PLAYSTUDIOS, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited and presented on a consolidated basis. The comparable 2021 period reflects Old PLAYSTUDIOS before the June 2021 business combination, accounted for as a reverse recapitalization. Dollar amounts below are in millions unless stated otherwise.
Business context
PLAYSTUDIOS develops and operates free-to-play mobile and social games, including social casino titles, with its playAWARDS loyalty program. Revenue is primarily from virtual-currency sales, with additional advertising revenue. The company said Tetris and MGM Slots Live contributed to growth in player counts.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $70.5 | $74.1 | Down 4.9% |
| Operating income (loss) | $(14.8) | $7.6 | — |
| Net income (loss) | $(25.2) | $5.9 | — |
| Adjusted EBITDA | $9.1 | $14.5 | Down 37.6% |
| Adjusted EBITDA margin | 12.9% | 19.6% | Down 6.7 percentage points |
| Operating cash flow | $11.6 | $4.8 | Up $6.8 |
| Cash and cash equivalents at period end | $220.0 | $39.5 | — |
Revenue less cost of revenue was $49.4 million, or approximately 70.1% of revenue, compared with $49.6 million, or approximately 67.0%, in Q1 2021. This is a calculation from reported revenue and cost of revenue, not a separately presented gross-profit measure.
Revenue from virtual currency fell 10.0% to $65.9 million; advertising revenue rose to $4.1 million from $0.9 million. Operating expenses increased 28.2% to $85.3 million. Selling and marketing was $20.5 million, research and development $17.0 million, general and administrative $9.7 million, depreciation and amortization $8.4 million, and restructuring and related costs $8.7 million.
Cash was $220.0 million and total liabilities were $42.2 million at March 31, 2022. The company reported no borrowings on its $75 million revolving credit facility. It said existing cash, operating cash generation and available borrowing capacity were expected to fund operations and capital expenditures for the foreseeable future. Operating cash flow benefited in part from working-capital timing, including collections of receivables; investing cash outflow was $5.1 million and financing cash flow was $0.1 million.
Material changes and unusual items
- Average DAU rose 23.5% to 1.56 million and average MAU rose 85.2% to 6.91 million, while average daily paying users fell 13.9% to 31,000. Daily payer conversion declined to 2.0% from 2.9%, and ARPDAU fell to $0.50 from $0.65. Management attributed the monetization declines partly to the addition of high-volume, lower-monetizing Tetris.
- The company suspended further development of Kingdom Boss and recorded an $8.4 million non-cash impairment charge. Restructuring and related expense also included severance and fees associated with potential acquisitions and the warrant tender offer.
- Stock-based compensation expense rose to $6.9 million from $0.9 million. The company approved 7.9 million RSUs during the quarter; approximately $26.0 million of RSU compensation expense remained unrecognized at quarter-end.
- A $2.7 million loss from the change in fair value of warrant liabilities reduced reported results. The warrant liabilities totaled $9.2 million at quarter-end.
- Income tax expense was $7.8 million despite a pre-tax loss of $17.4 million; the reported effective tax rate was negative 45.1%. Management cited jurisdictional earnings mix, R&D credits, non-deductible compensation and a valuation allowance among the factors affecting the rate.
Outlook, risks and contingencies
The filing provides no numerical revenue, earnings or cash-flow guidance. Management stated that it planned to continue investing in game development, player acquisition and growth, and said additional financing could be considered for business needs or acquisitions.
Key disclosed risks include dependence on Apple, Google, Amazon and Facebook for distribution and payments; platform fees generally around 30% for in-game purchases; reliance on player engagement and a relatively small paying-user base; competition, game monetization and development risk; licensed intellectual property and the Tetris agreement; privacy, cybersecurity and regulatory exposure; and labor shortages and employee attrition. Management also discussed continuing uncertainty from COVID-19 and its potential effects on player spending, rewards redemption, advertising and operations.
Contingencies include TeamSava litigation seeking 27.3 million NIS; the company said it could not reasonably estimate the probability or amount of loss and recorded no accrual. A shareholder securities class action was filed on April 6, 2022, alleging misstatements concerning Kingdom Boss development and projections; the company said it intended to defend the claims and had not accrued a loss. The filing also describes $17.9 million of future minimum rental commitments and an $8.0 million Tetris-related advance payment, none of which was considered earned at quarter-end.
Subsequent event: Beginning April 1, 2022, the company offered to buy outstanding warrants for $1.00 each and solicited approval for a warrant-agreement amendment that would permit redemption at $0.90 each. The company estimated the offer would require approximately $11.9 million, funded from available cash.
Important facts for investors to verify
- Whether player monetization stabilizes as the newer, higher-volume games mature, given lower paying-user counts, conversion and ARPDAU.
- The financial and product implications of suspending Kingdom Boss development, including any further impairment or restructuring costs.
- How much of the quarter’s operating cash flow reflects sustainable operations versus working-capital timing.
- The final participation, cash cost and share-count effects of the warrant tender offer and consent solicitation.
- Developments in the TeamSava and shareholder securities litigation, for which the filing reports no accrued loss.
- Future stock-based compensation expense and dilution from RSUs, options, warrants and potential earnout shares.