PLAYSTUDIOS, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Play Studios Third 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. And please note that this conference call is being recorded today, November 8, 2022. I will now turn the call over to Samir Jain, Head of Investor Relations and Treasury. Thank you, sir. Please go ahead.

Welcome, everyone, and thank you for joining the Play Studios third quarter 2022 earnings call. Hosting the call today will be Andrew Pascal, Play Studios Chairman and Chief Executive Officer, and Scott Peterson, Chief Financial Officer of the company. Our call today will contain forward-looking statements about future events, expectations, and projections. These statements involve risks and uncertainties that could cause actual future results to differ materially from our current expectations. We refer you to our SEC filings for a more detailed discussion of the risk factors that could impact our future operating results and financial conditions. During the call, management will also discuss certain non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is contained in our third quarter 2022 earnings release, which is available on the Play Studios website and in our SEC filings. With that, I'll turn the call over to Andrew.

Thank you, Samir, and good afternoon, everyone. Welcome to the Play Studios third quarter 2022 earnings call. We had a solid quarter, which showed both sequential strength and momentum on some of our key initiatives. Included in this is the performance of our core social casino games, such as Pop Slots, MyVegas Slots, and MyEconomy Slots, as well as notable progress with our newest products, such as MyVegas Bingo and Tetris. Of course, the big news, since we last spoke, is the acquisition of Brainiums, a well-established and successful casual games developer based in Portland, Oregon. We view the acquisition of Brainium as strategically significant in that it fundamentally repositions the company with a more diversified portfolio. I should also add that we were able to add Brainium without materially altering our strong financial position. As of September 30th, we had no borrowings under our revolver and a cash balance of $212 million. Let's start by talking about the quarters. Results were generally stable across the board, and in some cases gained momentum through the quarter. DAU and MAU of 1.5 million and 6.7 million were largely flat the second quarter, showing a stability in users and a reversal from prior year-to-date trends. Against the current industry backdrop, we're pleased with these results and believe they highlight the popularity of our games, the loyalty of our customers, and the efficacy of our Play Awards platform. On the industry front, we continue to grapple with a challenging user acquisition environment that's making it harder to find and retain profitable players. While changes to IDFA and iOS were instituted 18 months ago, the industry is still resetting. Considering this, I'm encouraged that we were able to generally hold our DAU and MAU figures flat sequentially while also increasing our opt-out, a direct reflection of the great work of our talented teams. On the economic front, we continue to operate in a challenging macro environment, Global tensions, quantitative tightening, and a persistently high inflation are raising market volatility and diminishing consumer confidence. We aren't in a position to predict the duration or severity of these challenges, so we'll continue to assume tough operating conditions and a less predictable environment overall. The overall social casino genre continues to be challenged, posting year-over-year declines of 2.2% for the past several quarters. With that said, we believe we're outperforming a number of our peers, posting results that are generally ahead of the market. Overall, we were able to raise sequential revenues in this group versus last quarter, while also lowering our spend on user acquisition. Our doubt for the social casino collection was also up versus last quarter and versus year-ago levels. While the year-over-year results continue to be negatively impacted by the tougher operating conditions, I'm encouraged by the delta of change, which is showing improvements through the year. We continue to focus on driving the innovation in our games in an effort to keep the players engaged and excited. Initiatives include new features, games, and live events, and we're supporting this through our studios across the Americas, EMEA, and Asia regions. As I've discussed in previous calls, we continue to advance our regional operating model, building a critical mass of talent and development capabilities around each of our geographic hubs. I'm excited to share that we continue to expand our teams and capacity in both Vietnam and Serbia, which now account for 282 of our playmakers, or 40% of our total headcount. Our leadership teams are hard at work onboarding, training, and integrating new team members for the benefit of all of our products. With this additional and more affordable capacity, our expectation is to expand revenues, thrive efficiencies, and yield stronger operating margins in the coming year. Let's shift topics and provide some highlights on Play Awards. The expansion of our loyalty platform is one of our two key strategic pillars, with the diversification of our game portfolio being the other. We believe the success of Play Awards will be a meaningful driver of growth as we demonstrate its capacity to lift the performance of games across a broad variety of genres and categories. Currently, our players have access to nearly 600 unique rewards through Play Awards, which is 15% more than the same period last year. Through the first nine months of the year, rewards purchases were also up 15% year over year and totaled a healthy 553,000 just this quarter. We think this program engagement has contributed to the stability of our player network and the overall performance of our games. Most of our games were designed to seamlessly incorporate our player awards proposition, and we view the inclusion of real-world awards as a key differentiator of our overall business. This is particularly important in times of dislocation, such as today, when holding and converting players is paramount to sustaining profitability. As you may recall, when we last spoke, I mentioned one of the specific goals for player awards was expansion into a broader collection of games. With its upcoming inclusion in Tetris and the newly acquired suite of 10 Brainium games, I'm proud to say we're better positioned to deliver on our plan. We expect Play Awards to be incorporated into most of these products in 2023, creating substantial value for our players and reward partners alike. At the same time, an expanded Play Awards presence has incredible value to our player network. Once incorporated into these new games, we'll have a unified loyalty model with explicit incentives for our players to trial and engage with our other products. By continuing to lead with our MyVIP branding, leverage real-world rewards in our cross-promotion merchandising, and work with our partners to offer aspirational experiences, we believe we can capitalize on our existing player network to drive the broader adoption and growth of our games. Unlike other gaming companies, Play Awards enables us to take this global, player-centered view of our business. Equally important will be the ability to show prospective partners the value of Play Awards for the casual gaming audience. We believe success with Tetris, My Vegas Bingo, and the Braining Suite can be meaningful proof points for our loyalty as a service business model. At the same time, we'll be introducing Play Awards to millions of new customers, which is clearly beneficial to our rewards partners. We expect the exposure to these new users will accelerate the velocity of reward redemptions and speed up the flywheel of our platforms. More players will lead to more redemptions, which will attract more partners and expand the rewards offered, which in turn will attract more players. Similarly, an expanded and more varied user base should make the platform more attractive to new rewards partners. Having said that, we continued to add world-class reward partners in the quarter, including AMC, Cinemark, and Checkers Restaurants. Including these partners, Play Awards represents a collection of 107 real-world brands, that includes iconic businesses such as Intercontinental Hotels, AEG, Royal Caribbean Cruises, and MGM Resorts. Through our Play Awards platform, these brands have delivered hundreds of millions of dollars of awards benefits to millions of gamers. Playblocks, our blockchain solutions business, continues to be a key strategic focus for us and integral to how we think about advancing our Play Awards platforms. As we've discussed in the past, we've made notable progress on this front, including the acquisition of Wonderblocks, our investment in Cryptomon, as well as forging a strategic relationship with Forte. In the quarter, we expanded our team and continued to build out our Web3 capabilities. The principles of blockchain continue to be a natural fit to our rewards platform and give us the ability to enhance our value proposition. Specific efforts we're working on today include tokenizing our Play Awards loyalty program, creating an exchange system for rewards, and establishing a new My VIP Rewards marketplace. We will continue to direct resources towards this effort and aim to show meaningful progress in 2023. Progress on new game initiatives continued this quarter with some exciting developments and milestones. Let's first talk about Tetris Prime, the existing game that we acquired along with the broader mobile rights to the brand. Overall, DAU and MAU remain robust as players continue to seek out this iconic game. In the past several months, We've been actively testing some new progression features that add depth and agency to the game experience. The results have been encouraging, and assuming the trends continue, we'll be launching the updated version of the product to all of the active players in the coming weeks. We've also been focused on improving monetization by refining the ad logic as well as introducing altogether new ad units. In addition to these refinements, we began testing our loyalty and rewards programs. We're encouraged by the interest in the program as exhibited in the percentage of daily users visiting the rewards store and are now shifting our attention to optimizing the rewards funnel. We're targeting a full launch of play awards in Tetris in 2023. As I've highlighted in prior calls, it's our belief that the Tetris game format has the potential to evolve into an altogether separate casual game category. Our plan remains to craft a new Tetris game that draws inspiration from and employs the playbook proven by many of the leading casual games. With that goal in mind, we've been advancing a new casual Tetris product. We've made great progress with the design of the core game and have recently started technical validation, making the product available to a very limited audience in a tertiary market. In addition to testing the production worthiness of the game, we're gaining valuable insights about the basic game experience. I look forward to providing more details in our upcoming calls. Our second major initiative, My Vegas Bingo, also made notable progress this quarter. Since assuming control of the app back in late February, we've been spending the time stabilizing the game and enhancing its key performance measures. Overall, the team's efforts have translated to increases in average daily payer conversion, average revenue per paying user, and ARPDAU, which sets the stage for a stepped-up level of UA spend. I should also highlight that, much like Tetris, Play Awards is a key part of the product plan. From the initial launch of the game, player awareness and visitation to the rewards store has been strong. And while conversion rates are still light, they're generally in line with our expectations, given the mix of players with adequate loyalty currency balances. As I've shared on prior calls, we continue to believe in the potential of this game and look forward to more fully realizing it in the coming quarters. Lastly, I'd like to discuss our recent acquisition of Brainium. As I shared at the time of closing, we believe Brainium is an excellent complement to our business and will drive significant value. For those who may be new to the transaction, Brainium is a well-established developer of casual games such as Solitaire, Mahjong, and Suzoku. The company's suite of 10 games has a loyal following of nearly 2 million DAU and 5.5 million MAU, more than doubling our active players. I'll remind you that nearly all of Brainium's revenues are generated from advertising, making the business highly profitable with an expected adjusted EBITDA margin for 2022 of roughly 40%. We're quickly incorporating Brainium into our operating framework and expect to have more to share during our fourth quarter call. On the capital front, we remain well-financed with a strong balance sheet, no borrowings, and a fully available revolving loan facility. While the acquisition of Branium lowered our cash balance post the quarter end, we remain in a strong financial position. As such, our capital plans remain the same. Expand our business, invest in strategic growth opportunities, and drive shareholder value. With a strong balance sheet, we believe we're ideally positioned to pursue any or all of these options. Also helping is a slowly rationalizing market where we're finally seeing a move to more reasonable valuations. Our recent acquisition of Branium is evidence of this as we were able to buy a high quality asset at a comparable EBITDA multiple to our own. We're hopeful that this changing landscape will expand the pool of acquirable assets and are quite encouraged about how the market is shaping up. In addition, Our board of directors reauthorized a $50 million share repurchase plan for another 12 months. We'll continue to monitor all of our opportunities to determine the best uses of our capital. I'll now turn the call over to Scott to provide more specifics on the financials. Thank you, Andrew. We reported $72.1 million of revenue during the quarter, compared to $70.6 million last year and $68.4 million in the second quarter of 2022. Better monetization drove increases in our core social casino game ARPDAU. The strong year-over-year and sequential increases were primarily driven by increased revenue per payer. As a reminder, we acquired Tetris in November of 21. Therefore, it was not included in last year's third quarter results. Adjusted EBITDA was $9.8 million compared to $9.6 million a year ago and $7.3 million in the second quarter of 2022. As Andrew mentioned, we were pleased with our third quarter KPIs. DAU was 1.5 million and MAU was 6.7 million, up 24.6% and 87.1% respectively over the last year and flat sequentially. Although third quarter ARPDAU was down 20% from last year's levels, those figures are diluted by the inclusion of Tetris to this year's results. Excluding Tetris, year-over-year ARPDAU increased by approximately 10%. On the loyalty side, we saw double-digit gains in partners, outlets, and rewards inventory which now stands at 595 unique rewards. Reward purchases of 553,000 units declined 3% during the quarter, but we saw a healthy increase in reward store views. On October 12th, we completed the purchase of Branium for $70 million in cash. Additionally, the acquisition includes a contingent payment based upon Branium exceeding certain financial milestones during the full 2022 calendar year. The maximum contingent payment is $27.25 million. There's been some confusion around this, so let me clarify how the contingent payment works. If Branium were to generate $1 above the threshold, then we will pay an agreed upon multiple on just that dollar. Effectively, you should view the most likely scenario being a total consideration value of $70 million and a deal multiple at or very close to 7.95 times. As mentioned in our October 13th call, if we were to pay any portion of the contingent payment, it implies that Branium is performing ahead of our expectations and thus should be viewed positively. For the full year 2022, we estimate Branium will generate $22 million in revenue and just under $9 million in adjusted EBITDA. Only two and a half months of this will be included in our results, given the October 12th purchase date. As implied by the full year estimates, Branium's primarily advertising-based revenue model has substantially higher margins than our legacy business, and will have a favorable impact to consolidated results. Including in Branium, we are updating our full year guidance to be between $275 and $285 million in revenue and between $32 and $35 million in adjusted EBITDA. Finally, as Andrew mentioned, our estimates for Branium do not include synergies, though we are optimistic many opportunities will present themselves in 2023 as we integrate our companies. Turning to the balance sheet, we ended the quarter with approximately $212 million in cash and no debt. Please remember that immediately after the end of the quarter, our cash balance decreased due to the acquisition of Branium. We increased our borrowing capacity to $81 million, all of which is available to us. Including the accordion feature, total borrowings available are $156 million. This strong financial position gives us considerable flexibility in terms of M&A, recapitalization opportunities, and development of internal initiatives, including the expansion of our loyalty program. As evidenced by the acquisition of Branium, we will be aggressive when the right opportunity presents itself. As of the close of the quarter, we had 129.9 million total shares of common stock outstanding. We did not repurchase any shares during the quarter and continue to maintain our board-approved $50 million share repurchase authorization. With that, I will pass it back to Andrew for some closing remarks. Thank you, Scott. So before we end our prepared remarks and open the call for questions, I'd like to reinforce some of the key points. First, we had a solid third quarter that included better than industry performance in year-over-year gains in revenue and adjusted EBITDA. Our KPIs were strong with growth in ARPDAU and stability in DAU and MAU despite persistent economic and industry weakness. We made notable progress in Tetris and My Vegas Bingo and believe both games are positioned to contribute meaningfully to our 2023 results. We advanced Play Awards with partners, growing 43% year over year, as reward purchases reached 553,000 and redemption retail value exceeded $31 million. And we made a strategically significant acquisition with Branium. The deal is immediately accreted to margins and alongside Tetris and My Vegas Bingo, provides the perfect portfolio for Play Awards to establish itself as the gaming industry's most distinctive and unique player retention platform. Lastly, I want to thank our dedicated teams around the globe, along with our strategic partners and investors, and to our new colleagues at Branion, welcome to the team. We're thrilled to be partners and are excited about what we can accomplish together. Thank you all for joining us today, and we're now happy to take your questions. Operator, please open the lines.