Welcome to the Playtika Q1 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. Now I would like to hand the conference over to our speaker today, Tae Lee, SVP of Corporate Finance, and Investor Relations. Please go ahead.

Welcome, everyone, and thank you for joining us today for the First Quarter 2023 Earnings Call for Playtika Holding Corp. Joining me on the call today are Robert Antokol, Co-Founder and CEO of Playtika; and Craig Abrahams, Playtika'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 this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC. We have 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. Building our momentum from last quarter, we achieved sequential growth across both casual and social casino-themed titles. I'm proud of our incredible global talent for our achievements and for setting the pace for the rest of the year. We are on track to meet our financial guidance provided on our last quarterly call, and we are excited about our content roadmap slate this year. Overall, we generated revenues of $656.2 million and credit adjusted EBITDA of $222.7 million. Several months ago, we took meaningful steps to further focus on our core strength of live operation. Our leadership position in mobile gaming was built on a best-in-class live game operation services, which enable us to provide innovate and personalized content to our players at optimal point in their game journeys. This quarter, we took positive strides towards further developing and implementing our AI technology in our Digital Studio. Our proprietary technology platform, combined with evergreen nature of our titles, has allowed us to successfully drive engagement and monetization year after year. Our technical capabilities allow us to deliver an improvement, more personalized experience to our loyal community of players. And I truly believe there is a lot of more growth potential across all our games. To summarize, I am confident we will strengthen our position within industry this year and that we will outperform our peers in the mobile gaming sector. I will now turn it over to Craig.

Thank you, Robert. We are pleased with our performance to start the year. We saw continued positive revenue trends that we started to see in Q4 across all of our games. Our top 9 games grew revenue per day sequentially quarter-over-quarter. In addition, we are starting to see the flow through from our focus on efficiency and changes that we have made to how we allocate capital. For the quarter, we generated $656.2 million of revenue, up 4% sequentially and down 3.1% year-over-year. Q4 last year marked a stabilization point for our portfolio, and we're encouraged by the organic sequential growth we experienced to start the year, particularly the strength within our casual games. We made the strategic decision to shift more of our user acquisition spend to our casual growth titles. Our focus on higher margin growth is evidenced in our financials this quarter, generating strong credit adjusted EBITDA. Credit adjusted EBITDA was $222.7 million, up 9.9% sequentially and 12.8% year-over-year. Our credit adjusted EBITDA margin was 33.9% compared to 32.1% in Q4 '22 and 29.2% in Q1 '22. Net income was $84.1 million, down 3.9% sequentially and up 1.1% year-over-year. We generated $151.5 million of revenue from our direct-to-consumer platform, up 0.9% sequentially and down 0.6% year-over-year. Our direct-to-consumer platform is comprised of all of our social casino-themed titles; and Bingo Blitz, our only casual title on the platform. As a result, direct-to-consumer platform revenues were slightly down year-over-year, given the decline in our social casino-themed titles, offset by strength in Bingo Blitz. Looking ahead, we're excited to introduce Solitaire Grand Harvest and June's Journey to the platform starting in the second half of 2023. Turning now to our business results for the quarter. Revenue across our casual-themed games grew 7.1% sequentially and 4.1% year-over-year. This growth was…

[Operator Instructions] Our first question comes from Stephen Ju from Credit Suisse.

So Robert and Craig, so can you update us on your stance toward new game development right now and how that might be evolving? And also talk about your ongoing M&A efforts. It seems like it's an ongoing difficult environment, particularly for the smaller studios. So are you seeing an increased number of assets come up for sale?

So thank you for the question. Regarding -- first regarding the M&A, we see today more opportunities coming to the market. As we said last year, the market is going to be tough for new players, for small players. And the company that will have an issue with -- and like understanding with the operation, will find themselves depending on the marketing effort. And if you depend on marketing effort, it's really hard to grow the business. So we as a company that leading the operations in the gaming industry, this is a big advantage for us to help small companies to grow their business. So yes, we see more opportunity in the market. We see more companies approaching us. And we think that this year is going to be a very positive year. Regarding new games, as we said last year, we decided to focus of investing in start-ups, investing in the game that we are promising, let's say, dependent of the internal development of new games. We believe this is the right approach to a company like Playtika. Until now, we see very good results in this direction.

Our next question comes from Matt Cost from Morgan Stanley.

I have 2. The first is just on the stabilization that you're seeing with Slotomania, and I guess with the casino portfolio more broadly. Can you just give a little more detail about what's driving that? And sort of your view on how sustainable that -- the acceleration is from here. The second question is just about generative AI. I was wondering if you could talk a little bit about some of the opportunities that you have to drive efficiencies using those tools, but also are there any risks to your business that you would highlight as those tools preliterate?

So thanks for the question. So regarding Slotomania, we said, I think, 2 quarters ago that we have a target. And now we're starting to stabilize Slotomania. And actually, we did very well in the last 2 quarters, especially in this quarter. I think the difference was our approach, we are focusing on the core games by focusing on the thing that's really important to the players. We are bringing more paying users to the circles of paying users in Playtika. It's working very well for us. We are very optimistic about the future. And the -- I think we will keep seeing Slotomania and not only Slotomania, the social casino-themed games is stabilized, and we are even optimistic of growing them. What was the second question?

The second question was around generative AI.

So as you know, we are investing in AI already a few years. We always believe in AI. Today, everyone is speaking about AI. It became like a buzz word. But Playtika always believed in this. And our first investment was around 2017, 2018. We are happy to announce that I can say in this quarter, we see very good results, especially in Bingo Blitz. We saw the growth of Bingo Blitz. We saw what's happening with the game that, as Craig said in the call, we launched this game -- we acquired this game 10 years ago. And with the help of AI, we see a very promising growth. And by the way, we're going to take this learning and this experience to our games. And the AI is here to stay and AI is not going -- I always say, AI is not going to replace employees. It's going to help them to grow the business with lesser mistakes with more promising things. And for us, we are not looking at efficiency. We're looking at growth right now with the -- all around our Digital Studios.

Our next question comes from Douglas Creutz from Cowen & Company.

If I just take your Q1 results and annualize them, a touch above the top end of your guidance range on revenue and pretty significantly above it on EBITDA. I understand it's early in the year, but is there anything that you've seen in kind of early Q2 that suggests to you that your run rate you achieved in Q1 is slowing down? And/or are you guys looking at any sort of increase in your cost base as the year goes on?

Doug, thanks for the question. So in terms of our guidance, we just gave guidance just a couple of months ago as part of the reporting for the fourth quarter. And obviously, we executed very well in terms of sequential growth with 9 of our top titles all growing sequentially per day. I feel very good about where we are, but it is still early in the year. And so I think given the macro environment, I felt it best to keep guidance there on top line. I think in terms of costs and expenses, we're looking at opportunities to ramp marketing throughout the year as well as some expenses are getting deferred to later in the year. So I don't think you can just look at run rate in Q1. So we decided to keep guidance at this point.

Our next question comes from Aaron Lee from Macquarie.

Congratulations on the results. I just wanted to -- there's a nice pickup in the DAUs and especially the DPUs, which you called out. Can you talk about how trends look as you move through the quarter from January to March and how things have looked in early Q2?

Sure. So we don't discuss kind of out-of-quarter results. I would say that we performed well throughout the quarter in terms of Q1. We have been focused, as we talked about on prior calls on DPU. DPU is the best metric for us in terms of monitoring the health of our user base. And Q1 typically has higher marketing spend. And so you will see some top of the funnel growing as a result, but we continue to focus on live ops and conversion and driving that DPU number going forward.

Got you. And just in terms of macro and the health of the consumer, can you talk about what sort of macro impact you might be seeing on your players and how that's changed in recent months? Obviously, the first quarter results were very nice. Does it seem like you're still finding against macro? Or has that improved a bit?

I think what we've seen since kind of middle of the fourth quarter last year is that the environment has been doing well, and we see kind of a healthy environment for mobile gaming. And obviously, it's represented in our results. And so given -- we have -- last year, we had 9 titles in the top 100. I think we have a very good sense of the health of the overall mobile gaming system and feels pretty good right now.

Our next question comes from Eric Handler from ROTH MKM.

Craig, just sort of looking at your expenses, R&D has come way down as you've taken some costs out of the equation. I assume that's all people cost. As you look at how you're staffed across your studios and corporate, is that $102 million sort of a relatively stable number you see going forward? Or will that increase as the year progresses? What can you tell about -- tell us about that?

I think from -- I guess what I'll comment is from a headcount perspective, we feel like things should be pretty consistent where we are. We obviously made a difficult decision last year to make some changes as we focus on efficiency. But now we're seeing a more efficient organization and one that is able to make quick decisions and move quickly. And so we feel good about the direction we're headed and feel the expense structure is in a good place.

Okay. And just as a quick follow-up. And looking at your CapEx was quite low in the first quarter. Can you maybe talk about how that ramps as we progress through the year to get to your $115 million, $120 million outlook?

Sure. So it's just timing of when purchases were made. So we still expect it to be in the range of guidance, but nothing specific from quarter-to-quarter that we're going to provide.

Our next question comes from Colin Sebastian from Baird.

This is Reese [ph] on for Colin. I was just curious if you guys could provide an update on the localization strategy? And then another question is, how are you guys thinking about kind of the future of the mobile landscape potentially as Google makes changes next year? So it would be great to hear that.

Sure. So I'll take localization. And then Nir, our CMO, will talk about the broader landscape in terms of mobile advertising. In terms of localization, we continue to see opportunities to localize our games in different markets. We just had some successful campaigns with Bingo Blitz in Europe, and we're looking at some other opportunities as well in some other jurisdictions. So I think we keep seeing that leveraging our 360 approach with television combined with performance is working well as we're launching these new markets and changes in local CRM as well as local languages making a difference. So we'll continue to push on that opportunity as well.

It's Nir Korczak, Playtika's CMO. So regarding, I would say, the privacy area around Android. So I think that we learned a lot from, obviously, from the IDFA. We have a very close relationship with Google as a strategic partner of us. So I assume that most of the things that we have learned, we can implement in the new area, and we are working with them step by step to be ready to whatever that will come.

Our next question comes from Eric Sheridan from Goldman Sachs.

Maybe if I could get 2 in. First, I know you talked about AI broadly and the investments you made over a number of years. Can you talk a little bit about how that might factor into long-term content and game creation costs and how to think about the potential to drive efficiencies on that side of the business over the medium to long term? And then second, always interested to hear any updated thoughts on capital allocation and how you guys are thinking about the broader M&A landscape out there in terms of potentially allocating capital against inorganic growth?

Cool, thank you. I will answer regarding the AI and Craig will take the M&A. So as I said in the beginning of the call, we always believe in AI, and it took us time to really understand how to use this magnificent tool. I think the first implement and the first effect that we see for working with AI is more optimization of our current feature and current product because we need to remember there are products that we develop 5, 6, 7 years ago in our games. And now with the AI tools, we can optimize them much better to do segmentation to understand how to provide this product to the players to learn from this, to be more ready for new players that entering the game. And I think this is a very, very big change in actually how we're thinking of building a product from scratch, it's changing how we are thinking to approach to a customer, it's a game changer, I can say. But still, there is a lot of work to do. And the good news for Playtika is that we are using this really in one game, and we see -- and it's going to be implemented in all our games, and it's a very big key success in our future.

Eric, it's Craig. In terms of capital allocation, I think we're pretty consistent with our messaging over the last couple of calls in terms of M&A being an area of focus and priority for us, especially given the changes we made in terms of our pipeline in new games, M&A continues to be a core part of our strategy in terms of bringing on new franchises. I know we've talked about it earlier, but I think the additional recent consolidation in the industry just plays into the fact that mobile gaming entertainment is one of the most attractive categories within the broader entertainment landscape, and we expect consolidation to continue. And so with that, I think there's going to be opportunities for us to continue adding franchises under our portfolio.

Our next question comes from Franco Granda from D.A. Davidson.

Craig, you pointed out the success you're seeing in shifting more of your budget over to your casual growth titles. Can you perhaps talk a little bit more about your own practices in terms of what is working, what is not and what kind of return on ad spend assumptions you have embedded into the guide for the year? And then for my second question, how should we think about the mix of online versus offline marketing for this year?

Sure. So I would say, broadly, we're investing in the titles where we see the most potential for future growth, and we have the best return on ad spend. And the 3 fastest-growing titles in the portfolio are Bingo Blitz, Solitaire Grand Harvest and June's journey. And so those titles are all seeing increased budgets associated with that. I think in terms of the tactical specifics, we just don't share that publicly. But in terms of the types of things we're doing, you can see some of it on TV, and then that's backed up by continued performance marketing efforts. And so combined with localization and opportunities to bring our games to new markets as well. So I think it's consistent with previous strategy. I just think we're leaning in more towards our biggest and fastest-growing titles. And we're constantly evaluating as we've made product changes throughout the rest of the portfolio opportunities to ramp marketing there as well for growth.

And our last question comes from Omar Dessouky from Bank of America.

So I was -- I'm happy to hear that Bingo Blitz has improved, it seems like partly because of the AI technology. And I wanted to double-click into that. We've had a couple of questions on AI on this call so far. But I wanted to know specifically whether the difference and the timing of this improvement came from models, AI models that were recently released or AI models that have been around for a long time and that you just started to use them? And when I say recently released, I'm really talking about the ones that were released by OpenAI and have been discussed very frequently in the media and in the technology ecosystem.

No. So I think just to be, I guess, give more clarity, this is all tied to our Digital Studio efforts. Our Digital Studio efforts are providing tools to our studios to help improve their games and make better decisions. And so in terms of the product feature we referenced in the script as it relates to Bingo Blitz, it was really about using segments to really personalize the experience to our players. And that personalization and better segmentation tools really helped that game. I don't think we -- I don't have more technical answers in terms of specifically what did it, but this is all part of our broad Digital Studio efforts, which is something we've been developing internally for some time.

But I want to add something to make things clear. Our growth in Bingo Blitz is not coming only from the AI capabilities and AI effort is helping us. The growth is coming from an amazing job that the teams and the new products and the new features they are launching. So of course, we are speaking about a thing that can help us to grow in the future, but it's to make things clear, this is not what is growing dramatically the growth of the business, it's helping the growth.

Sure. And so have you -- has Playtika started using the large language models and the models that OpenAI has commercialized?

Yes. I don't -- it's not -- I can follow up with that. It's not something that I'm aware of in terms of the types of tools that the team is using my belief, it's mostly focused on our own proprietary tools.

Thank you. All right. That concludes the Q&A session. Thank you all for participating in today's conference call. This does conclude the program. You may now disconnect.