Playtika Holding Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Playtika develops and operates free-to-play mobile games, earning primarily from sales of virtual items. Results are unaudited and presented in U.S. dollars; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $656.2 | $676.9 | Down $20.7 (3.1%) |
| Operating income | $152.4 | $120.4 | Up $32.0 |
| Operating margin | 23.2% | 17.8% | Up 5.4 percentage points |
| Net income | $84.1 | $83.2 | Up $0.9 |
| Net margin | 12.8% | 12.3% | Up 0.5 percentage points |
| Credit Adjusted EBITDA, non-GAAP | $222.7 | $197.5 | Up $25.2 |
| Credit Adjusted EBITDA margin, non-GAAP | 33.9% | 29.2% | Up 4.7 percentage points |
| Cash provided by operating activities | $20.5 | $58.1 | Down $37.6 |
Cost of revenue was $185.7 (down $1.2); research and development was $102.4 (down $10.3); sales and marketing was $143.7 (down $36.0); and general and administrative expense was $72.0 (down $5.2). The company attributed revenue weakness to declines in some casual and slot-themed games, partly offset by growth in select casual titles and improved monetization and content.
Users and revenue mix
- Average daily active users (DAUs) were 9.1 million, down from 10.1 million; average monthly active users were 30.2 million, down from 31.7 million.
- Average daily paying users were 326,000 versus 323,000; daily payer conversion rose to 3.6% from 3.2%, and ARPDAU increased to $0.80 from $0.74.
- U.S. revenue was $461.3; EMEA $105.0; APAC $46.1; and other regions $43.8. Third-party platforms generated $504.7 of revenue and direct-to-consumer platforms $151.5.
Liquidity, debt and cash flow
- Cash and cash equivalents were $767.2 at March 31, compared with $768.7 at year-end; including restricted cash, the balance was $769.0.
- Total debt book value was $2,420.6, including $12.1 current and $2,408.5 long-term. The company had no revolver borrowings and reported $600 of available revolving capacity. Approximate net debt using cash and cash equivalents was $1,653.4.
- The term loan matures in 2028 and had a 7.38% stated rate at quarter-end; $600 of senior notes bear 4.25% interest and mature in 2029. The company reported compliance with debt covenants and a first-priority net senior secured leverage ratio of 1.32x versus a 6.25x covenant limit.
- Operating cash flow fell to $20.5, with working-capital movements including accrued expenses and liabilities reducing cash. Investing outflow was $15.4, compared with $180.3 in Q1 2022, which included short-term bank deposits and a business-combination payment. Financing outflow was $6.1.
- Management stated that cash, revolver capacity and operating cash flows should cover normal operating needs and capital expenditures for the next 12 months and foreseeable future.
Material changes, outlook and risks
- Operating income improved despite lower revenue, supported by reduced marketing and personnel-related costs. Management cited lower media buying, fewer offline campaigns and recent headcount reductions.
- Interest expense increased to $38.0 from $23.7 as average rates on variable-rate debt rose. Interest income increased to $7.8 from $0.8. The effective tax rate increased to 32.1% from 10.4%, primarily reflecting tax positions not meeting the more-likely-than-not standard and GILTI; the prior-year rate benefited from a discrete foreign deferred-tax valuation-allowance release.
- The company provided no specific revenue or earnings guidance in the supplied filing text. It expects continued investment in sales and marketing and anticipates research and development and general and administrative expenses may increase in absolute dollars as the business expands.
- Interest-rate exposure remains material: the filing estimates a 100-basis-point rate change would affect annual interest expense by $8.6 before the impact of swaps. Swaps cover $1.0 billion of notional principal. Foreign-currency hedges covered approximately $175.4 of planned expenses and mature within 12 months.
- Key business risks include dependence on a limited number of games, a small share of high-spending users, and third-party distribution and payment platforms; competition, discretionary consumer spending, indebtedness, cybersecurity, and international operations are also cited. Apple represented 56% of receivables at quarter-end and Google 29%.
- Contingencies include litigation alleging that social casino games constitute illegal gambling, a securities class action, trademark disputes and a German copyright claim. The company said it could not estimate potential effects for several cases. A lawsuit filed in April 2023 alleges fiduciary-duty breaches relating to the controlling shareholder’s indicated interest in selling shares and the resulting strategic review and self-tender process.
- Credit Adjusted EBITDA is a non-GAAP measure. Its increase included lower negative adjustments for contingent consideration and other items; it should not be treated as equivalent to GAAP earnings or operating cash flow.
Important facts for investors to verify
- Whether revenue declines and lower DAUs persist, and whether improved payer conversion and ARPDAU offset user losses.
- Whether operating cash flow recovers after the quarter’s working-capital outflows and whether cost reductions are sustainable.
- Debt refinancing, variable-rate interest exposure, hedge effectiveness and continued covenant compliance.
- Potential financial and regulatory effects of the social-casino litigation, securities claims and controlling-shareholder-related lawsuit.
- The reconciliation and comparability of Credit Adjusted EBITDA, including the effects of unusual or nonrecurring adjustments.