PLAYSTUDIOS, Inc.

Good afternoon, everyone, and welcome to the Play Studios fourth quarter and year-end 2023 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Samir Jain, Head of Investor Relations and Treasury. Mr. Jain, you may begin.

Thank you, operator. Good afternoon, and thank you for joining us for Play Studio's fourth quarter and year-end 2023 earnings call. Joining me on the call today are our chairman and CEO, Andrew Paschal, and our CFO, Scott Peterson. Before we begin, let me remind you that during the course of this call, we'll make forward-looking statements. These statements are based on our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for discussion of the risks and uncertainties that may affect our future results. We will also discuss certain non-GAAP financial measures during this call. These measures should not be considered as a substitute for financial results prepared in accordance with GAAP. Our results are prepared in accordance with GAAP, and a reconciliation to comparable GAAP measures will be provided in our fourth quarter earnings release and in our SEC filings. With that, I'll pass the call to Andrew.

Thank you, Samir, and welcome, everyone, to our fourth quarter and year-end 2023 earnings call. Earlier today, we published a press release containing our financial results along with the commentary for the recently completed fourth quarter and year-end. Included in the release is new segment reporting alongside our usual financial disclosures. Scott will discuss these materials in greater detail later, but if you haven't had a chance to review the release, I'd encourage you to do so. So 2023 was an eventful and somewhat challenging year for the game industry, but despite the macro and secular headwinds, it proved to be transformative for Play Studios. We undertook a number of new initiatives, advanced key elements of our strategy, and meaningfully enhanced our overall position. So I'd like to start with some of the more noteworthy highlights. First, we closed the year strong with fourth quarter and full year revenues and adjusted EBITDA exceeding both our guidance and analyst expectations. We grew adjusted EBITDA by nearly 65% in a year and expanded our EBITDA margins by close to 700 basis points. We grew revenues by 7% despite the overall contraction in the mobile games industry. We substantially diversified our sales mix by increasing advertising revenues from 8% to 19%. We continue to add users with MAU and DAU increases of 70% and 84% respectively. We reorganized our company around our two key business lines, Play Games and Play Awards, enabling further efficiencies and laying the groundwork for Play Awards to become an independent, external-facing business. We continued to expand Play Awards reach by adding more players and onboarding new rewards partnerships. We more than doubled Tetris Prime's revenues and renewed our partnership with the Tetris company, extending our exclusive mobile license for up to an additional eight years. We fully incorporated Brainium into our operating framework and posted sequential quarter-over-quarter growth. And finally, during the year, we purchased $15 million in stock, remained debt-free, and maintained our strong cash position. If you're a stakeholder in our company, I think it's critical that you understand not just our more recent performance, but how uniquely positioned we are for our future growth. We remain the only company to thoughtfully craft compelling games that leverage world-class brands, proven game mechanics, and a robust real-world loyalty program. This unique approach has enabled us to post 10 years of growth, diversifying our portfolio network of players and composition of revenues in the process. As I've reaffirmed in the past, our strategy consists of two key pillars. The first consists of expanding our play games division by optimizing our existing portfolio, along with developing and acquiring new games so that we can demonstrate our loyalty lift across a broader collection of products. We've done this most recently by complementing our internal efforts with strategic M&A, acquiring the rights to Tetris, and the bringing a portfolio of casual games. The second is focused on advancing our Play Awards division by enriching our platform and suite of services so that we can provide it to the broader games industry. I believe that executing on these strategic priorities will enable us to accelerate our growth, minimize creative risk, improve margins, and ultimately drive substantial value. So let's touch on some of our primary initiatives, starting with Play Games. In Play Games, the focus in 2024 will be stabilizing our core products, sustaining momentum in our growth portfolio, and continuing to advance the initiatives currently in development. Let me dive a little deeper into each. Our three key initiatives in our core portfolio for 2024 will be improving the monetization trends in MyVegas and MyKanani, expanding our mix of direct business, and the adoption and renewed merchandising of My VIP and all of our primary titles. While we expect the broader social casino trends to remain challenging, we believe these dynamics can result in both above market and absolute growth for our portfolio. We're pleased with the progress being made in My Vegas and My Konami and are already seeing tangible results from the changes we began implementing in mid 2023. As a reminder, both these games have loyal followings and are frequently played by our users. As such, our biggest opportunity is to get more players to convert to paying users. In support of this, our teams are intensely focused on refining the game economies, enhancing our segmentation and pricing practices, and introducing new features that enrich the overall game experience. On the topic of MyVIP, all of our studios are actively working on adopting our newest Play Awards in-game store and loyalty economy solutions. Doing so will allow us to enhance the merchandising of our loyalty program as well as introduce a rich collection of new in-game and web-based benefits. We believe this will allow us to further enhance the loyalty lift across our products, as well as offer compelling incentives to purchase our platform through our player-specific and bespoke web solution. This supports our third Play Games priority, which is focused on generating more direct sales with our players. Today, our share of direct sales, while ramping, is still well below many of our peers. With that said, we believe the uniqueness of our loyalty model allows us to offer tailored incentives to players that purchase from us directly. Turning to our growth portfolio, the focus in 2024 will be the continued scaling of our games and the integration of MyVIP. Tetris Prime had a tremendous 2023, and we believe there's still substantial growth ahead. This year is the 40th anniversary of the Tetris brand, and we have a number of exciting marketing initiatives planned for the year. We think these efforts, combined with the game's organic momentum, will lead to higher DAUs and increased ARPDAU. We're seeing strong reception to our loyalty offering in the game and believe the full rollout of tiered offerings will result in even more increased player engagement. We're expecting a similar impact in Brainium's suite of games, which are also scheduled for a full loyalty rollout in 2024. The inclusion of loyalty was a key reason we purchased Brainium, and we're excited about the impact it'll have on player engagement and resulting revenues. Finally, our development portfolio. As I've reaffirmed on each of our quarterly calls, we're passionate game makers. As such, we remain committed to creating and publishing new games that will delight our existing network of nearly 14 million monthly active users, as well as attract altogether new players into our mix. With our recent extension of our Tetris license, our immediate focus is on fully capitalizing on this beloved franchise. I'm happy to share that we have two new and distinctive Tetris titles in development. Each game represents a new embodiment of the Tetris format, combining the best of the classic game with the most popular mechanics found in today's leading casual games. As I've said before, crafting new games is more art than science, and as such, the ultimate success of each is hard to predict. That said, we know the Tetris brand is incredibly popular with players and many of the games in the puzzle category today are facsimiles of the real thing. We firmly believe this creates an opportunity for us to capture players who we believe would choose a true Tetris game if given the option. Let's shift our attention to our Play Awards line of business. 2024 will be a seminal year for Play Awards as we explore how best to commercialize the platform. As I've highlighted since going public, we've built the game industry's most robust loyalty solution, In doing so, we've nurtured a marketplace that has scaled to nearly 14 million consumers on one side and hundreds of real-world benefits providers on the other. It's our ambition to dramatically scale our model by providing loyalty services to other game publishers and provide access to an even more expansive network of qualified consumers to real-world businesses. Given the strategic significance of Play Awards and the meaningful investments we continue to make in our platform and operating infrastructure, we've elected to break out the business as a distinct unit. Over time, we think Play Awards can grow to be a standalone business that not only bolsters the performance of our games, but generates direct revenues and meaningful profits of its own. If that happens, we're confident that the unique value of this asset will be recognized and reflected in our company's valuation. With all these exciting initiatives in place, we believe 2024 is shaping up to be another year of progress and growth We're intensely focused on scaling our business and fully exploiting our unique rewarded play model, all while striking the right balance between optimizing our core business with continuing to invest in our future opportunities. In doing so, we'll continue to expand our audience, scale revenues, improve margins, and drive higher profits. Scott will provide more details when he outlines our 2024 guidance in a moment. However, I want to quickly touch on our thinking and approach to capital allocation. The dislocation between the market's view of our stock and what we believe to be fair value has diverged considerably. As such, we're evaluating buying back our stock under the recently re-upped $50 million share repurchase authorization. We also remain committed to pursuing accretive and strategically transformative M&A opportunities that are in keeping with our overall strategy and expansion plans. Finding the right asset at the right price is challenging, but I can assure you we're very active. I'm confident the right opportunity will present itself eventually, and when it does, we have the needed resources to act quickly. In the meantime, we expect to continue to generate positive cash flows and add to our already sizable cash balance. I'll now turn the call over to Scott to provide some additional comments and share our 2024 financial guidance. Scott?

Thanks, Andrew. Good afternoon, everyone. In addition to today's press release, our Form 10-K will be filed shortly. Please look to those filings for a comprehensive summary of our quarterly and full year results. Before discussing our results, I wanted to draw your attention to new disclosures this quarter. We are now providing both revenue and EBITDA separately between our Play Games and Play Awards segments. We hope that this added information will better clarify our businesses and allow you to more closely track their growth over time. We finished the year strong with quarterly revenues and adjusted EBITDA ahead of consensus expectations. Fourth quarter adjusted EBITDA of 14.7 million was 22% higher than a year ago, continuing the trend of sizable gains that we've seen since the beginning of the year. For the full year, adjusted EBITDA was up 63% from 2022, and the adjusted EBITDA margin of 20% was up 680 basis points from last year's margins of 13.2%. Revenues in the quarter were down modestly versus a year ago, largely due to the end of a licensing contract in the second quarter of 2023. Adjusting for this other revenue, we would be flat versus a year ago. For the full year, our revenues were up 7% versus 2022. As a reminder, the one-year anniversary of the acquisition of Branium occurred in October, so our results from that point forward are comparable on a year-over-year basis. DAU and MAU in the quarter were up 6% and 16% respectively. Tetris continues to drive the bulk of these gains, though we are seeing healthy lifts across our growth portfolio. Our core social casino portfolio saw user declines in the quarter on the back of continued industry weakness. As Andrew discussed earlier, we are optimistic about this portfolio heading into 2024 and believe it can be a positive contributor to overall user growth. Excluding the impact of our advertising-driven games Tetris and Brainium, ARPDAU was up roughly 3% in the quarter. The growth in ARPDAU was broad-based across our social casino portfolio. Both Tetris and Branium grew arped out considerably from the fourth quarter of 2022, and we believe there is significant opportunity for growth ahead. We ended the quarter with approximately $133 million in cash, no borrowings, and full availability of our $81 million revolver. We did not repurchase any shares during the quarter and still have $50 million remaining in our stock purchase authorization. Our broader capital allocation goals remain the same, investing in our games, building and scaling play awards, pursuing strategic and accretive M&A and investing in our public equity. Finally, our outlook for 2024. We estimate that revenues will range between $315 and $325 million and adjusted EBITDA between $65 and $70 million. With the annualization of uranium, these estimates are apples to apples and do not include M&A. This is particularly noteworthy for the revenue guidance, which implies organic growth despite what we believe will continue to be a challenging industry and economic backdrop. Our guidance also implies continued adjusted EBITDA margin gains. When modeling our 2024 results, please consider the following. We expect many initiatives to gain momentum throughout the year, so you should assume a sequential pickup through each quarter. Other revenues will track closer to the quarterly rate generated in fourth quarter of 2023. This change will annualize in the third quarter of 2024. Thank you. I will now turn the call back to Andrew for some closing remarks.

Thank you, Scott, and thanks to everyone participating in today's call. Before we end our prepared remarks and open the call for questions, I'd like to reinforce some key points. 2023 was a year of growth, development, and change. We nearly doubled our EBITDA, increased revenues in a declining market, and put in place the building blocks for substantial progress in the years to come. Entering 24, our business is substantially more diversified than it was just a year ago. A majority of our games are outside the social casino category, and advertising revenues now make up nearly 20% of our overall sales mix. These new businesses are also our fastest growing, implying a continued mix shift towards higher margins and larger addressable markets. With our recent license extension in place, we're committed to establishing Tetris as a world-class mobile franchise. We have exciting new games in development and are working towards introducing our first new title later this year. Play Awards will begin qualifying its revenue opportunities this year. There continues to be a high level of interest in our program, technology, tools, and unique capabilities, and we believe this will be a meaningful driver of future growth. We're making progress in our efforts in MyVegas and MyEconomy and believe both games are on track for notable improvement in 2024. Branding exited last year with substantial momentum as our efforts around new advertising initiatives began to take hold. We expect to see continued momentum this year. Our balance sheet remains strong with 133 million in cash and no debt and supported by an operating business that generates positive cash flows. Our plan remains to use our capital to make transformative acquisitions and our goal is to make progress on that front this year. At the same time, we continue to look at other ways to use our capital to generate shareholder value, including strategic investments in our business and making use of our $50 million share we purchased authorization. Lastly, I continue to believe there's a large discrepancy between the core value of our business and the value ascribed to us in the public markets. While frustrating, rest assured our leadership is aligned, our teams are focused, and we're all committed to strengthening our company. I want to thank you for your time today. We appreciate your support and hope you're as excited about this year as we are. I'll now turn the call over to the operator to take your questions. Operator?

Thank you. And we will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 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. Once again, to ask a question, press star 1. We'll pause for a moment while we pull for questions. Thank you. And our first question comes from Ryan Sigdahl with Craig Hallam. Please state your question.

Hey, good afternoon guys.

Hey Ryan, how are you?

Good, good thanks. I want to start with the potential commercialization of Play Awards as a loyalty as a service platform. Is that just a focus area or is the pipeline actively being evaluated and worked on as we speak?

Look, it's been something we've been focused on really since the early part of this last year. We've done a lot to kind of qualify the opportunity and start to evaluate different commercial models. I would say we're still in that phase, but are encouraged by the feedback that we've received. I think that the level of interest and curiosity around the program and its potential impact has reinforced for us that there's value here. And it's now about resolving the right and best way for us to go and exploit it. And so we fully expect that we'll resolve that this year. And as we do, we'll share our thinking and provide a bit more of an outlook.

Switching over to the cost side, is there more efficiencies that you guys have targeted or is primarily the operating leverage and margin expansion to get to that peer median more so to do with operating leverage and revenue growth?

I think we're always looking at how and where we might be able to find new opportunities for added productivity and efficiency. But I think that really the more significant opportunity for us is top line growth. I think if you were to look at our fully loaded cost per employee as compared to our public peers, you'll find that we're in line or actually below where they are. So we'll again continue to look for how and where we can be more productive. but our margin expansion going forward is going to come from top line growth and flow through.

Makes sense. One more for me. Just as you think about the stock at this valuation, I know you had some prepared remarks, but are there any M&A transactions that could be more creative than just going and repurchasing your own stock here?

Yes, we believe there are. There are obviously difficult to find in light of how and where we're trading, and I think it's important for everybody to understand that while we're always going to be looking to ensure that the transactions we would do are accretive, we also want them to be strategically significant and that they really reposition the company to enjoy yet even greater growth. I think sometimes you have to look past the immediate impact of the transaction and how it's engineered financially to what does it really mean for the company in terms of its strategy and how it's going to continue to evolve. So those are the factors that we consider as we look at our opportunities.

Great. Thanks, guys. Good luck. Awesome, Ryan. Thank you.

Our next question comes from Aaron Lee with Macquarie. Please state your question.

Hey, good afternoon, guys. Thanks for taking my question.

Sure. Hi, Aaron.

Can you just start, you know, turning to guidance for a second, can you just talk about the puts and takes that get you to the high end and the low end of the range? You know, what's contemplated from an investment and marketing standpoint? And you're just generally where you think the biggest buckets of growth will come from. Thank you.

Sure. I mean, I'll take this and I'll ask Scott to add any further color. You know, the growth is really going to come from across the portfolio on the game side of our business. We further kind of qualify and look at our portfolio in several different subcategories. There's our core portfolio. There's our growth portfolio and the products that we have in development. We see opportunities in our core portfolio which have come under pressure because of the secular headwinds over the last two years. As we talked a lot about, social casino has suffered some contraction, but it's been overcome by the growth in the casual categories that we're now very active in. With that said, we think that social casino is stabilized and we're seeing signs of growth there. So we think there'll be a modest amount of growth coming out of that portfolio this year. When we look at our growth products, they really relate to the current live products that we have in the casual portfolio. Our Tetris Prime product, which has grown meaningfully in the last year and continues to have great momentum, as well as the Branium Suite. And then we have a collection of new products that we're actively investing in in the development category that it's hard to predict how and when they'll be ready to be launched into the market, but we would hope that one of them will be in a position where we can start to introduce it before the end of the year. So across the game portfolio, that's how we're thinking about growth. It's a bit moderated. And then as far as the underlying investments and user acquisition and our budget there, we'll scale that up to support the products that are worthy of it, especially if we end up launching one of the new casual Tetris products this year. There'll be pretty meaningful investments on the UA side associated with that. Otherwise, we're focused on continuing to, as I alluded to a moment ago with Ryan, look for new opportunities to drive productivity and efficiency as we introduce these new products and continue to scale our existing ones. And so that's what's going to drive the continued kind of flow through and margin expansion. And the only thing I would add to that is, as we said, or as I said in my comments, you know, the way we're viewing the year is it's sort of going to be a sequential growth. You know, we're kind of on this trajectory, so to kind of look at each quarter is hopefully getting a little bit better as we go.

great i appreciate all the color there um and then just turn to play awards for a second is there anything you can share in terms of how confident you are that this will materialize this year versus slipping next year and how should we be thinking about the reinvestment into the play awards platform from here you know should it be fairly steady from current levels or do you kind of expect to have to turn on the faucet a bit to accomplish some of your goals thank you yeah i know those are great questions look i i think that we are

We're pretty confident about the value proposition that we have with Play Awards. We obviously have a ton of experience with it. The complexity is in making the transition to providing it as a service to other strategic partners and publishers in the industry. And so there's work to be done there and certainly hope that we'll resolve our strategy and approach before the end of the year. And as I said earlier, we'll provide some clarity in future calls as we resolve it. And then as far as the ongoing investments that we're going to continue to make in Play Awards, they're fairly stable. I think once we're in a position and we're ready to scale servicing and supporting new game publishers as partners, there'll be some level of added cost, but we don't believe it'll be that material relative to our current run rate. So the current investments are fairly mature and they'll continue.

Great, that's helpful. Thank you very much, and good luck.

Yeah, thanks so much, Aaron.

Thank you. Our next question comes from David Pang with Stifel. Please state your question.

Thanks, guys. I would like to hear your thoughts on what the implementation of the DMA in Europe means for Play Studios. Does it have any impact on your efforts on DTC?

Hi, David. You're just talking about the new regulations there with Apple.

The new regulations and the updated policies from Apple and Google? Yeah.

So I think like everybody else in the industry, we're still waiting for this thing to fully form. I mean, obviously, it's quite fluid. And the litigation seems like it's still ongoing. So there's really nothing definitive there. But I think our DTC strategy is going to be much more related to what we do with MyDAP and the integration into our games.

I can speak to that. Sorry, I didn't hear the acronym. So the direct-to-consumer proposition for us is something that we're obviously focused on. We're going to continue to watch and see how the various disputes between the platform providers and Epic and other game makers play out, but Our general view is that we have a really unique proposition with Play Awards. And for a long time, we've had a web-based presence where our players can now interact with us directly in order to explore the full range of benefits that we offer through our Play Awards program. We've incorporated into our web solution the capacity for our players to purchase with us directly. So unlike most of our peers in the industry, we can actually offer up really unique incentives and a value proposition that's very different from everybody else to actually incentivize and encourage that direct purchase with us. So that's a program that we're actively ramping up. We're continuing to invest in new features and capabilities, so we would expect that our direct-to-consumer complement of our revenues will continue to grow. We think that there's a ton of room for us to increase the overall mix of direct-to-consumer revenue, and of course that comes with a pretty meaningful improvement in margin and gross margin. So that should be a driver for us going forward.

And just to follow up on that point, do you have a long-term target on what DTC might make up?

Well, we set goals for ourselves each year as part of our planning process, and we look at where our peers are, the ones that are, we think, more mature and have been far more aggressive in the way that they've approached appealing to their consumers more directly. Playtika in particular has been a leader in this space, and I think something close to 25% of their revenue is direct to consumer. And so I would certainly hope that we'll be able to achieve rates that are comparable to theirs But there's a lot of work to do there for us to achieve that level of overall mix. But our ambitions are certainly to be in line with where our peers are, at least.

Got it. Thank you. Thank you.

And just a reminder to the audience, to ask a question, press star 1 on your telephone keypad. To remove yourself from the question queue, press star 2. Our next question comes from Greg Debus with Northland Securities. Please state your question.

Hey, good afternoon, Andrew and Scott. Thanks for taking the questions. Yeah. I think you said just later this year was kind of your commentary, but if you could go over maybe the rough timing of new games launched this year and maybe if there are any modeling implications regarding marketing or increased development expenses during certain time periods.

Yeah, I mean, I think what we kind of signaled in our more formal remarks is that it's tough to predict when it is that we'll formally launch and start to scale up a new product. We have a few new products that have been in development now for over a year, both aligned with the Tetris franchise and brand. And we certainly would hope that we would introduce one before the end of the year. But the likely timing of it, we don't think will have any real meaningful impact on our performance for this year. Our forecasts and what we've shared in terms of guidance don't really take into account any impact from a new product that we introduce in the market, both top line as well as what we might do from a UA or a marketing perspective.

Got it. Makes sense. And I'm wondering if you could just address the overall interest levels from, you know, perspective, play awards, loyalty platform, you know, customers. You know, I know in past quarters you've talked about it, you know, being strong. I wonder if you've seen, you know, more interest there or if it's kind of stabilized. And, you know, I guess considering we've talked about it for a little bit now, like, you know, what's kind of causing maybe the delay in, you know, an initial customer there?

Yeah, I think what I'll do is I'll ask Jason Hahn, who's here with me. He heads up our corporate development and business development, who's really been leading the effort on qualifying those opportunities for to kind of share maybe a little bit of the color. First, as I alluded to a moment ago, the interest and I think the value of our program is pretty universally recognized. I think the complexity comes in how we go about pursuing it, so maybe I'll let Jason speak to that.

Yeah, so I think on the feedback, given some of the things that are happening in the market where it's becoming increasingly hard for mobile developers to acquire new users, I think everybody recognizes the value proposition of a program that allows you to hold on to users longer and invest in your loyal players that you already have is tremendously valuable as a value proposition. And we've demonstrated that our solution does in fact do that. And so we've had to spend, I'd say, the better part of the last eight months building really tangible case studies to showcase with real data and A-B testing that our platform does, in fact, undisputably create that loyalty lift. And we now have that. So that was one of the pieces of feedback we got from the market, which was you need some tangible case studies. We have that. The other piece of feedback was making it very seamless for a third party to integrate the solution into your game. And so we spent also the better part of the last eight months working on technology and refining it. so that any game developer can easily integrate this into their products. I think now that we've kind of addressed some of that feedback, we're just working on optimizing those things even more before we go back out to the market more formally and launch this as a formal product solution. But we're kind of getting ready to productize it in that way where we can actually launch it as a dedicated product.

Okay, that's helpful. Thanks.

Thank you. If there are no further questions at this time, I'll hand the floor back to management for closing remarks.

Just want to again thank everybody for their interest in the company and continued support, and we look forward to an exciting year ahead.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.