Greetings, and welcome to the PLAYSTUDIOS Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Samir Jain, Head of Investor Relations and Treasury. Thank you, sir. You may begin.

Thank you, operator. Good afternoon. And thank you for joining us for PLAYSTUDIOS second quarter 2024 earnings call. Joining me on the call today are our Chairman and CEO, Andrew Pascal; and our CFO, Scott Peterson. Before we begin, let me remind you that during the course of this call we will 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 a discussion of the risks and uncertainties that may affect our future results. I would like to remind everyone that we'll 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 second 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 second quarter 2024 earnings call. As always, our commentary today is in addition to the financial disclosures we made in our press release. I encourage you to take a look at the release for a summary of our recent performance. We were very active this quarter completing many of the strategic initiatives we've been discussing for some time. As such, I'd like to use my time today to discuss these efforts in greater detail and let Scott follow with a summary of the quarter and our 2024 outlook. I'd like to start by offering some general observations and thoughts. This call marks our three year anniversary since becoming a public company. When we made the transition, we shared our vision and plans for our future. We described our intention to expand our portfolio of games, scale our collection of players, enrich and more fully leverage our loyalty program and diversify with our business. While our path to achieving these goals has been a bit different than originally imagined, we stand here today having made meaningful progress. From 2021 to 2023, please consider. We've expanded our game portfolio from four social casino apps to a collection of 20 games across most of the popular casual categories. Among them is the beloved Tetris franchise, a game we acquired along with the exclusive mobile rights for up to eight more years. We've increased our daily active players or DAU nearly 230% from 1.5 million to 3.4 million players. We've unified our myVIP loyalty program across our primary apps. And since the program's inception extended nearly $900 million of real world benefits to our players across a collection of nearly 600 unique rewards. We scaled revenues 8% from $287 million to $311 million. More importantly, we…

Thank you, Andrew. In addition to today's press release, our Form 10-Q will be filed shortly. Please look at those filings for a comprehensive summary of our second quarter results. Net revenues in the quarter were $72.6 million, a 7% decrease versus a year ago. Weaker results were driven by softness in our social casino portfolio, which continues to be negatively impacted by an industry wide slowdown. We continue to expect this category to remain challenged throughout the year. As discussed in past calls, our focus remains on the opportunities unique to our games and we believe that progress there can drive growth despite a challenging backdrop. Our casual portfolio continues to perform strongly with notable strength of Brainium. Andrew discussed some of the other drivers and I will reiterate that we expect the continued scaling of advertising and the full adoption of loyalty to support ongoing momentum. Likewise, Tetris Prime continues to grow and our hope is that the addition of Tetris Block Puzzle will drive even more interest in the franchise. Second quarter consolidated adjusted EBITDA was $14.1 million compared to $16.3 million a year ago. As would be expected with a decline in revenue, we also experienced a decline in operating margins as the impact of our fixed costs were accentuated. We believe that our revenue will strengthen in the future. And as it does, we expect margins to return to their recent levels. Longer term, we still believe our business can reach margin parity with peers. The second quarter also marked the last period in '24 where we will compare against the previously disclosed, non-recurring licensing agreement. That agreement added nearly $2 million to our revenue in the second quarter of 2023, most of which flow directly to adjusted EBITDA. DAU was 3.2 million and MAU…

Thank you, Scott. Despite these secular challenges in social casino, I remain bullish on our business. In a little over a year, we've grown our mix of casual revenues from virtually zero to over 20%. We've expanded our adjusted EBITDA margins by over 600 basis points since '21 and raised adjusted EBITDA by close to 60%. We secured the mobile license for the highly valuable Tetris brand for the next eight years and have already launched the new Tetris game. We're hard at work developing new titles and making Tetris a multi-game franchise. With the purchase of our shares owned by Microsoft, we bought back approximately 10% of our outstanding Class A common stock this year and close to 15% since we initiated our current program in November of 2022. Our balance sheet remains pristine with no leverage and close to $1 in cash per share. While these accomplishments are absent in our share price, we remain committed to increasing the intrinsic value of the company and believe our stock price will ultimately reflect its true value. Lastly, I want to thank our talented teams across the globe that remain so committed to our company, our players and our products. It's their passion and dedication that enables us to continue to move forward and further position the company for future success. Operator, please open the lines for questions.

[Operator Instructions] Our first question comes from Ryan Sigdahl with Craig-Hallum Capital Corp.

Maybe want I to start with guidance, fully kind of aware of the industry challenges that are present for you guys and everybody. But looking at the second half implied revenue guidance, previously it was implying kind of up mid single digits, now it's down high single digits. I guess anything besides the industry headwinds to call out whether anything has slipped or puts takes I guess within your business, I guess, for such a wide swing in the back half?

No. I mean, it's really the change in the trajectory of the business that’s concentrated in, I think, two areas relative to what was our forecast. First is what's happening in social casino. And quite frankly, if you look across our three core titles, the shortfall is almost entirely attributed to one. And there's actually, I think, more positive signs associated with the other two. But the social casino category just continues to be challenging. And then the other is, we had anticipated that we would be scaling at this point our Tetris Block Puzzle product. It's in the market, it's open more generally across all of the primary markets. But we're not yet investing as aggressively as we originally anticipated and scaling it up. We certainly hope to be doing that in the coming months. The game is a great game, all of the metrics are very healthy. The challenge that we're having right now is just optimizing our capacity to acquire players. And so we get some amount of organic traffic but it's modest relative to our other Tetris product. And we need to stimulate more growth by being able to go and invest and acquire new users affordably and profitably. And it's just proven to be super challenging. There are incumbents in the category that are spending a lot of money making the cost per install nearly prohibitive. We think we'll overcome it, because we have what we believe is without question the strongest product in the category. And so we're exploring and testing a variety of different strategies and tactics. So we hope to be able to do that before the end of the year. But those were the two reasons really for the change in the overall forecast. Social Casino, one product within the portfolio specifically and the delay in scaling our block puzzle product.

Maybe switching over to playAWARDS, any update -- or I guess, any update on the pipeline of potential customers and monetizing that in a B2B fashion?

No. Nothing material to really provide just yet. I can tell you that we're continuing to look at those opportunities. We're -- have been a bit more consumed with the focus on stabilizing the core casino portfolio and a bunch of initiatives and rationalizing the cost structure of the business in light of where revenues are pacing. So the team is intensely focused right now on the cost structure of the business and continue to refine it. And then we'll be able to free up the mind share that's needed in order to really advance that aspect of our business. But right now it's stabilized the core business, focused on what we believe to be the more near term drivers of growth and also make sure that the cost structure of the business is being tended to. So that's what we're focused on.

Last one for me. Just anything from a Q3 to Q4 cadence from a cost standpoint, whether it’d be advertising and customer acquisition, competing against the election or the myVIP World Tournament of slots, how much of material potentially impact that is? But just anything to be aware from kind of a cost and/or sequential standpoint in the Q3, Q4?

Nothing meaningful. I mean, there is obviously, the fourth quarter seasonality. I mean you highlight the election, not entirely sure how that's going to impact some of the investments we make on the UA front. But no, nothing meaningful to add.

Our next question comes from Cory Carpenter with JP Morgan.

I have two. Maybe to start, just hoping you could expand a bit on the myVEGAS and KONAMI initiatives. Maybe what exactly you're doing and how far along you're on that journey? And then you just mentioned, Andrew, there's one game that's lagging. Are there things you're doing here that you think could be expanded to other games in the portfolio and applied and helpful in that manner?

So myVEGAS and KONAMI -- I'll start with myVEGAS. I mean, myVEGAS continues to be the bright spot in the portfolio. It's actually been growing at a double digit rate year-over-year, quarter-over-quarter, month-over-month. So it has solid momentum and it's actually -- gives us a sense that there is an opportunity for us to stabilize the overall casino portfolio and enjoy some modest growth from it. There's work to do though. In the case of KONAMI, its performance is generally flat. So it's stable, it's not enjoying any growth for the moment. But we believe that it too is on a path where it can enjoy some modest growth. Pop! Slots has seen contraction, particularly over this last quarter there was a pretty meaningful deceleration in its performance. A lot of it was a function of some things that we did in the way that we were managing the economy of that product. And without getting into specifics, I would say that its underperformance was as much a function of how we operated the product as it was a reflection of overall market conditions. Historically, that product has been a major contributor for us. And we expect that as we address the issues that we've identified that it will continue to be. As far as the changes that we made, if you recall, back in the second quarter of last year, we went through a fairly meaningful restructuring of the casino portfolio. myVEGAS and KONAMI were owned and managed -- when I say owned, they were run by teams that were based one in Asia, myVEGAS' case and out of Austin, in the case of KONAMI. We elected to concentrate our casino portfolio and run it out of our Tel Aviv studio where there was deep talent, and we felt that the products could benefit from their shared experience. So we went through that restructuring and completed it in the second quarter, started to stabilize and get some traction as we move through the third quarter. That momentum was disrupted a little bit with the conflict in Israel, which has proven to continue to add complexity to the things that we're trying to do. But we ultimately did, in fact, accomplish what we set out to do, which was reconstitute new leadership teams focused on advancing those products. In the case of both myVEGAS and KONAMI, we're seeing encouraging results. We unfortunately have not seen or had the same experience with Pop! but continue to bear down on and stabilize and feel like there's an opportunity for us to reset that product.

And then just for a follow-up, just because Tetris so big uplift in 1Q from the player beating the game. How was the response to the 40th anniversary in terms of just consumer excitement? And I know Tetris did some specific marketing around it. So how did consumers respond to that relative to your expectations?

Yes. I mean, relative to our expectations, it fell quite short of them. And we saw some uptick in organic traffic but relative to our experience from the first quarter with what we refer to as the Willis effect, not nearly the same. So we didn't see the same kind of interest and social engagement and activation that would have translated to the kind of growth that we had imagined. So it fell short of our expectations. With that said, we've kind of reloaded, this is the year of Tetris' 40th anniversary, we've got some other cool things that we're doing with some interesting campaigns and influencers that will continue to take advantage of its milestone birthday and we'll see if we can find a way to generate that organic interest. But we still feel like there's an opportunity there. And with that said, the year-over-year performance for Tetris continues to be strong. So when you look at how it's performed this quarter relative to the same quarter last year it's up and we will continue, as I said, to support it and take advantage of these opportunities.

Our next question comes from Aaron Lee with Macquarie.

Just want to dig in a little deeper on the Tetris -- the new Tetris product. Can you just talk a little bit more about what you're seeing in the early days engagement retention and maybe any cross sell opportunities to your existing Tetris game? And I know you mentioned you guys just feel it wasn't in the right place to kind of scale up the marketing. But can you just talk about how you would judge what is the right time to kind of lean into this game a little bit more or what you would like to see before you make that choice?

So as far as the game is concerned, what we're seeing, the retention is very strong. Early retention is definitely where you would want and need it to be so that you can go and start stacking cohorts and scale and grow the audience. And that's holding up as we see those cohorts mature. So the day 30 retention is strong, again -- and keeping with what we would want to see in order to stack cohorts. Then it's really about our capacity to go and acquire new players at a price that allows us to get the returns that we're looking for within the time horizon we're holding the game to currently look for at about an 18 month payback on the paid acquisition. And in light of where we're seeing CPIs right now, that's a bit challenged. With that said, I can share that in the last 30 days, the team has done a great job and we see CPIs coming down. So the way that we are talking about the product, converting traffic and ultimately driving installs and retained installs as the metrics are improving and that is what will dictate when we're ready to invest in it more aggressively. It's when the cost of acquiring a player hits a certain threshold that allows us to confidently achieve a return on that player withing the 18 month horizon that we’ve set for it. As we hit that threshold we will start layering in more UA investment.

And then just broadly, I want to touch on your cost structure. How are you guys thinking about your cost structure right now? Do you feel like it's in the right place or are there opportunities to become more efficient while also making sure that you don't impact your product pipeline and the things that you have planned?

Well, it's not in the right place in light of our current revenue pace. And so, I can tell you as a senior team and as a broader leadership team, we're constantly looking at how and where we can improve our efficiency and productivity and support our products more efficiently and take costs out of the business. That is an active ongoing discipline that the team is intensely focused on. With that said, it's complicated, because we want to continue to service and support our products with the new content and features that they need in order to sustain or ultimately improve their performance. And then, in addition to sustaining the existing products, they're the investments that we're making and the initiatives that we think are going to drive our future growth, which are largely focused on Tetris as a franchise. So we believe in those opportunities between Tetris and playAWARDS. We're going to continue to invest in them because we're growth oriented as a business. And so -- and of course, we don't get credit for that today. In fact, it compromises our margins and overall performance, because those initiatives aren't yet contributing to our top line performance or growth. But we believe in them. I think that, we're applying the right level of rigor in the way that we're analyzing our progress and the performance of those initiatives and looking at and testing their market fit in order to get them right and ready to scale. And we believe that the investments we make in them in relationship to the asymmetrical upside that they represent it’s absolutely the right thing for us to be doing. So we’re being, I think, vigilant about looking forward and taking the costs out of our business without adversely impact its current momentum and then strategically investing in our new initiatives that are going to drive our future growth.

Our next question comes from Clark Lampen with BTIG.

[Technical Difficulty] but the game you are talking about within your social casino portfolio where you are seeing some pressure, right now. Is this sort of similar to what you're talking with the new Tetris [Technical Difficulty] we're trying to scale up right now where the sort of LTVs relevancy [Technical Difficulty] sort of match your threshold, or is there an issue with [engagement]? Just love to understand, I guess, what's behind on the pressure and then maybe more importantly, how [vulnerable], I guess, you guys think it is? The second question I have is I just wanted to follow-up with your comments around sort of team playAWARDS opportunity. Could you help, I guess, kind of articulate for us what it is that you see, I guess? And understanding that resources are being devoted elsewhere right now, what is it so far that sort of hurt the scale effort for you right now? Is there [Technical Difficulty] sort of sell motion you've experienced a little bit more friction with after onboarding? Any insights, I guess, you feel comfortable [will be appreciated].

You're breaking up quite a bit, but I think I was able to decipher the two questions. The first one you were asking about the gain within the casino portfolio that is underperforming and not meeting our expectations, and was that a result of a similar dynamic that we're seeing on the Tetris product that I just described, that it's a function of being able to go into the market and acquire players at a price that's warranted or justified in order to drive future growth. The short answer is, no. That's not the reason. Pop! Slots has always been a strong game and it's been the leader in terms of its capacity to monetize the existing audience. The problems with the product have to do with some of the things we did in managing its underlying economy, meaning the amount of value and playtime that we afford to the players for free and when it is that we introduce friction into their cycle of play that requires that they actually start to spend money. It's complicated. We made some decisions that ultimately trend -- resulted in players not monetizing to the same degree. They're still active within our network in playing, but able to play without spending as much is the short of it. It's not the entire issue, it is one of the fundamental issues that since has been focused on, and there's a number of things we're going to do to address it. Some of the initial things we've already done and we've seen some improvement already. And so I would say a very different set of issues that have impacted the performance of that product. Unfortunately, it's the largest of our products in our entire portfolio. So an 8% to 9% reduction in its performance is…

And our next question comes from Martin Yang with Oppenheimer and Company.

My one question is about the timing of third Tetris game. Is the launch plan relating to the third game tied to how you scale Tetris Block Puzzle and how the current UA campaign trend would that inform on your decision on the third Tetris games launch date?

Is the third game dependent on how long [Tetris] does the release date?

No. The short answer is, no. I mean, we really look at each of these games in terms of -- we have an overall strategy for Tetris. There's a continuum of products that satisfy what the Tetris purist would want to play and what we believe a new more casual Tetris player might react and respond to. And the games each have a distinct position along that kind of strategic continuum, if you will. And so they're all advancing independent of one another. We believe that as we get them into the market and start to scale them that we can look at the opportunities to cross promote. And someone moves from being a more casual player to a more sophisticated player to then a Tetris purist we think we can help move some of those players across the portfolio of products. But they all get advanced independently, put in the market and tested independently and they have to justify their ongoing investment, both in the development effort as well as ultimately the scaling and marketing of them. So what I do hope though is that the products that are in the market today, Tetris Prime and Tetris One Puzzle and both the successes and challenges that we're having in the way that we're marketing them will definitely inform our strategy and approach for how it is that we look to launch the success of the next set of product within franchise. But they're not dependent on one game working for us to continue to advance and invest in another product.

I have a follow-up. As a reference to cross promotion, can you maybe generally describe how much cross promotion have you applied across all the games, including social casino and the casual portfolio?

Not nearly enough. So it was one of the core aspects of our whole thesis and frankly our own experience in the past. When we introduced new products, we'd incorporate the loyalty program, we’d aggresively cross promote and we communicate all the benefits to the player of actually adopting and engaging with one of our new games. Adopting our loyalty program into our other titles so that we have the capacity to not just cross promote them but to incentivize the adoption and playing of our other products is not something that we’ve executed on to our expectation. So we are in the cycle of that. We are just a few months away from having the program unified and being able to manage it, as I just described. So we should be able to see better performance and harvesting of players from our existing network that we've not yet really seen the full benefit of.

Our next question comes from David Pang with Stifel.

Just wanted to follow-up on the myVEGAS title. And given the improving trends for the title, are there plans to invest in marketing for the game?

Yes. We do today. In fact, we just recently -- we're constantly on a cycle of every two weeks doing a wholesale evaluation of every title in the portfolio and what its marketing budget is and whether there need to be adjustments. And keep in mind, the campaigns for these titles are managed literally daily, if not intraday. But the overall budget that we're allocating gets revisited every two weeks and we've just elected to allocate more marketing dollars to that title. So yes, it's worthy of it and we're going to start spending more money than we have.

And just would love to hear your thoughts on what's causing the persistent weakness for the overall social casino category? Is it -- are you seeing any impact from iGaming, is there any kind of overlap there on the player base?

I don't think it's coming from iGaming. I think it's coming from a new form of free-to-play casino products, which is the sweepstakes category. If you are looking at the sweepstakes industry and its growth over the past several years, it's gone from $0.5 million industry to nearly $3 billion industry this year. And these sweepstakes products are free-to-play social casino products. They're just accessed initially through the web, they have companion mobile apps. Most of the activity, 70% plus of the engagement in these products is through a mobile device. So it is, I would say, a complement to, if not part of, what I would characterize as part of, the social casino category. And so if you were to look at really the headwinds that everybody -- the pure social casino players on mobile and desktop, like the primary I think headwinds are coming out of this emergence of these sweepstakes opportunities. And so what is it about them that is so interesting and compelling, they have a dual currency model. When they initiate play, they get a bunch of currency that they play for free and then there's a mode that they can toggle into that allows them to actually play with a currency that they can accumulate and cash out for real cash value. And that fits within the sweepstakes laws and statutes across all the different states. There’s about 45 states that accommodate or allow for sweepstakes form of gaming. So I would say more than like pure interactive gambling, it's these sweepstakes products that are really biting into the more traditional social casino market.

[Operator Instructions] Our next question comes from Greg Gibas with Northland Securities.

Wanted to get a sense of kind of within your updated guidance, what you assume for performance within the social casino versus the casual categories in the back half?

We generally have kind of assumed similar trends to what we're seeing today in terms of pace. I mean, we believe that we'll stabilize PoC. But that generally, we're going to continue to see pressure on social casino as the category. Coming from, as I just described, we think some of the broader market dynamics, the emergence of sweeps. And we'll talk about kind of our strategies and plans for sweeps on a future call when we're in a better position to. But as far as the social casino category, we're generally forecasting similar performance to what we've experienced so far this year.

And regarding kind of what you said about M&A, seeking large transformative acquisitions, kind of hard to come by, hard to get over the finish line. How active should we expect it to be maybe in the back half,should we expect some smaller opportunities like we saw from Pixode? And then given your commentary on the sweepstakes category, does it make sense for you guys to maybe pursue that?

Jason, do you want to take that question?

So we remain aggressive but disciplined in our pursuit of M&A. It's certainly something we're focused on. At all times, we have an active pipeline of companies that we are pursuing that fit into the various buckets, some of which are in that transformative bucket that are meaningful scale, but will obviously are more complex and harder to pull off as you alluded to. And some of which are really attractive, more tuck-in acquisitions that we think are strategically compelling and accretive that we can go after. And so we remain open to all of those different opportunities that can add value to the business and be accretive to either our growth or to our margin profile. When it comes to the sweepstakes business, we continue to look at different opportunities to evaluate that space. We're being very thoughtful in the way that we enter that space and consider all the different opportunities there as well, given how big of a market it's become and how dynamic it is. We want to be thoughtful. But you can expect to hear more from us around that in the future.

There are no further questions at this time. I'll hand the floor back to management for closing remarks.

Thanks very much. So look, before we conclude the call, I just want to reaffirm a couple of key things. First of all, as a management leadership team, we are intensely focused on making sure that our business is operating efficiently and productively and that where there is an opportunity for us to take cost out of the business and improve our margins, we're going to find it and we're going to do it. But we're also a company that is deeply committed to future growth. It's not as deterministic, as we'd like it to be. We're creating products that don't have functional utility. They're entertainment products that appeal to people on more of an emotional plane. We believe in the opportunities that we're investing in. We're going to continue to invest in those things, because of the future growth they represent. And hopefully, we'll continue to find the right balance between optimizing the performance of our business as it is today, as challenging as the environment is, while still investing in those things that are going to drive our future growth. So I appreciate that it's certainly difficult to engender the kind of confidence from the investor community that we would hope and want, particularly when we're having to adjust our guidance. But I believe that I, along with the team, are doing all the things that we need to do to be responsible and reacting to both our current performance, while still staying focused on what we can and should be investing in, in order to scale up our business and build the kind of confidence going forward. So I appreciate everybody's time, continued support. And I look forward to talking about our progress on our upcoming calls. Thank you very much.

Thank you. And with that, we conclude today's conference. All parties may disconnect. Have a good day. Thank you.