Playtika, one of the world's largest standalone pure-play mobile game companies, reported Q4 F2022 earnings last week. Let’s jump into the details, but first, a bit of a primer on Playtika and where it stands in the industry.
Founded in 2010 and headquartered in Israel, Playtika initially focused on casino games before expanding into casual gaming through strategic acquisitions in the late 2010s. The company went public in January 2021 at a time when the gaming industry was experiencing record earnings and high engagement levels, with an initial share price of $27.
However, as COVID's impact declined, excitement over game valuations also faded, while Apple‘s ATT privacy changes began to impact the mobile advertising market. Playtika's stock, like many other gaming and technology companies, experienced a sharp correction in 2022, plummeting to its current trading price of $9.60 a share, representing a decline of approximately 65% from its IPO price.
Although Playtika is a major player in the social casino segment, its growth has stagnated, with core titles showing their age and in active decline. Despite some modest success in diversifying its portfolio with casual games, the company has not been able to make up for its lack of growth. Nevertheless, Playtika continues to invest in growing its casual portfolio, yet with inconsistent results. We will discuss these investments in more detail below.
Despite the company’s efficiency and pragmatic business practices, Playtika is a company with a growing list of issues, and we fear the latest earning report foreshadows a potentially more troubling future ahead.
Q4 2022 Financial Performance
The company delivered $2.6 billion in revenue for the full year, up 1.3% year-over-year (YoY) and Q4 Revenue came in at $631.2 Million, down 2.7% YoY. Credit Adjusted EBITDA (Adj. EBITDA) came in at $805.1 million, down 5% YoY, representing a 30.1% margin, while Q4 Adj. EBITDA stood at $202.6 Million, up 15% YoY with a 32.1% margin.
It’s likely that Playtika’s layoffs on December 12, 2022 slashing more than 600 employees — in addition to slowed hiring, reduced production, and reduced user acquisition (UA) costs in relation to marketing — partially explain this jump in EBITDA. The company also reported a net Income of $275.3 Million for the year, down 10.8%, and net income for the quarter came in at $87.5 Million, down 14.5%.
Playtika’s cash balance fell by $248 million YoY, ending the year at $768.7 million, while its debt balance fell by a marginal $11.7 million, leaving the balance for the year at a high $2.4 billion. Playtika’s net debt currently makes up a hefty 44% of its market cap.
Operating KPIs didn’t paint a bright picture either. Average DAU for the quarter fell from 10.3 million to 8.8 million, a 14.6% decline YoY, and average MAU for the quarter fell from 33 Million to 28.3 YoY, a 14.2% decline. Paid user metrics showed growth, but that’s because of ongoing IDFA-related UA struggles. Playtika’s overall user count dropped, making for a lower denominator.
The company also announced a tender offer on October 10th, 2022, buying back some 51 million shares for a cost of $600 million at $11.58 per share. There are several angles from which to look at the offer. On one hand, it’s a smart way to return wealth to shareholders, but given the unimpressive results this past quarter — without much reason to believe the future will much brighter — it may also be the case that management is propping up its financial ratios like P/E and ROE by reducing the denominator.
One bright spot for Playtika is the contribution of direct-to-consumer (DTC) revenue. This quarter, it stood at 23.8%, compared to 21.7% this time last year. DTC purchases improved overall because transactions occur within Playtika’s proprietary platforms instead of on third-party platforms like the App Store and Google Play Store, yielding a higher margin since in-app-purchase spending processing fees range from 3-4% as opposed to 30% on third-party platforms.
It’s important to acknowledge DTC has been down sequentially since Q2 of 2022, but as the overall pie reduces in value and IAP’s contribution lessens, the contribution of DTC goes up, albeit slightly. Playtika said it hopes DTC’s overall contribution to revenue mix in the long term will reach 30%, and the company is adding two new and high performing titles, June’s Journey and Solitaire Grand Harvest, to the DTC platform in 2023.
Playtika’s Growth Problem
Looking at the larger picture, it’s obvious that Playtika is struggling to grow, recording minimal growth for the year with a decline for the quarter on a comparable basis. Let’s try to understand how the operating segments of Playtika drive its performance and what the most pressing issues for the company are today.
As briefly mentioned, Playtika comprises two operating segments — social casino games and casual games — both operating in the mobile games ecosystem. Here’s the breakdown by revenue between the two.
Social Casino Segment:
The social casino segment peaked during the COVID pandemic when physical casinos were closed, but since reopening, online games in this category have struggled to maintain their COVID-era popularity and have been in decline. Additionally, because this segment is highly driven by heavy spenders, and Apple’s ATT policies make it much harder to run targeted UA campaigns, this drove another significant blow to social casino operators.
Furthermore, the portfolio of games giving Playtika significant market share in the social casino segment has started to age, with the most successful games dating back to the period between 2011 and 2013. According to data.ai, Playtika's casino segment declined by 20% YoY in revenue and 37% in downloads from 2021 to 2022, with the top revenue generator, Slotomania, experiencing a 19% decline in revenue and 23% decline in downloads, while Slots - House of Fun suffered the worst decline both in revenue (down 34%) and downloads (down 77.4%) YoY.
In contrast, the second-highest revenue-generating title, World Series of Poker, showed the least severe decline in revenue (down 9%) and downloads (down 9%) YoY, but a decline nonetheless. Given the alarming rate of decline, the age of these games, the difficulty of UA targeting, and the saturation of the social casino genre, one of Playtika’s most pressing concerns right now should be how to stem the loss in this segment.
While Playtika's top three titles (Bingo Blitz, Solitaire - Grand Harvest, and June’s Journey) drove most of the growth, the company's casual segment saw a modest revenue increase of 7% YoY, whereas in the same period downloads saw a 34% decline across the overall portfolio. However, aside from those top earners, all other noteworthy titles in the portfolio showed a decline YoY, highlighting challenges for Playtika in significantly diversifying its overall revenue streams.
One notable success story is June's Journey, a puzzle and hidden object game that saw impressive growth of 21% YoY in revenue, despite being more than five years old and declining 53% in downloads YoY.
On the other hand, home design simulation game Redecor's decline was the steepest in the portfolio, with its overall revenue dropping from $80 million in 2021 to $50 million in 2022, a decline of 38% YoY alongside a 36% decline in downloads YoY. (It’s worth noting that Redecor has contributed about three months of revenue to Playtika since it was acquired in September 2021, so the figures in the tables above reflect three months of data for 2021. We took how much the app contributed to Reworks and Playtika in total to calculate the decline from 2021 to 2022.)
Although Playtika is seeing modest growth in casual, it's perhaps unsustainably occurring off of shrinking downloads, and it fails to offset the steep declines in social casino. In relation to the layoffs mentioned, three recently soft-launched games were also shut down: match title Merge Stories, which launched in September 2019; farming simulator Dice Life, which launched in February 2021; and puzzle game Ghost Detective, which launched in Nov, 2021. Switchcraft, another recent release, had its marketing support pulled in Q1 2022 since it didn’t meet internal growth / KPI metrics, Playtika said.
The commonality across these segments is Playtika’s worsening UA struggles, with downloads shrinking at a faster rate than revenues. This suggests the company is extracting more money from its existing user base, especially in the casual genre, and it’s a worrying trend given the lack of upcoming releases and the continued decline of several of its highest-earning properties.
The Rovio Situation
On January 19, 2023, Playtika made a "bear hug" bid to acquire Rovio for €9.05 per share in an all-cash deal, valuing Rovio at roughly $810 million. It is improbable Playtika would use all its cash reserves for one transaction, so it would need to raise additional debt to fund the acquisition. Typically, 2% of revenue for the year would be used to arrive at a “minimum cash balance” figure, but given this is a highly levered company, management may want more of a cushion. This offer marked Playtika's first public bid for Rovio, having previously (and privately) submitted a lower offer of €8.50 per share on November 16th, 2022.
The acquisition of Rovio makes strategic sense for Playtika as it would provide them with one of the best-known IPs in the F2P mobile gaming space. Additionally, the deal would bring in a significant revenue stream of about $334 million (according to 2022 figures), resulting in a major revenue mix shift (casual would then drive 70% of revenue while social casino would drive 30%) while also providing Playtika with a portfolio of evergreen games that have been generating stable revenue for several years.
Playtika would unlock the most upside by finding new ways to unleash the Angry Birds IP. However, knowing Playtika, the company would also try to squeeze higher revenues out of these time-tested games and perhaps see where it can cut costs (since Rovio reported an Adj. EBITDA margin of 17% in its latest year, which is below Playtika’s average). All that said, Rovio has so far shown little interest in the bid, making it unlikely the deal will go through for now. The company is assessing its options, and we’ll likely learn more soon.
Before moving on, it should also be mentioned that around a year ago, in February 2022, Playtika publicly announced it was exploring “strategic alternatives,” which could include a take-private transaction, sale, or divestment. Those efforts have so far failed, and even though it’s unclear whether they are still pursuing a sale at this point, the bid to acquire Rovio makes a near-term deal even less likely. Of course, if Playtika were to add Rovio to its portfolio, it could make the combined company more attractive to investors, such as private equity firms. Regardless, it's clear that Playtika is currently focused on maximizing margins and EBITDA, as it seeks to increase its value in the market for shareholders in the near future, despite no visible growth vectors for its top line.
Suspension of New Games Pipeline
In its earnings announcement, Playtika made a noteworthy announcement that only adds to its grim outlook for the future: the suspension of its new game development pipeline. The company cited the economic unviability of new games given the increasing cost-per-install (CPI) and challenging marketing environment surrounding mobile gaming.
While this decision may appear drastic at first glance, the nonreactive stock price indicates the market has already factored in Playtika's announcement, which essentially acknowledges the reality that has been evident since the deprecation of IDFA. Plus, given the fact that Playtika hasn’t released a new game that significantly contributes to its top line in several years, cutting back on game development mostly means greater cost savings on similar levels of revenue.
That’s not to say Playtika’s decision won’t have any consequences. One significant impact is that the company's guidance for next year shows no growth, despite some recovery of the back catalog in the early months of Q1. In fact, the midpoint predicts a decline in top-line revenue. For a games company, usually the only way to achieve significant organic growth over time is to release new games. However, Playtika is abandoning this strategy in the near-term, indicating it doesn’t want to make significant investments in new games with a riskier and longer return profile than usual.
The move does raise questions about what will happen to Playtika’s creative teams working on new projects. Will this announcement affect their morale, or lead to canceled projects, high turnover, or, worse, even more workforce reductions? We’ll have to monitor this situation closely in the following quarters to see how it affects Playtika’s pipeline and performance.
We should also note that the company claims it is optimizing its cost structure to streamline operations and run more efficiently going forward, with the goal of aligning expenses with revenue trends. On December 13th, 2022, Playtika announced a round of layoffs, which affected 610 employees. However, this was not the first time the company reduced its workforce; Playtika laid off 250 employees just seven months earlier on May 31st, 2022.
Playtika expects that the full effect of these layoffs will be reflected in its EBITDA margins by Q2 F2023, resulting in potential savings of up to $33 million. This partially explains the guidance for fiscal 2023, which shows little to no revenue growth but an increase in EBITDA margins.
Playtika’s Live-Ops Strategy
Playtika has always put a strong emphasis on live operations, and the company accomplishes this through its proprietary Boost platform. The main strategy is to acquire games and grow them, but Playtika’s methods (at least recently) focus on maximizing gains from its existing user bases, which may require revamping a game’s monetization approach. While this strategy has achieved increased growth in its casual portfolio for 2022, it hasn’t always been successful, and Playtika has developed a reputation for being a “ruthless” operator when working with smaller studios.
For example, when Playtika acquired Seriously, the developer wanted to create new games, but Playtika pushed for aggressive monetization techniques designed to grow their existing hit game, Best Fiends. The disagreement eventually led to Playtika shutting down the Finnish studio entirely.
Similarly, Playtika completely revamped the monetization mechanics for Reworks’ Redecor, helping cause a 39% YoY decrease in revenue in 2022. This was covered extensively in a research essay from January, in which Eva Grillova wrote, “Playtika misjudged the Redecor audience by throwing it into the same bucket as social casino players, overlooking that they have more motivations to play than to watch their coin balance.”
Overall, while Playtika achieved growth in its casual portfolio, only the top-grossing titles showed growth, namely Bingo Blitz, Solitaire - Grand Harvest, and June’s Journey. It’s a good reminder that these aggressive techniques do not always resonate well with newly integrated audiences, and studios that prioritize their audiences and long-term growth may think twice about joining Playtika’s ecosystem.
Growth Vectors Are Harder and Harder to See
As discussed in the previous section, Playtika's growth strategy has been largely focused on acquiring existing studios and maximizing revenue from existing users. However, as organic growth will be non-existent in the near-term, the company's only real option for growth is through M&A/inorganic growth. Unfortunately, other factors are currently limiting Playtika's options in this regard. Without the ability to pursue its usual playbook, the company's long-term viability in public markets is looking shakier.
Playtika currently holds $768.7 million in cash, which could potentially be used to acquire a sizable competitor (as it attempted with Rovio). However, it is important to note that the company also has a significant amount of debt, totaling around $2.41 billion compared to a market cap of $3.7 billion.
Management has stated that its net target leverage is between 1x and 3x, but they also note the company may be willing to exceed that for the right M&A opportunity. The net leverage ratio for the last 12 months (LTM) stood at 2.1x, arrived at through the division of net leverage (debt balance of $2.4 billion) - Cash ($768 million) / LTM Credit Adjusted EBITDA of $805.1.
Currently, $1.87 Billion of debt (term loan) matures in 2028, and $600 million (senior notes) matures in 2029. In last quarter’s earnings call, management noted an unused revolver balance of $600 million as another avenue to use if a big M&A opportunity arises, in addition to the cash on the balance sheet.
If we want to take a highly simplified view of how long Playtika would take to pay down its debt balance, taking into account the last 4 quarterly EBITDA results (unadjusted), Playtika, on average, generates $158 million in EBITDA per quarter. If we assume it uses $75 million (47% of unadjusted EBITDA) to pay down its debt every quarter, it would take the company around 32 quarters, or eight years, to pay down the debt.
Although Playtika boasts impressive adjusted EBITDA figures, which are admittedly among the leading figures in the overall sector, their EBITDA margin contracted YoY. It’s also a bit foolish to over-rely on EBITDA for a company with outsized interest payments. In 2022 Playtika paid a sizable 23.5% of its operating income in interest expenses, a bit lower compared to 2021’s 27.4%. Even though the company wants investors to pay attention to Adj. EBITDA, because, well, it adjusts out several expenses to make the company look better than it actually is, smart followers of the business will put more emphasis on free cash flow (FCF) — how much actual cash actually is produced after all expenses are accounted for. In Playtika’s case, FCF margins are roughly half that of Adj. EBITDA.
In our view, Playtika finds itself in a challenging position. While the company could pursue smaller targets, like the $25 million investment in Ace Games, such deals are unlikely to boost Playtika's growth prospects significantly. Moreover, as management has acknowledged, the current UA landscape is tricky to navigate and doesn't offer many viable small-sized targets. And even if Playtika were to identify such targets, given its reputation, potential deals may be more difficult to secure given how previous acquisitions were messed up.
And if Playtika chooses to pursue larger acquisition targets, such as Rovio, it may have to dip into a significant portion of its cash reserves. While using its shares as an alternative option would seem logical, Playtika's shares are currently trading at a much lower value than at the time of its IPO (making deals more dilutive), and it’s unclear whether company owners would actually want shares of Playtika in return at this stage. However, relying too heavily on cash reserves could be risky, given the company's high level of leverage.
However, given the challenges associated with user acquisition and scaling, coupled with the implications of joining Playtika's portfolio, including aggressive live-ops at all costs with little space for creativity, it’s uncertain how many companies might be interested in an acquisition offer. Considering all the factors above, Playtika's growth prospects appear uncertain. Both organic and inorganic growth pose headwinds, which puts Playtika between a rock and a hard place.
Following Playtika's IPO, it became apparent the company's move to go public may have been too hasty. In retrospect, waiting longer to go public or pursuing an earlier exit during the initial COVID-fueled gaming boom may have been a wiser choice. Additionally, Playtika's repeated failures to successfully launch new games or integrate recent acquisitions have illustrated an inability to execute on both substantial organic and inorganic growth. This has resulted in burned bridges with investors, and we believe these shortcomings have damaged the company's reputation in public markets.
As a pure-play mobile game maker, Playtika is currently in a precarious position as a public company, heavily reliant on the mobile gaming ecosystem with no exposure to other gaming, media, or technology verticals. This leaves them vulnerable to the whims of Apple and Google, and the negative impacts of ATT have made clear how risky the dependence on platform providers has become.
Furthermore, with 45% of revenue coming from the social casino category combined with declining revenues overall due to privacy and macroeconomic factors, Playtika's growth prospects in this saturated and highly regulated segment are more uncertain than ever. Additionally, most of their top revenue-generating games are 10 years old and in decline. Investors have taken note of these challenges, resulting in a significant drop in the stock price over the past two years.
Playtika's future options are likely one of the following. First, Playtika may decide not to take any drastic steps and continue with its current trajectory. The company would still likely be profitable and pursue some M&A as a way to find growth.
The second option is to divest its social casino assets to a strategic or financial sponsor in that vertical, as most traditional gaming and tech investors will not be interested in social casino properties. However, we think despite social casino’s shortcomings, this is still a highly profitable segment and brings in sizable cash flow; unless Playtika receives a substantial offer that would allow it to create more value, it’s unlikely it will separate itself from social casino in the near-term.
Alternatively, a Chinese company may look to buy Playtika, particularly with interest in the casual segment. This would be yet another way to unlock global diversification, as NetEase and Tencent have done for the last several years, and a way to offset the Chinese market, especially given China’s more erratic and adversarial stance toward gaming as a whole of late. It’s worth noting that Giant Co., a Chinese online game maker, still holds a significant stake in Playtika. However, it’s doubtful a major company would want to pay up for Playtika given its heavy debt load.
A fourth option is private equity, which actually could make some sense. After all, this is a company that needs support in turning the ship around, and the company already has a past ownership history with private equity entities. A take-private transaction is a possibility, though investors interested in the company may wait longer to monitor Playtika’s stock performance and swoop in at even lower prices. And, once again, taking on a company already saddled with debt limits optionality. Related, it's crucial for Playtika to address investor concerns and take significant steps to improve its governance and communication practices. For instance, Joffre Capital, a tech and media buyout fund, was interested in taking a stake of 25.7% last June, but the deal fell through due to “significant” governance deficiencies, communication failures, and conflicts of interest, according to a damning letter delivered to Playtika’s board last December.
Looking ahead, it appears Playtika will find it challenging to achieve positive growth. While the company is an efficient operator that has effectively executed its live ops strategy with established products, and to a lesser extent with more recently acquired ones, its reputation around M&A may hinder its ability to acquire the growth needed to gain traction in public markets. Playtika’s other option is organic growth, but historically, building new games has not been its forte, and the suspension of new game development puts a cap on what’s possible here. Of course, we will closely monitor the Rovio acquisition situation and look to provide more extensive coverage in the next quarter should any significant developments on that front occur.