PLAYTIKA HOLDING CORP. We are one of the world's leading developers of mobile games creating fun, innovative experiences that entertain and engage our users. We have built best-in-class live game operations services and a proprietary technology platform to support our portfolio of games which enable us to drive strong user engagement and monetization. Our games are free-to-play, and we are experts in providing novel, curated in-game content and offers to our users, at optimal points in their game journeys. We own some of the most iconic free-to-play mobile games in the world, many of which are the #1 games in their respective genres, based on total in-app purchases on iOSApp Store andGoogle Play Store for the three months endedMarch 31, 2021 worldwide, according toApp Annie . Our players love our games because they are fun, creative, engaging, and kept fresh through a steady release of new features that are customized for different player segments.
Components of our Results of Operations
Revenues
We primarily derive revenue from the sale of virtual items associated with online games.
We distribute our games to the end customer through various web and mobile platforms, such as Apple, Facebook, Google and other web and mobile platforms plus our own proprietary platforms. Through these platforms, users can download our free-to-play games and can purchase virtual items to enhance their game-playing experience. Players can purchase virtual items through various widely accepted payment methods offered in the games. Payments from players for virtual items are non-refundable and relate to non-cancellable contracts that specify our obligations and cannot be redeemed for cash nor exchanged for anything other than virtual items within our games. Our games are played primarily on various third-party platforms for which the platform providers collect proceeds from our customers and pay us an amount after deducting platform fees. We are primarily responsible for fulfilling the virtual items, have the control over the content and functionality of games and have the discretion to establish the virtual items' prices. Therefore, we are the principal and, accordingly revenues are recorded on a gross basis. Payment processing fees paid to platform providers are recorded within cost of revenue. Cost of revenue Cost of revenue includes payment processing fees, customer support, hosting fees and depreciation and amortization expenses associated with assets directly involved in the generation of revenues, primarily servers. Platform providers (such as Apple, Facebook and Google) charge a transactional payment processing fee to accept payments from our players for the purchase of in-app virtual goods. Payment processing fees and other related expenses for in-app purchases made through our proprietary platforms are typically 3-4%, compared to a 30% platform fee for third party platforms. We generally expect cost of revenue to fluctuate proportionately with revenues.
Research and development
Research and development consists of salaries, bonuses, benefits, other
compensation, including stock-based compensation and allocated overhead, related
to engineering, research, and development. In addition, research and development
expenses include depreciation and amortization expenses associated with assets
associated with our research and development efforts. We expect research and
development expenses will increase in absolute dollars as our business expands
and as we increase our personnel headcount to support the expected growth in our
technical development and operating activities.
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--------------------------------------------------------------------------------Sales and marketing
Sales and marketing consists of costs related to advertising and user acquisition, including costs related to salaries, bonuses, benefits, and other compensation, including stock-based compensation and allocated overhead. In addition, sales and marketing expenses include depreciation and amortization expenses associated with assets related to our sales and marketing efforts. We plan to continue to invest in sales and marketing to retain and acquire users. However, sales and marketing expenses may fluctuate as a percentage of revenues depending on the timing and efficiency of our marketing efforts.
General and administrative
General and administrative expenses consist of salaries, bonuses, benefits, and other compensation, including stock-based compensation, for all our corporate support functional areas, including our senior leadership. In addition, general and administrative expenses include outsourced professional services such as consulting, legal and accounting services, taxes and dues, insurance premiums, and costs associated with maintaining our property and infrastructure. General and administrative expenses also include depreciation and amortization expenses associated with assets not directly attributable to any of the expense categories above. We also record adjustments to contingent consideration payable recorded after the acquisition date, and legal settlement expenses, as components of general and administrative expense.
Interest expense and other, net
We generally did not incur interest expense prior toAugust 2019 . InAugust 2019 , we borrowed$2,583 million under our senior secured 363-day bridge loan facility, and then subsequently refinanced the borrowings under that facility inDecember 2019 pursuant to our Credit Agreement, dated as ofDecember 10, 2019 (the "Credit Agreement"). We further amended our Credit Agreement inMarch 2021 , including amending the interest rates thereunder. Our interest expense includes amortization of deferred financing costs and is offset by interest income earned on the investment of excess cash and cash equivalents. We expect to continue to incur interest expense under our Credit Agreement, although such interest expense will fluctuate based upon the underlying variable interest rates.
Provision for income taxes
The provision for income taxes consists of income taxes in the various jurisdictions where we are subject to taxation, primarilythe United States , theUnited Kingdom andIsrael and was determined using a worldwide estimated annual effective tax rate and took discrete items into consideration. Under currentU.S. tax law, the federal statutory tax rate applicable to corporations is 21%. Our effective tax rate can fluctuate based on various factors, including our financial results and the geographic mix to which they relate, the applicability of special tax regimes, changes in our business or operations, examination-related developments and changes in tax law. Consolidated Operating Results ofPlaytika Holding Corp We measure the performance of our business by using several key financial metrics, including revenue, and operating metrics, including Daily Paying Users, Daily Active Users, Daily Payer Conversion, Average Revenue per Daily Active User, and Monthly Active Users. These operating metrics help our management to understand and measure the engagement levels of the our players, the size of our audience and our reach. Daily Active Users We define Daily Active Users, or DAUs, as the number of individuals who played one of our games during a particular day. Under this metric, an individual who plays two different games on the same day is counted as two DAUs. Similarly, an individual who plays the same game on two different platforms (e.g., web and mobile) or on two different social networks on the same day would be counted as two Daily Active Users. Average Daily Active Users for a particular period is the average -27- --------------------------------------------------------------------------------
of the DAUs for each day during that period. We believe that Daily Active Users is a useful metric to measure the scale and usage of our game platform.
Daily Paying Users
We define Daily Paying Users, or DPUs, as the number of individuals who purchased, with real world currency, virtual currency or items in any of our games on a particular day. Under this metric, an individual who makes a purchase of virtual currency or items in two different games on the same day is counted as two DPUs. Similarly, an individual who makes a purchase of virtual currency or items in any of our games on two different platforms (e.g., web and mobile) or on two different social networks on the same day would be counted as two DPUs. Average DPUs for a particular period is the average of the DPUs for each day during that period. We believe that Daily Paying Users is a useful metric to measure game monetization. Daily Payer Conversion We define Daily Payer Conversion as (i) the total number of DPUs, (ii) divided by the number of DAUs on a particular day. Average Daily Payer Conversion for a particular period is the average of the Daily Payer Conversion rates for each day during that period. We believe that Daily Payer Conversion is a useful metric to describe the monetization of our users.
Average Revenue per Daily Active User
We define Average Revenue per Daily Active User, or ARPDAU, as (i) the total revenue in a given period, (ii) divided by the number of days in that period, (iii) divided by the average DAUs during the period. We believe that ARPDAU is a useful metric to describe monetization.
Monthly Active Users
We define Monthly Active Users, or MAUs, as the number of individuals who played
one of our games during a calendar month. Under this metric, an individual who
plays two different games in the same calendar month is counted as two MAUs.
Similarly, an individual who plays the same game on two different platforms
(e.g., web and mobile) or on two different social networks during the same month
would be counted as two MAUs. Average Monthly Active Users for a particular
period is the average of the MAUs for each month during that period. We believe
that Monthly Active Users is a useful metric to measure the scale and reach of
our platform, but we base our business decisions primarily on daily performance
metrics, which we believe more accurately reflect user engagement with our
games.
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--------------------------------------------------------------------------------Results of Operations
The table below shows the results of our key financial and operating metrics for the periods indicated. Unless otherwise indicated, financial metrics are presented in millions ofU.S. Dollars, user statistics are presented in millions of users, and ARPDAU is presented inU.S. Dollars.
Three months ended
March 31,
(in millions, except percentages, Average DPUs and ARPDAU) 2021 2020
Revenues $ 638.9 $ 534.2
Total cost and expenses 508.6 421.0
Operating income 130.3 113.2
Adjusted EBITDA 258.0 186.1
Non-financial performance metrics
Average DAUs 10.4 11.6
Average DPUs (in thousands) 296 272
Average Daily Payer Conversion 2.8 % 2.3 %
ARPDAU $ 0.68 $ 0.50
Average MAUs 31.4 37.1
Comparison of the three months ended March 31, 2021 versus the three months
ended March 31, 2020
Three months ended
March 31,
2021 2020
(in millions) (Unaudited)
Revenues $ 638.9 $ 534.2
Cost of revenue $ 183.0 $ 165.9
Research and development 85.2 60.8
Sales and marketing 140.1 125.3
General and administrative 100.3 69.0
Total costs and expenses $ 508.6 $ 421.0
Revenues
Revenues for the three months ended
Cost of revenue
Cost of revenue for the three months endedMarch 31, 2021 increased by$17.1 million when compared with the same period of 2020. The increase in cost of revenue was primarily due to increased platform fees associated with increased revenues, and increased amortization expense for recently capitalized software development costs. -29- --------------------------------------------------------------------------------
Research and development expenses
Research and development expenses for the three months endedMarch 31, 2021 increased by$24.4 million when compared with the same period of 2020. The formula for determining the payment amounts under the 2017-2020 retention plan resulted in expense under that plan being recognized on an accelerated basis, with higher expense recognized in the earlier years of the plan. Based upon a change to the structure of how award payments are determined within the terms of thePlaytika Holding Corp. Retention Plan (the "2021-2024 Retention Plan") as compared to the 2017-2020 plan, expense under the current plan is required to be recognized ratably over the term of the plan.. As a result, when comparing the quarter endedMarch 31, 2021 with the quarter endedMarch 31, 2020 , long-term compensation expense under the respective retention plan included within research and development expenses has increased by approximately$1.6 million . In addition, the introduction of stock-based compensation plans has resulted in approximately$6.5 million in additional research and development expense for the quarter endedMarch 31, 2021 , with no comparable amounts for the prior year. The remaining increase in research and development expenses was primarily due to increased headcount and payroll costs.
Sales and marketing expenses
Sales and marketing expenses for the three months endedMarch 31, 2021 increased by$14.8 million when compared with the same period of 2020. As discussed above, the accelerated recognition of long-term compensation expense under the 2017-2020 retention plan as opposed to the ratable recognition of such expense under the 2021-2024 Retention Plan resulted in an increase in expense within sales and marketing expenses of approximately$3.4 million when comparing the quarter endedMarch 31, 2021 with the prior year quarter. In addition, the introduction of stock-based compensation plans has resulted in approximately$2.8 million in additional sales and marketing expense for the quarter endedMarch 31, 2021 , with no comparable amounts for the prior year. The remaining increase in sales and marketing expenses was primarily due to increased headcount and payroll costs, and increased media buy expenses.
General and administrative expenses
General and administrative expenses for the three months endedMarch 31, 2021 increased by$31.3 million when compared with the same period of 2020. Included in general and administrative expenses for the quarter endedMarch 31, 2020 , with no comparable amounts for the quarter endedMarch 31, 2021 , are expenses for contingent consideration and merger and acquisition related activity of approximately$29.4 million . Included in general and administrative expenses for the quarter endedMarch 31, 2021 , with no comparable amounts for the quarter endedMarch 31, 2020 , are stock-based compensation expenses of$15.0 million and bonus expenses of approximately$35.2 million paid as a result of the successful initial public offering of the Company's stock inJanuary 2021 . Adjusting for these items, general and administrative expenses for the three months endedMarch 31, 2021 would have increased by$10.5 million when compared to the same period of 2020. This increase was a result of an increase in long-term compensation expense under the retention plan of$13.8 million , offset by other immaterial changes. -30-
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Other Factors Affecting Net Income
Three months ended
March 31,
(in millions) 2021 2020
Interest expense $ 78.0 $ 53.4
Interest income (0.2) (0.1)
Foreign currency exchange, net (0.8) 4.9
Other (1.3) 0.1
Provision for income taxes 18.9 19.1
Interest expense
In March 2021 , the Company refinanced its existing term loan with a combination
of a new term loan and fixed-rate senior notes. The refinancing transaction was
considered a debt-modification for accounting purposes. As a result, a portion
of the original issue discount incurred when the original term loan was entered
into has been carried over to the new term loan, and approximately $22.9 million
of this original issue discount was written off as interest expense during the
quarter ended March 31, 2021 . In addition, the Company recorded approximately
$14.5 million in expense associated with the Refinancing Transaction. Prior to
these one-time charges to interest expense, interest expense for the quarter
ended March 31, 2021 was lower than interest expense in the same period of 2020
due to a combination of a lower outstanding principal balance and lower interest
rates.
Provision for income taxes
The effective income tax rate for the three months ended March 31, 2021 was
34.6% compared to 34.8% for the three months ended March 31, 2020 . The effective
tax rate was determined using a worldwide estimated annual effective tax rate
and took discrete items into consideration. The primary differences between the
effective tax rate and the 21% federal statutory rate for the three months ended
March 31, 2021 were due to tax rates in foreign jurisdictions and the relative
amounts of income earned in those jurisdictions, the tax impact of repatriation
of the undistributed earnings of certain foreign subsidiaries and the inclusion
of Global Intangible Low-Taxed Income ("GILTI"). The primary differences between
the effective tax rate and the 21% federal statutory rate for the three months
ended March 31, 2020 were due to tax rates in foreign jurisdictions and the
relative amounts of income earned in those jurisdictions, certain tax positions
taken in various jurisdictions that do not meet a more likely than not standard
and significant non-deductible expenses.
Reconciliation of Adjusted EBITDA to Net Income
Adjusted EBITDA is a non-GAAP financial measure and should not be construed as
an alternative to net income as an indicator of operating performance, nor as an
alternative to cash flow provided by operating activities as a measure of
liquidity, or any other performance measure in each case as determined in
accordance with GAAP.
Below is a reconciliation of Adjusted EBITDA to net income, the closest GAAP
financial measure. We define Adjusted EBITDA as net income before (i) interest
expense, (ii) interest income, (iii) provision for income taxes, (iv)
depreciation and amortization expense, (v) stock-based compensation, (vi) legal
settlements, (vii) contingent consideration, (viii) acquisition and related
expenses, (ix) expense under our long-term compensation plans, (x) M&A-related
retention payments, and (xi) certain other items, including impairments. We
calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by revenues.
We supplementally present Adjusted EBITDA and Adjusted EBITDA Margin because
these are key operating measures used by our management to assess our financial
performance. Adjusted EBITDA adjusts for items that we believe do not reflect
the ongoing operating performance of our business, such as certain noncash
items, unusual or infrequent items or items that change from period to period
without any material relevance to our operating performance. Management believes
Adjusted
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EBITDA and Adjusted EBITDA Margin are useful to investors and analysts in
highlighting trends in our operating performance, while other measures can
differ significantly depending on long-term strategic decisions regarding
capital structure, the tax jurisdictions in which we operate and capital
investments. Management uses Adjusted EBITDA and Adjusted EBITDA Margin to
supplement GAAP measures of performance in the evaluation of the effectiveness
of our business strategies, to make budgeting decisions, and to compare our
performance against other peer companies using similar measures. We evaluate
Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with our results
according to GAAP because we believe they provide investors and analysts a more
complete understanding of factors and trends affecting our business than GAAP
measures alone.
Adjusted EBITDA and Adjusted EBITDA Margin as calculated herein may not be
comparable to similarly titled measures reported by other companies within the
industry and are not determined in accordance with GAAP. Our presentation of
Adjusted EBITDA and Adjusted EBITDA Margin should not be construed as an
inference that our future results will be unaffected by unusual or unexpected
items.
Three months ended
March 31,
(in millions) 2021 2020
Net income $ 35.7 $ 35.8
Provision for income taxes 18.9 19.1
Interest expense and other, net 75.7 58.3
Depreciation and amortization 33.2 27.2
EBITDA 163.5 140.4
Stock-based compensation(1) 24.3 -
Acquisition and related expenses(2) 35.7 29.4
Long-term cash compensation(3) 29.8
11.0
M&A related retention payments(4) 3.1 4.9 Other one-time items 1.6 0.4 Adjusted EBITDA$ 258.0 $ 186.1 Net income margin 5.6 % 6.7 % Adjusted EBITDA margin 40.4 % 34.8 % (1) Amounts for the three months endedMarch 31, 2021 include stock-based compensation expense related to the issuance of equity awards to certain of our employees. (2) Amounts for the three months endedMarch 31, 2021 primarily relate to bonus expenses paid as a result of the successful initial public offering of the Company's stock inJanuary 2021 . Amounts for the three months endedMarch 31, 2020 include (i) contingent consideration expense with respect to our acquisitions of Seriously and Supertreat, and (ii) third-party fees for actual or planned acquisitions, including related legal, consulting and other expenditures. (3) Includes expenses recognized for grants of annual cash awards to employees pursuant to our Retention Plans, which awards are incremental to salary and bonus payments, and which plans expire in 2024. For more information, see Note 12 of our consolidated financial statements included in this document. (4) Includes retention awards to key individuals associated with acquired companies as an incentive to retain those individuals on a long-term basis. For more information, see Note 12 of our consolidated financial statements included in this document. -32- --------------------------------------------------------------------------------
Liquidity and Capital Resources
Capital Spending
We incur capital expenditures in the normal course of business and performs ongoing enhancements and updates to our social and mobile games to maintain our quality standards. Cash used for capital expenditures in the normal course of business is typically made available from cash flows generated by operating activities. We may also pursue acquisition opportunities for additional businesses or social or mobile games that meet our strategic and return on investment criteria. Capital needs for investment opportunities are evaluated on an individual opportunity basis and may require significant capital commitments.
Liquidity
Our primary sources of liquidity are the cash flows generated from our operations, currently available unrestricted cash and cash equivalents, short-term bank deposits, and borrowings pursuant to the Credit Agreement. Our cash and cash equivalents totaled$963.8 million and$520.1 million atMarch 31, 2021 andDecember 31, 2020 , respectively. As ofMarch 31, 2021 andDecember 31, 2020 , we had$600 million and$350 million in additional borrowing capacity pursuant to our Revolving Credit Facility (as defined below), respectively. Payments of short-term debt obligations and other commitments are expected to be made from cash on hand and operating cash flows. Long-term obligations are expected to be paid through operating cash flows, or, if necessary, borrowings under our Revolving Credit Facility or additional term loans or issuances of equity. Our restricted cash totaled$2.6 million atMarch 31, 2021 and$3.5 million atDecember 31, 2020 . Restricted cash primarily consists of deposits to secure obligations under our operating lease agreements and to secure company-issued credit cards. Our ability to fund our operations, pay our debt obligations and fund planned capital expenditures depends, in part, upon economic and other factors that are beyond our control, and disruptions in capital markets could impact our ability to secure additional funds through financing activities. We believe that our cash and cash equivalents balance, restricted cash, borrowing capacity under our Revolving Credit Facility and our cash flows from operations will be sufficient to meet our normal operating requirements during the next 12 months and the foreseeable future and to fund capital expenditures.
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