Playtika Holding Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Amounts are in U.S. dollars, millions unless stated otherwise.
Business context and reporting period
Playtika develops free-to-play mobile games and generates most revenue from virtual-item purchases. It distributes games through third-party platforms and its own proprietary platforms. On August 31, 2021, it acquired 80% of Finnish game developer Reworks Oy for $400 million, subject to customary adjustments, and consolidated Reworks from that date. Reworks’ contribution to the quarter’s income statement was not material.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $635.9 | $613.3 | $1,934.0 | $1,798.0 |
| Operating income | $154.5 | $203.7 | $450.2 | $244.9 |
| Net income | $80.5 | $119.9 | $206.2 | $16.1 |
| Adjusted EBITDA (non-GAAP) | $247.8 | $261.4 | $770.2 | $730.8 |
| Adjusted EBITDA margin | 39.0% | 42.6% | 39.8% | 40.6% |
| Operating cash flow | Not provided separately for the quarter | $383.8 | $333.5 |
Q3 revenue grew 3.7% year over year, while operating income fell 24.1% and net income fell 32.9%. Revenue increased 7.6% for the nine-month period. Q3 net margin was 12.7%, compared with 19.5% a year earlier; nine-month net margin was 10.7%, compared with 0.9%. Nine-month basic and diluted EPS were both $0.50, versus $0.04 in 2020.
Cash and cash equivalents were $894.1 at September 30, 2021, with $100.1 of short-term bank deposits; combined, $994.2. Current assets were $1,277.2 and current liabilities $580.6. Total debt had a $2,490.5 face value ($2,438.1 book value); the $600 million revolving facility was undrawn. The company reported a 1.04x first-priority net senior secured leverage ratio against a 6.25x covenant maximum.
Nine-month net cash used in investing was $569.4, including $397.7 for Reworks and $100.0 placed in short-term deposits. Financing provided $564.5, including IPO proceeds and debt refinancing. Cash, cash equivalents and restricted cash increased by $372.6 to $896.2.
Material changes versus the prior comparable period
- Management attributed revenue growth to improved monetization, new content and product features, engagement across the portfolio, and Reworks. Proprietary-platform revenue rose to $137.7 in Q3 from $88.7; these platforms generally carry lower transaction fees than third-party platforms.
- Average Q3 DAUs declined to 10.4 million from 10.9 million, while average DPUs rose to 293,000 from 283,000, payer conversion to 2.8% from 2.6%, and ARPDAU to $0.67 from $0.61. Average MAUs increased to 35.4 million from 32.4 million.
- Q3 research and development and sales and marketing expenses increased by $26.0 and $24.4, respectively, reflecting higher compensation, headcount, facilities and marketing costs. Q3 G&A increased by $22.4, including higher stock-based compensation and public-company costs.
- Nine-month G&A declined by $213.0 year over year, substantially reflecting the prior-year $264.3 of stock-based compensation and $37.6 legal settlement, partly offset by 2021 IPO-related bonus expense of approximately $35.4. Comparisons are also affected by retention-plan expense timing.
- Nine-month net income improved substantially from 2020, when results included unusually high stock-based compensation. Q3 income was lower year over year, and the filing attributes lower nine-month interest expense before one-time refinancing charges to lower interest rates.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said cash, deposits, revolving-credit availability and operating cash flows should be sufficient for normal operating needs and capital expenditures for the next 12 months and foreseeable future.
- Acquisition and financing: Reworks consideration includes a future payment for the remaining 20%, tied to 2022 EBITDA and capped at $200 million; the acquisition-date fair value of contingent consideration was $32.2. In March 2021, Playtika refinanced its term loan and issued $600 million of 4.25% senior notes due 2029. Nine-month results included $22.9 of write-offs of deferred financing costs and $14.5 of debt-modification expense.
- Compensation and adjusted results: Q3 long-term cash compensation-plan expense was $28.5; nine-month expense was $88.5. Adjusted EBITDA excludes, among other items, stock-based compensation, long-term cash compensation, acquisition costs and certain unusual items; it is non-GAAP and not a substitute for GAAP results or operating cash flow.
- Taxes: The effective tax rate was 37.9% in Q3 and 36.7% for nine months of 2021, versus 24.5% and 83.2%, respectively, in 2020. The filing cites foreign tax rates and income mix, as well as certain tax positions, among the differences from the 21% U.S. statutory rate.
- Principal risks: Dependence on a limited number of games, paying users and external distribution/payment platforms; competition and user-acquisition economics; regulation of social casino games and loot-box mechanics; privacy and cybersecurity; international operations, including Israel, Belarus and Ukraine; and substantial indebtedness and variable-rate exposure. About 73.6% of nine-month revenue came through the iOS App Store, Facebook and Google Play Store.
- Legal matters: A patent case was dismissed in July 2021 after the court found the asserted patents invalid; the plaintiff appealed on October 18, 2021. The company also disclosed ongoing Canadian trademark litigation and a German copyright claim, for which the recorded reserve may be less than a possible final amount. A previously disclosed social-casino class action settlement was approved in February 2021.
- Controls: Management concluded disclosure controls were effective as of September 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved monetization and proprietary-platform growth can offset declining DAUs and sustain revenue and margins.
- Reworks’ performance and integration, final purchase accounting, and the amount ultimately payable for the remaining ownership interest.
- Debt service, refinancing requirements, floating-rate exposure and compliance with credit-agreement covenants.
- The nature and sustainability of adjusted EBITDA after considering excluded compensation, stock-based compensation and acquisition-related costs.
- Developments in platform policies, game regulation, privacy requirements and disclosed litigation, including the patent appeal.