Playtika Holding Corp.

Good day and thank you for standing by. Welcome to Platica Q2 2023 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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. Please go ahead.

Welcome, everyone, and thank you for joining us today for the second quarter 2023 earnings call for Platica Holding Corp. Joining me on the call today are Robert Anticall, co-founder and CEO of Platica, and Craig Abrams, Platica's President and Chief Financial Officer. I'd like to remind you that today's discussion may contain forward-looking statements, including, but not limited to, the company's anticipated future revenue and operating performance. These statements and other comments are not a guarantee of future performance, but rather are subject to risks and uncertainties, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after the call. For 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, and we will also post our prepared remarks immediately following the call. With that, I will now turn the call over to Robert.

Good morning, and thank you, everyone, for joining our call today. Before we dive into business and financial results for the quarter, I would like to highlight our recent announcement to acquire the Governor of Poker Franchise. Over our history, we have successfully executed various acquisitions that have played an important role in establishing Playtika as an industry leader in mobile gaming. We are consistently searching for a promising game franchise that we can optimize and monetize using our operations, excellence, and best-in-class live ops. Govern 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, this quarter we generate net income of $75.7 million and credit adjusted EBITDA of $215 million, which markers 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 internally 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&A. I will now turn it to Craig, who will walk through the financial and discuss the quarter in greater detail. 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% of revenue, a new record for the company. Coming off strong sequential growth to start the year, we saw normalization in Q2. For the quarter, we generated $642.8 million of revenue, down 2% sequentially and 2.5% year-over-year. Net income was $75.7 million compared to $36.4 million in Q2 of 2022. Credit adjusted EBITDA was $215 million, 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 generate record revenues of $165.3 million from our direct-to-consumer platform, up 9.1% sequentially and 7.6% year-over-year. Our direct-to-consumer business now makes up 25.7% of overall revenues. turning out our business results for the quarter. Revenue across our casual theme games declined 1.4% sequentially and increased 3.7% year-over-year. This year-over-year growth was driven by strength in Bingo Blitz, Solitaire Grand Harvest, and June's Journey. Bingo Blitz revenue was $156.3 million, down 1.8% sequentially and up 6.3% year-over-year. In the quarter, we saw positive results from GEMS and Canon features released in May. This is a significant economy change for the game, as the focus of GEMS is to generate revenue through gameplay enhancers, and the Canon feature is also an example of a 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. Salt Air Grand Harvest revenue was $81.8 million, 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 successful feature launches, including new seasons of My Farm 2, strong Easter collection monetization, and the special set campaign edition. Shifting to our social casino themed games, social casino-themed games revenue declined 3% sequentially and 9.9% year-over-year. Slotomania revenue was $144.7 million, down 1.3% sequentially and 9.9% year-over-year. We are encouraged to see Slotomania revenue stabilizing for the third 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 marketing environment. After seeing strong initial success for WSOP, we plan to roll out this new user acquisition solution to additional studios by the end of 2023. Turning out a specific line items in our P&L for the second quarter. 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. R&D decreased 19.9% year-over-year. The lower R&D expenses were largely driven by the reduction in force that we announced at the end of the fourth quarter, 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 and new games. As we noted last quarter, we started to pull back on some of our UA spending in Redecor in the second half of 22. G&A expenses decreased by 29.6% year-over-year. 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 30th, we had approximately $955.1 million 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 $8.6 million. ARPDAU increased 12.2% 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 and $105 million, down from $115 to $120 million previously. In terms of the M&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. 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.

Thank you. We will now conduct a question and answer session. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while I compile the Q&A roster. Our first question comes from Matt Cost from Morgan Stanley. Please go ahead. 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&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. I guess, what is changing that's making it more favorable? Like, you know, why lean in now? And has the playbook changed at all in terms of what you're looking to target in terms of M&A potential acquisitions? I think this is a casino game, which I think is a little different than what you've done in the past. And then I have one follow-up. Thank you.

Sure. Thanks, Matt. I think what we're seeing is that, you know, 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. 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 franchise or a high-growth studio, we have our eyes on a variety of opportunities and will continue to be opportunistic in going forward and executing.

Great. And then just on the comment and prepared remarks around 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 or the new solution were, and then how long it will take to roll out to the rest of the studio?

Sure. Nercortruck, our CMO, will take that one.

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 years. Okay, thank you.

Thank you. One moment for our next question.

Our next question comes from Steven Zhu from Credit Suisse. Please go ahead.

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

Yes, thanks for the question. So, as we said at the beginning of the year, we're going to add another two games to our network, and this is going by plan. The growth is coming from our current apps that are already running there. Everything is by the plan. As we said at the beginning, this is a very important focus. This is a very big advantage of Playtika on our competitors, and the As we started this before, we are focusing and we are on track as we said in the beginning. That's it. Thank you.

Thank you.

One moment for our next question. Our next question comes from Omar Desalchi from Bank of America.

Please go ahead.

Hey, guys. Thanks for taking the question. So I wanted to look beyond your DTC platform and ask you, you know, what potential, what other potentials there are for gross margin expansion opportunities? 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. I was hoping you could talk a little bit about where Playtika's portfolio might fit into those opportunities.

Thanks, Omar, for the question. Like we said in the last quarters, we really believe in AI. We started to invest in AI in 2016. We built three 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. And this is where we are focusing. We're building tools that will help our talent to focus on 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 margins, 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. I'm really happy to see that all the buzzwords that everyone was speaking, Platica is delivering the goods. And this is only the beginning. of the efficient and strong work to build better margins and better profitability to the company.

Okay, thank you very much.

Thank you.

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

Please go ahead.

Thanks, good afternoon. 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 made 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.

Sure, thanks Colin. If you look kind of at last year, Q1 to Q2, we saw a similar decline in DPU. So I think there's some seasonality there as it relates to kind of new user acquisition and efficiency there. I think the second component we've always talked about is, you know, DPU is well correlated with revenue and revenue normalized in Q2 after a very strong Q1. You know, 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 Air Grand Harvest. Other than that, I think it's really focusing on execution and, as Robert said, on efficiency and improving our margin profile.

All right. Thank you.

Thank you.

One moment for our next question.

Our next question comes from Clark Lampin from BTIG. Please go ahead.

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 you know, 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? You know, if there's any sort of specific timeline that you can put around that, I think it would be helpful also.

Sure. Thanks for the question, Clark. So I think our focus really has been around using M&A as a platform to add additional IP to our portfolio rather than organic development, given kind of you know, where we are positioned in the marketplace, both from a balance sheet perspective and a capability perspective. I think, you know, as Robert mentioned, AI is helping us across all areas of kind of the customer lifecycle, 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, you know, in titles that we acquire. So I think that continues to be the playbook for us rather than, organic development, although we do have, you know, some organic development, you know, still within the studios, but it's not something that we feel like we should press the gas on at this moment in time.

Got it. And maybe to follow up quickly on DTC, I know you've talked about two 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? you know, for some reason, in terms of player experience, or is that on the table for every one of your games, I guess, eventually?

So, first, we always look at the maturity of the games and the maturity of the players that are 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 projection, what we said, and we're feeling very strongly about it. And again, this is a big, big advantage of Playtika. Thank you.

Thank you.

One moment for our next question.

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

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 Slotomania 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. So any comments on Slotomania would be helpful. Thanks.

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

Okay, thank you. One moment for our next question.

Our next question comes from Aaron Lee from Macklery. Please go ahead.

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&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.

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, you know, continue to be opportunistic in the M&A market, and so we see that as a big opportunity as we look forward. You know, I think Governor Proker is a good example of the ability to bolt on a well-established franchise and fabric our live ops and technology platform to help grow that asset. But, yeah, there's no further guidance beyond 2023. Okay, fair enough.

And then on the governor of poker acquisition, you know, historically, I think it was your marketing and distribution and live ops 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 were probably doing pretty well with marketing just given their prior advertising ownership. So is it really the live ops where you think you can be additive or is it like past acquisitions where it's really all of the above? Thank you.

So thanks for the question, Abe. I think when you look at the governor of poker, okay, it's a little bit, you know, 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 spending and experience of monetization and operation of nine games that we're running today is something that you cannot even compare to what others have. So when we look at this company, we saw two important stuff. First, 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 Playtica, 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 come with our approach. We're looking for stable businesses. We're looking for big communities. We're looking for companies that have strong teams that can help us with the challenges in the future.

Got it. Thank you, Robert. Thanks, Craig. Appreciate the call there.

Thank you. One moment for our next question. Our next question comes from Eric Handler from Roth MKM. Please go ahead.

Yes, good morning, and thanks for the question. I'm wondering if you could talk a little bit more on M&A. As you look at deals, are you trying to fill in maybe some holes in the portfolio, or is it just looking at games that you just think you can grow?

First, we're looking for good deals. Before everything, we need to see a deal that fits our way of thinking and looking. We're looking for deals that make sense. A few years ago, the prices and everything were so high. Now, everything is coming to normal, coming to normal prices. So the environment is more comfortable to make a deal. This is one. Second, we're looking for teams, strong, stable teams, that can help us, again, as I said before. And third, yes, we would like to build a bigger portfolio. We would like to have more games in the top 100 grossing games in the US. 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&As. We're doing this. We're still looking. We're still searching. We are really excited about the time that we have now, and we have more hopes for the future.

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 of Poker?

Trust. actually one of the main issues that Governor of Poker is not competing against the WSOP. Governor of Poker is bringing something that we don't have, and it's localization. When you look at Governor of Poker, you have 19 countries that Governor of Poker is very strong there that we are not there. So together with Governor of Poker, we become the number one strongest social poker app in the world. So for us, it's a win-win situation.

Great. Thank you.

Thank you.

One moment for our next question. Our next question comes from Mayloon Quach from Calwin. Please go ahead.

Hi. Staying on the topic of discovered poker, How big is the title and what is the expected impact of that to your fiscal 23 revenue or EBITDA? Is that already reflected in your updated guidance? Thanks.

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

Got it. Thank you.

Thank you.

One moment for our next question.

Our next question comes from Eric Sheridan from Goldman Sachs. Please go ahead.

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 industry 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. Thank you.

Sure. So I think 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&A for that growth. And given we were not active in the marketplace these last few years while valuations were kind of sky high, we're now in a position to start being more opportunistic and taking advantage of the current market environment. 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.

Thank you. Thank you. One moment for our next question.

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

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 DDC version of a game and how long it can take for that to be a meaningful contributor? And then any updates to how you were thinking about the EU's Digital Markets Act and similar legislations and what that means for Platiga?

thanks sure robert will take that first question so now i hope you hear me

Regarding the first part of the question, nothing changed in what we spoke about the B2C. We are on track. We are not changing anything. We're working the same. 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, to drive a better margin and better profitability. Regarding the second half, I think Craig will take it.

Yeah, 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.

Okay. Thanks, Robert. Thank you, Craig.

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. Thank you.