PLAYSTUDIOS, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Play Studios second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, August 9, 2022. I will now turn the call over to Joel Agana, Corporate Secretary and General Counsel. Please go ahead.

Thank you, operator, and hello, everyone. By now, everyone should have access to our second quarter 2022 earnings release, which is available on the Play Studios website at www.playstudios.com in the investor section. Some of management's comments today will be forward-looking statements about future events, expectations, and projections. forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. You should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risk factors that could impact future operating results and financial condition. During the call, management will discuss non-GAAP measures, which we believe can be usable in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2022 earnings release on the www.playstudios.com website and on our form 8K filed with the SEC today. Hosting the call today, we have Andrew Paschal, Play Studios Chief Executive Officer, and Scott Peterson, Chief Financial Officer of the company. Bill will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Andrew.

Thank you, Joel, and good afternoon, everyone. Welcome to the Play Studios second quarter 2022 earnings call. The second quarter proved to be quite challenging as the overall economic backdrop is impacting the consumer games industry generally and our business more specifically. For delving into our views of the current market, our outlook, and the strategies and plans we're advancing, I'd like to highlight some key events from the quarter. We continue to advance our Play Awards platform, adding new capabilities, new partners, and new benefits to our MyVIP program. We saw continued strength in rewards purchases as our active players shopped from benefits valued at over $125 million of inventory and bought $32.5 million of real-world rewards. We advanced our Web3 strategy, consummating key strategic agreements and seeding a variety of opportunities that align with our rewarded play vision. We completed a significant amount of the redevelopment work required to reconstitute our MyVegas Bingo product. We continued to optimize the existing Tetris game while advancing the altogether new, more casual version of the franchise. We attracted some amazing new talent into the company, expanding our capacity and capabilities in our European and Asian studios. and we generated 68.4 million of revenue and 7.3 million of adjusted EBITDA. Before sharing the specifics of our quarter, I'd like to provide a brief reminder of who we are and how we're positioned in the industry. Play Studios is a unique mobile gaming publisher with a portfolio of eight games, most of which incorporate our industry-first real-world loyalty program. For over 10 years, we've been rewarding free-to-play social and mobile players with real-world benefits from a diverse collection of partners, We are the pioneers of rewarded play, and we remain deeply committed to more fully realizing the potential of our model as we diversify into new game genres, expand our player network, and continue to enhance what is already the richest collection of real-world benefits offered to gamers. With that as context, let's delve a bit more deeply into the state of our business, starting with the overall macro environment. There are a variety of factors that have shaped the economic backdrop and which are impacting consumer behavior. More extreme market volatility, escalating inflation, unprecedented quantitative tightening, and the war in Ukraine have undermined consumer confidence. This has resulted in the second quarter of sequential declines as year-to-date consumer spending on games is down approximately 10%. Furthermore, the social casino category has been impacted to a similar degree, with the scale providers in some cases seeing more significant year-over-year and quarter-over-quarter declines across many of the key metrics. In addition, the user acquisition environment remains quite dynamic as the distribution platforms continue to adopt policies that make it ever more difficult to find, target, and accumulate new quality players. While these dynamics make for a challenging environment over the short run, they also bring focus to areas of opportunity. In our case, we see continued strength across our loyalty and rewards business as consumers look to stretch their discretionary dollars. This translates to increased levels of engagement with our loyalty program which allows us to further demonstrate our capacity to source and deliver qualified consumers for our partners, a key catalyst for our virtuous model. It's important to highlight this fundamental distinction when considering our current market position and future prospects. Unlike our peers, we combine games people love with real-world rewards they want, providing our players with an added dimension of value. It's our experience with this model and our deep belief in its extensibility that drives our optimism and informs our strategic priorities. On the topic of strategy, ours consists of two key pillars. The first is focused on evolving our Play Awards platform and suite of services so that it can be leveraged across a broader collection of games. The second consists of scaling our player network by employing our model in new games and new genres. Doing so will allow us to increase the liquidity of our rewards marketplace and deliver more value to all of our stakeholders. As we've shared, we plan to do this through a variety of approaches, including joint development, publishing, and strategic M&A. Let's touch on some of our primary initiatives, starting with our loyalty platform, Play Awards. As I mentioned at the top of the call, we've made great strides with advancing our Play Awards platform. We've continued to develop the systems, tools, and practices that will allow us to incorporate our services into new games, as well as enhance the features within our existing products. The elegance and simplicity of our in-game integrations belies the complexity and growing sophistication of our platform. Today, we enable a collection of over 100 real-world brands like Intercontinental Hotels, AEG, Royal Caribbean Cruises, and MGM Resorts to tap into the massive web and mobile consumer channels and source new customers. And we've delivered hundreds of millions of dollars of rewards benefits to millions of gamers, making our MyVIP loyalty program the richest in all of gaming. More specifically, over the past quarter, the team's been active in qualifying and onboarding new reward partners. Since our last call, we've added 35 new outlets, including a number of new local and affordable options, such as Sonic, Famous Dave's, and Papagino's. These new partners are among over 100 award partners offering more than 500 distinct rewards. Lastly, given the importance of consumer engagement with our program, it's worth highlighting that reward purchases were up 6% versus last year and nearly in line with last quarter's record performance. This translated to over 567,000 in-game reward purchases, which is among the highest to date. With that said, our program is about to get even richer. Over the past several quarters, we've been advancing our plan for leveraging Web3 solutions in our platform. We've watched as other upstarts and established game makers rush to take advantage of the growing interest in NFTs and newly minted digital assets. In most cases, we felt the offerings lacked substance, and anticipated the correction we've observed over the more recent weeks and months. However, observations of the market and our vision for enriching our rewarded play model left us even more convinced that the principles of blockchain could bring even more utility and value to our overall ecosystem. More specifically, we're currently working on tokenizing our Play Awards loyalty program in a way that will allow our players to gift and exchange rewards as well as sell them in a new MyVIP rewards marketplace. In support of this vision, we recently revealed the strategic and practical work we've been advancing over the past several quarters. In short, we've been executing a thoughtful and integrated strategy that called for securing a key technology and thought partner, amassing a team with the requisite skills and experience, and seeding strategic relationships through early-stage investments. Our recently announced relationship with Forte, our seed investments in Wonderblocks and Cryptomon, and our acquisition of Wonderblocks are the underpinnings of Playblocks our blockchain division that will partner with our first party studios and strategic partners to support our expanded vision for our loyalty and rewards business. Turning to the second of our strategic pillars, we continue to advance the development of our newer game initiatives as well as focus on the execution of our core games. We have two relatively early stage initiatives. As a reminder, last November, we acquired the rights to Tetris, one of the most widely played and beloved franchises in the history of consumer gaming. As part of the acquisition, we inherited an existing Tetris game and its collection of active users, which is reflected in our overall network-wide DAU and MAU growth since the start of the year. It's worth noting that we rolled out several key features over this past quarter, most notably a new puzzle and progression feature focused on deepening engagement. And we're on the cusp of introducing our Play Awards program into the Tetris game, which should also improve engagement, retention, and network-wide value as we leverage our MyVIP loyalty program to incentivize multi-app play. In addition to servicing the existing classic version of Tetris, we're deep into the design and development of an altogether new Tetris app. As I previously shared, it's our belief that the Tetris game format has the potential to be its own casual game category alongside Match 3, Solitaire, and Bingo. Each of these categories demonstrates the unique power of a universally appealing game format when complemented with progression mechanics, richer features, and sophisticated live operations. We've been executing the plan that I shared back in May. It calls for us to craft a new Tetris game that employs the playbook proven by most of the leading casual games. We expect to launch the beta version of the new Tetris app later this year. The second initiative is My Vegas Bingo, which we assume full responsibility from our development partner in late February. We elected to do so to afford us more influence and control over the stability, operations, and evolution of the game. Since completing the transition, most of our development capacity has been consumed with addressing its technical stability and performance. We're now finally attending to some of the other foundational features and tools that will enable us to operate the product with more sophistication, employing far more refined segmentation practices allowing us to tailor the experience for our players. We continue to believe in the potential of this game and anticipate stepping up the pace of new content and employing more proven monetization practices with a goal to start ramping up our investments in user acquisition later this fall and into the winter season. As for our core products, we continue to invest in the evolution and performance of our more mature games. These include My Vegas slots, my Konami slots, and our Pop Slots franchise, which includes the MGM Slots live game. Each of these products is supported with ongoing features, content, and live event releases as we work to keep the games fresh and always interesting for our players. Addressing the ever-increasing demands of these franchises calls for sustained creative inspiration and consistent improvements in productivity. I'd like to highlight and acknowledge the focus and commitment of our teams from all eight studios as they apply themselves to improving our execution. As I mentioned in each of our last calls, executing in a post-COVID environment is more complex and challenging. If you recall, I spoke to the escalating costs in each of our primary tech hubs and our need to grow our teams in alternative markets. I'm pleased to share that we continue to make great strides in each of our regional development studios. All in, these studios now have approximately 260 playmakers, accounting for nearly 40% of our total development capacity. Before wrapping up my update on our strategic priorities, I think it's worth further reflecting on the overall state of the market and our opportunities. It's my experience and deeply held view that economic instability and contraction is a time for renewal. It forces a comprehensive review of every aspect of your business and brings a renewed focus to your primary opportunities, as well as clarity around how best to exploit them. In our case, it provoked a more intense level of scrutiny in which we're testing our core assumptions challenging our beliefs, and making some tough decisions, all in the interest of preparing ourselves to exploit the inevitable stability and growth that will return to the markets. As I consider our company and its unique collection of assets, our teams, our players, our partners, and our intellectual property, it's my view that now is the best time to reset, recommit, and invest in the initiatives and opportunities that will strengthen our long-term positions. Before handing things off to Scott, I want to briefly touch on our forecast for the rest of this year, given the environment, and our current thinking about capital allocation. Scott will provide more details, but given the combination of consumer headwinds created by rising inflation and the threat of recession, along with a more challenging near-term environment in general, one where IDFA continues to impact the entire mobile games market, we consider it prudent to take a more conservative outlook for the remainder of the year. At our current trajectory, We expect our full-year revenue to range between $270 million and $285 million, and full-year adjusted EBITDA to be between $30 million and $35 million. On the capital allocation front, we have remained consistent that the best use of our capital is to invest it in strategic growth opportunities. We remain active in our pursuit of acquisitions and continue to work through a pipeline of interesting opportunities. Accordingly, during the second quarter, we again elected to not purchase any stock under our previously authorized $50 million stock repurchase plan. However, we did decide to launch a tender for the outstanding public and private placement warrants. As we expressed in our filings, the primary reason for the tender was to provide investors and potential investors with greater certainty as to our capital structure. In the end, we were able to repurchase approximately 25% of the outstanding public warrants. Lastly, I want to highlight that I continue to purchase stock throughout the second quarter. As I've shared in past calls, I initiated my 10b51 purchase back in January, and I continue to accumulate shares under the program at prices that at times exceeded $6 a share. It remains my view that the current share price does not reflect what I believe to be fair value. I'll now turn the call over to Scott to provide more specifics on the financials.

Thank you, Andrew. We reported revenue of $68.4 million during the second quarter of 2022 compared to $70.8 million during the same quarter last year. While in-app purchases declined relative to the prior year, advertising and other revenue increased, primarily as a result of Tetris and MGM slots live. For the second quarter, we generated adjusted EBITDA of $7.3 million compared to $3.4 million during the prior year quarter. The decline in revenue was mostly offset by a decline in cost of sales. As a result, the difference in adjusted EBITDA was primarily driven by a reduction in UA costs from the higher-than-normal amounts associated with the launch of MyVegasBingo last year, partially offset by increased payroll associated with the ramp-up of our foreign studios and incremental public company costs that weren't in the prior year quarter. Looking at some of our other KPIs, we are still encouraged by player engagement with our loyalty platforms. Program activity continues to expand. Reward purchases during the second quarter were 567,000 units, growing 6% compared to 534,000 units for the same period last year. This translated to a total retail value of $32.5 million, a 10% increase over the same period last year. Our rewards inventory continues to expand, increasing 14% over the prior year to 532 unique rewards. We continue to see strong game KPIs versus the prior year. However, the market factors described by Andrew earlier have resulted in sequential declines. Average GAU was 1.5 million and average MAU was 6.6 million, up 17.2% and 54.4% respectively over the prior year quarter, down 6% and 4% sequentially over the first quarter of 2022. As mentioned in prior calls, while the organic install volume and resulting active users from Tetris are meaningful, the revenue contributions are modest and driven almost exclusively by ads. As a result, the increases in average DAU and MAU from Tetris were dilutive to our ARPDAU, which was 51 cents in the second quarter of 2022, down 17.7% over last year's second quarter ARPDAU of 62 cents. Adjusting for the impact of Tetris, the current quarter's ARPDAU was 69 cents, an 11.4% increase over the prior year quarter. Similarly, average daily payer conversion was impacted, coming in at 2% for the quarter, down approximately 70 basis points year over year. We recorded a non-cash charge of 821,000 associated with the increase in fair value of our warrant liability. Turning to the balance sheet, we ended the quarter with approximately 220.6 million of cash and no debt. We maintain 75 million of borrowing capacity, representing all of the availability under our five-year secured revolver, exclusive of the accordion feature, which provides for up to an additional 75 million of credit. All in, with the cash and revolver availability, we have approximately 295 million of liquidity, or 370 million with the accordion. Subsequent to June 30th, we amended our revolver in order to allow for the repurchase of up to $20 million of warrants or Class A common stock without obtaining additional bank consent and to increase the facility by $6 million to fund the purchase of real property. As to the close of the quarter, we have 128 million total shares of common stock outstanding. Given the strong balance sheet, we believe we remain very well positioned to execute our multi-year plan of diversifying our game portfolio and advancing our loyalty platform model. We did not repurchase any shares during the quarter and continued to maintain the full $50 million of availability under the share repurchase authorization. We did, however, repurchase approximately 1.8 million or approximately 25% of our public warrants at $1 per warrant during the quarter. On August 2nd, the company entered into an agreement to acquire substantially all of the assets of Wonderblocks Labs Inc., which provides tools for the development of a play-to-earn loyalty platform for digital entertainment on the Ethereum blockchain. The company paid Wonderblocks $2 million at closing and agreed to pay up to an additional $3 million, subject to the satisfaction of certain product and financial milestones. In conjunction with this acquisition, the company established a new subsidiary, Playblocks Inc. Regarding guidance, as Andrew mentioned, given the combination of consumer headwinds created by inflation and the threat of a recession, we consider it prudent to take a more conservative outlook for the remainder of the year. Given the games market decline of 10% year-to-date and our current trajectory, we now expect our full-year revenues to range between $270 and $285 million and full-year adjusted EBITDA to be between $30 and $35 million. With that, I will pass it back to Andrew for some closing remarks.

Thank you, Scott. Before we close our prepared remarks and open the call for questions, I'd like to reinforce some of the key points. While the overall macro market and resulting consumer outlook has softened, We view the moment as an opportunity to reset and reposition ourselves for future growth. Our second quarter pace fell short of our initial expectations, but was generally in line with our industry peers. We've memorialized play blocks and executed on key partnerships, investments, and acquisitions, positioning us to enhance our play awards model with new Web3 features and capabilities. We continue to advance play awards with player engagement growing by over 6% year over year, as reward purchases top 567,000 and redemption retail value of 32.5 million. We advanced Tetris Prime, Tetris 2.0, and My Vegas Bingo with a view towards scaling each in the later part of the year. We're recomposing our teams and intensely focused on expanding our development capacity and productivity. We're advancing a number of strategic M&A opportunities with a view toward further demonstrating the value of our platform business. Lastly, I want to thank our dedicated teams around the globe, along with our strategic partners and investors. Thank you all for joining us today. We're happy to now open the call. Operator, please open the line for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Ryan Sigdal with Craig Hallam. Please proceed with your question.

Hey, guys. This is Will. I'm for Ryan. Thanks for taking our questions. I just wanted to ask you first about what trends you saw sequentially throughout the quarter and maybe into July as it relates to user play and pay, given some of these increasing macroeconomic challenges.

Thanks, Will. Look, I think the latter part of the quarter that we just reported on, we saw some deceleration So total player engagement softened a bit, and that was reflected both in some amount of DAU erosion and then ultimately a lower rate of conversion, so fewer monetizers that were actively spending within and across the portfolio of products. I would say that those trends generally kind of continued on to the early part of this quarter, although we've seen more recently some firming up, but it's a little bit early for us to speak more specifically to what's happening in the moment. We'll obviously be reporting on that in a few months.

All right, great. Thanks for that. And then as a follow-up somewhat to that, I suppose, With crazy demand in Vegas right now, are you seeing an increased usage of real world rewards and anything you can comment on, on maybe player metrics after using rewards versus players who have never redeemed?

Sure. Short answer is yes. I mean, there's this heightened interest in Las Vegas as a vacation destination. I think it's in large part because it's accessible and affordable and And, of course, for the players of our games, even more so, is they purchase reward benefits, and whether that's altogether free room nights and free experiences or discounted opportunities, we're seeing them engage with and participate at rates that are among the highest we've ever seen. So, you know, as I highlighted during the call, we're – the underlying rewards business and our players' engagement with our rewards proposition remains very strong. As far as the behavior and what we see from players after they've engaged with the rewards program, even after they become aware of it relative to those that are not, we absolutely see an impact. We see increases in retention, the frequency with which people play and how deeply they engage with the product and ultimately what they end up spending, which is why we're such deep believers in the strength of our model. So it's really important for us to continue to more effectively merchandise the program within our apps and to elevate the visibility of our program outside of them so that we can just increase the overall scale and size of our audience that's engaging in our model and in our marketplace. And when that happens, everyone benefits.

All right, great. And one last one for me. Any update or further updates on your direct-to-consumer platform?

You know, we continue – I mean, the short answer is we're obviously very committed to it. We're continuing to evolve it and how it is surfaced and within the apps. You know, there's some challenges still. Even though we can enable people to purchase with us directly – people tend and want to purchase in a moment. It's a rather spontaneous choice. And so there's a fair amount of friction you have to overcome as you send someone from in your app to a dedicated portal where they can purchase and then back into the app to engage and play and start to enjoy those benefits. So that whole cycle and that return path back into the app is something that we're working on. I think what we've seen as we've improve the merchandising and reduce some of that friction, we see increases in the adoption rate and the ongoing participation in the portal. So it's still something we're deeply committed to, but I would qualify it as still a data program that requires more refinement.

All right, great. That's all for me. Thanks, guys. All right, thank you.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment please while we poll for more questions. Your next question comes from Martin Yang with Oppenheimer. Please proceed with your question.

Hey guys, this is Andrew on for Martin. Thanks for taking the questions. I just have two for you. So the first one, how would you describe the impact of more travel activities on your games in terms of player engagement, retention, rewards redemption? Do you guys see a positive correlation there? And then I'll follow up with another one.

Okay, I think whenever we introduce a new partner in a collection of rewards, we see increases in the level of interest that our players express just by browsing and shopping within the store, and it also increases in actual participation in the program, so purchases and redemptions. And, you know, as I highlighted a moment ago, that translates to a deeper level of engagement in and among those players that are taking advantage of those benefits. So it's why we remain active in finding and qualifying new partners and keeping the overall rewards offering fresh and interesting to our players. So short answer is yes. Whenever we introduce new partners, it stimulates increased levels of engagement and activation among our players.

Okay, great. And then, I guess, can you talk a little bit about maybe the resource allocation regarding your developer teams, for example, how many headcounts are focused on content for existing games, how many focus on new games, and then maybe some on the emerging projects like the blockchain division?

Sure. You know, across the company, we are approximately 650 employees, and that is across the eight different studios that we manage. As I highlighted on the call, there are two relatively new studios that we've been investing in scaling and growing. One is in Belgrade, Serbia. The other is in Hanoi, Vietnam. Between those two studios, we're approaching 300 employees. So as far as just our commitment to building capacity with really capable and talented team members, but in markets, they're a lot more affordable. We've been intensely focused on that over the course of the past year. Of course, as we scale up those teams, it takes a little time to get them indoctrinated, familiar with the products and product teams they're assigned to, and getting them productive and able to contribute optimally to the execution of the content and features that we're putting into those games But those are benefits that we fully expect to start realizing here in the latter part of this year and then going forward. As far as the allocation of our overall development capacity to existing franchises as opposed to new initiatives, I would say that it's approximately 80% of our development capacity and resources are servicing our existing products And then about 20% of our capacity is allocated to the two relatively new initiatives, the Tetris initiative and the Bingo initiative. So that's the general allocation. The core franchises are at scale, and those products demand or require consistent cadence of feature releases and live operations and new game content. And that's how and why you see the allocation that I just spoke to. And then as far as the Playblocks initiative, our acquisition of Wonderblocks allowed us to bring into the company a relatively small team of just over 20 people that had been actively working on an overall set of features and technologies and tools and an overall framework. It's going to enable us, as I alluded to in our other communications, to tokenize our loyalty program and enable our players to start gifting and for certain classes of rewards actually go into a marketplace that will manage and sell and exchange them. So we're excited about that as an initiative, and I expect that we'll continue to invest in that team, although I would say that Its current scale provides us with the capacity that we need in order to see us find ourselves in the market with those features that I just alluded to.

Perfect. Thank you. All right. Thanks, Andrew.

Ladies and gentlemen, we have reached the end of the question and answer session, and this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.