

Speaker 6

Okay. Thank you. So I think you had a pretty good jump in DTC revenue So can you talk about which franchises or new game launches that might be driving the change in mix there? Thank you.

Speaker 2

Yes. Thanks for the question. So as we said at the beginning of the year, we're going to add another 2 Games to our network and this is going by plan. The growth is coming from our Current hubs are already running there. Everything is by the plan.

Speaker 2

As we said at the beginning, this is a very This is very big advantage of Playtica on our competitors. And as we started this before, we are

Speaker 6

Thank

Operator

you. Thank you. One moment for our next question. Our next question comes from Omar DeSouki from Bank of America, please go ahead.

Speaker 7

Hey guys, thanks for taking the question. So I wanted to look beyond Potentials there are for gross margin expansion. In particular, we've heard in the industry things like Subscriptions and mobile gaming portfolios potentially fitting into subscriptions sold by third parties as well as things like alternative app stores. And I was hoping you could talk a little bit about where Playtecha's portfolio might fit into those opportunities.

Speaker 2

Thanks, Omar, for the question. So we like we said in the last quarters, We are really believe in AI. We started to invest in AI in 2016. We've built few labs around it. And I know that everyone today is speaking about it, but we already started to implement our tools and you see it in our margins.

Speaker 2

And this is where we are focusing. We're giving We're building tools that will help our talent to focus at the important work and the AI is supporting every activity that we're doing. We see a very good future for our margins. If I'm speaking about the margins, Platica was always looking at the margin, was always looking at the EBITDA and building an efficient and stable and Strong business for the future. And I'm really happy that we see the results now.

Speaker 2

I'm really happy to see that all the buzzword that everyone was speaking, Plentica is Delivering the goods and this is only the beginning of the efficient strong work to build better margin and better Stability to the company.

Speaker 1

Okay. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from Colin Sebastian from Baird. Please

Speaker 7

Just wanted to ask or follow-up on the sequential drop in DPUs, maybe you could talk about retention trends in games and maybe if there were specific decisions during the quarter To focus more on operating efficiency and if more broadly you're seeing any changes in sort of the customer acquisition Landscape, obviously, outside of the AI powered marketing that you discussed. Thank you.

Speaker 3

Sure. Thanks, Collin. So If you look kind of last year, Q1 to Q2, we saw a similar decline in DPU. So I think there's some seasonality there as it relates Kind of new user acquisition and efficiency there. I think the second component we've always talked about is DPU It's well correlated with revenue, and revenue normalized in Q2 after a very strong Q1.

Speaker 3

As we looked out to this year in terms of planning, I would say the biggest difference was Focus on our biggest franchises and larger marketing budgets for titles like June's Journey, Bingo Blitz and Salt Lake Grand Harvest. Other than that, I think it's really focusing on execution and as Robert said, on efficiency and improving our margin profile.

Speaker 1

All right. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Clark Lampkin from BTIG. Please go ahead.

Speaker 8

Hi, thanks for taking the question. Craig, I've got one on development, sort of following up on Your commentary around AI driven marketing efficiencies, those certainly felt, I think, pretty encouraging relative to what we were hearing about user acquisition challenges over the last couple of quarters. If you end up seeing the same benefits with other titles that you have with World Series of Poker, would that be enough for you to feel comfortable Leaning back into new title development or launches, if there's any sort of specific timeline that you can put around that, I think it would be helpful also.

Speaker 3

Sure. Thanks for the question, Clark. So I think our focus really has been around using M and A as a platform to add additional IP to our portfolio rather than organic development, given kind of where we Our position in the marketplace, both from a balance sheet perspective and a capability perspective, I think, as Robert mentioned, AI is helping us Across all areas of kind of the customer life cycle from acquiring customers to retaining customers to monetizing customers. And so that benefit is going to accrue across the portfolio and we'll see that in our organic titles, in our portfolio plus In titles that we acquire. So I think that continues to be the playbook for us rather than organic development, although we do have some Organic development still within the studios, but it's not something that we feel like we should press the gas on at this moment in time.

Speaker 8

Got it. And maybe to follow-up quickly on DTC. I know you've talked about 2 new titles coming over the balance of the year. As we think about the portfolio a little bit more broadly, are there titles of yours where maybe a DTC offering wouldn't work For some reason in terms of player experience or is that on the table for every one of your games, I guess eventually?

Speaker 2

So, first, we always look at the maturity of the games and the maturity of the players, the playing the games and the loyalty. Of course, not all the titles will work the same, and we're not expecting everyone to work the same. But for sure, it will give advantage. For sure, some of the revenues will work and we are as I said in the beginning, we are on the track with our A projection, what we said, and we're feeling very strongly about it. And again, this is a big, big advantage of Playtecha.

Speaker 1

Thank you.

Operator

Our next question comes from Drew Crum from Stifel. Please go ahead.

Speaker 9

Okay, thanks. Hey guys, good morning. What does your outlook for the second half imply for casino in terms of rate of decline? Should we see this business flatten out exiting the year? And can you comment on how Slottomania is tracking Relative to your forecast, I think there was a comment in the prepared remarks that casino maybe underperformed a little bit in 2Q.

Speaker 9

Any comments on Slottomania would be helpful. Thanks.

Speaker 3

Sure. So we've seen Slottomania continue to Stabilized in terms of trends over the last three quarters. And I think as we talked about a couple of quarters ago, it was a key area of focus for us. And so I think we're pleased with that. Obviously, We're making some assumptions that we can further stabilize the rest of the portfolio there and making appropriate investments.

Speaker 3

And so It's an area of focus for us and just as we've done it with Slotomania, we expect to do it with the rest of the portfolio as well.

Operator

One moment for our next question. Our next question comes from Aaron Lee from Macquarie. Please go ahead.

Speaker 10

Hey, good morning. Thanks for taking my question. So you seem to have reached stabilization in some of your core games and growth in others. And you obviously have also recently announced the acquisition of Governor of Poker. And I believe you touched on this a bit in your comments around the M and A market, but maybe you could just give some more color on how we should be thinking about organic versus inorganic growth for 2024 and beyond.

Speaker 3

Thanks, Aaron. We're not giving long term guidance at this point. I think that, As we mentioned earlier, there's opportunities for us to continue to be opportunistic in the M and A market. And so we See that as a big opportunity as we look forward. I think Governor Poper is a good example of the ability to bolt on Well established franchise and leveraged our LiveOps and technology platform to help grow that asset.

Speaker 3

But yes, there's no further guidance beyond 2023.

Speaker 10

Okay. Fair enough. And then on the Governor of Poker acquisition, Historically, I think it was your marketing and distribution in LiveOps that were the value add that you'd bring to each acquisition. So can you talk about the value add that you're bringing to Governor of Poker since I would imagine they're probably doing pretty well at marketing just given their prior advertising ownership? So is it really the LiveOps where you think you can be additive?

Speaker 10

Or is it like past acquisitions where it's really all of the above? Thank you.

Speaker 2

So thanks for the question. I think when you look at the government of poker, Okay. It's a little bit early to say because we still didn't close the deal. But I think what we are bringing here is something that most of the companies, they don't have it. The understanding and experience of monetization and operation Of 9 games that we're running today is something that you cannot even compare to what others have.

Speaker 2

So when we look at this company, we saw 2 important stuff. 1st, a very stable and a very Strong game that's running for many years in a big community. And second, we saw a very strong Team that can help Playtika not only with this game, with other stuff. So today, we're looking not only, okay, what we can bring, What we can help to other companies, we're looking what we can get and what we can learn from them. So this is a different change that we can with our approach.

Speaker 2

We're looking for stable businesses. We're looking for big communities. We're looking for companies that have strong teams That they can help us with the challenges in the future.

Speaker 10

Got it. Thank you, Robert. Thanks, Craig. Appreciate the color.

Operator

Our next question comes from Eric Handler from Roth MKM. Please go ahead.

Speaker 11

Yes. Good morning and thanks for the question. Wondering if you could talk a little bit more on M and A. As you look at deals, Are you trying to fill in maybe some holes in the portfolio? Or is you just looking at games that you just think you can grow?

Speaker 2

So first, we're looking for good deals, okay? Before everything, We need to see a deal that fit our way how we're thinking and looking. We're looking for deals that are making sense In this a few years ago, the prices and everything was so high. Now everything is coming to normal, coming to normal prices. So it's the environment is more comfortable to make a deal.

Speaker 2

This is one second. We're looking for teams, Strong stable teams that can help us again as I said before. And 3rd, yes, We would like to build a bigger portfolio. We would like to build to have more gains in the top 100 grossing gains in the U. S.

Speaker 2

We're looking for more stability. We're looking for more force. And again, We see opportunities. We said we're going to do M and As. We're doing this.

Speaker 2

We're still looking. We're still searching. We are really excited about the coming the time that we have now and we have more hopes for the future.

Speaker 11

Okay. And then just as a follow-up. With Governors of Poker, I wonder what does Governors of Poker provide you that you maybe didn't necessarily have with World Series Poker?

Speaker 2

1st, actually one of the main issue that Government of Poker is not competing against the WSO. The WSO is bringing something that we don't have and it's localization. You look at Governor of Poker, you have 19 centers that Governor of Poker is very strong there that we are not there. So together with Governor of Poker, We've become the number one strongest poker social poker app in the world. So for us, it's a win win situation.

Speaker 11

Great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Meilun Kwach from Cowen. Please go ahead.

Speaker 12

Hi. Staying on the topic of Discover Corporate, how big is the title? And what is the expected impact Of that to your fiscal 2023 revenue or EBITDA, is that already reflected in your updated guidance? Thanks.

Speaker 3

Sure. Well, given that transaction hasn't yet closed and will close later in Q3, and it's relatively immaterial For our guidance, it's baked into the guidance number we gave, but it's not a number we're disclosing at this time.

Speaker 12

Got it. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Eric Sheridan from Goldman Sachs. Please go ahead.

Speaker 13

Thank you for taking the question. You guys talked earlier in the call about a framing of sort of industry growth being flat to down. I think one of the big investor debates continues to be as we move further away from the pandemic, as we move further away from digesting some of the privacy changes that Apple made. What do you see potentially as some of the barriers to getting back to sort of more normalized mid single, if not low double digit type Growth that a lot of people thought was sort of the normalized level for gaming growth and especially mobile looking longer term. Just curious your own perspective on that.

Speaker 13

Thank you.

Speaker 3

Sure. So I think from if I look at it from our lens, it's really getting back to doing transactions. Given we don't have a large organic pipeline of titles coming out every year driving growth like most other gaming companies, We're more reliant on M and A for that growth. And given we were not active in the marketplace these last few years while valuations We're kind of sky high. We're now in a position to start being more opportunistic and taking advantage of the current market environment.

Speaker 3

So I think for us, We'll get back to growth as we continue to layer on transactions. It's sort of how we've done it over history Since the company's inception. So that really for us is how we see growth in a consolidating, more mature market, And that's what we plan to execute.

Speaker 13

Thank you.

Operator

Our next question comes from Brian Fitzgerald from Wells Fargo. Please go ahead.

Speaker 6

Thanks guys. Just a quick follow-up on direct to consumer, really showed up this quarter. Anything changing in How you drive adoption of the DTC version of a game and how long it can take for that to be a meaningful contributor? And then Any updates to how you're thinking about the EU's Digital Markets Act and some of the legislations and what that means for Plataeka? Thanks.

Speaker 3

Sure. Robert, I'll take that first question.

Speaker 2

So now I hope you hear me. Regarding the first part of the question, nothing changed in what we spoke about in B2C. We are on track. We are not changing anything. We're working the same.

Speaker 2

Again, we are really happy. I would say again, it's our biggest advantage and the tool that we're going to use in the future to drive more revenue, to drive more EBITDA, Drive more a better margin and better profitability. Regarding the second half, I think Fred will take it.

Speaker 3

Yes. There's nothing in terms of impact that is going to affect us in terms of guidance for this year, and It's not on our radar right now.

Speaker 6

Okay. Thanks, Robert. Thanks, Craig.

Operator

Thank you. I am showing no further questions at this time. So this concludes today's conference call. Thank you for participating. You may now disconnect.

Operator

Thank you.

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