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OFFON

PLAYTIKA HOLDING CORP.

(PLTK)
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PLAYTIKA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/06/2021 | 08:04am EDT

Overview


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 iOS App Store and Google Play Store
for the six months ended June 30, 2021 worldwide, according to App 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.

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

                                      -26-
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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


Interest expense is primarily related to borrowings under our Credit Agreement
dated as of December 10, 2019 (the "Credit Agreement"). We amended our Credit
Agreement in March 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
and short-term bank deposits. 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, primarily the United States, the
United Kingdom and Israel and was determined using a worldwide estimated annual
effective tax rate and took discrete items into consideration. Under current
U.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 of Playtika 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 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
                                      -27-
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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.

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 of U.S. Dollars, user statistics are presented in millions
of users, and ARPDAU is presented in U.S. Dollars.
                                                   Three months ended                     Six months ended
                                                        June 30,                              June 30,
(in millions, except percentages, Average
DPUs and ARPDAU)                                2021                2020               2021               2020
Revenues                                    $    659.2$   650.5$ 1,298.1$ 1,184.7
Total cost and expenses                          493.8              722.5            1,002.4            1,143.5
Operating income (loss)                          165.4              (72.0)             295.7               41.2
Adjusted EBITDA                                  264.4              283.2              522.4              469.4

Non-financial performance metrics
Average DAUs                                      10.4               11.8               10.4               11.7
Average DPUs (in thousands)                        300                315                298                293
Average Daily Payer Conversion                     2.9  %             2.7  %             2.9  %             2.5  %
ARPDAU                                      $     0.70$    0.61$    0.69$    0.56
Average MAUs                                      36.1               36.1               33.7               36.6



                                      -28-
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Comparison of the three and six months ended June 30, 2021 versus the three and six months ended June 30, 2020

                                                                                Six months ended
                                    Three months ended June 30,                     June 30,
                                         2021                   2020          2021           2020
(in millions)                                              (Unaudited)
Revenues                     $        659.2$ 650.5$ 1,298.1$ 1,184.7
Cost of revenue              $        183.9$ 192.6$   366.9$   358.5
Research and development               91.8                      65.8          177.0          126.6
Sales and marketing                   146.5                     125.8          286.6          251.1
General and administrative             71.6                     338.3          171.9          407.3
Total costs and expenses     $        493.8$ 722.5$ 1,002.4$ 1,143.5



Revenues

Revenues for the three months ended June 30, 2021 increased by $8.7 million when
compared with the same period of 2020. Revenues for the six months ended
June 30, 2021 increased by $113.4 million when compared with the same period of
2020. The increase in revenues was primarily due to our ongoing improvements to
monetization, new content and product features, and increased engagement across
our broader portfolio of games.

Cost of revenue

Cost of revenue for the three month ended June 30, 2021 decreased by $8.7 million when compared with the same period of 2020, primarily as a result of a larger percentage of our revenues being derived through our proprietary platforms where we pay lower fees to facilitate the revenue transactions.


Cost of revenue for the six months ended June 30, 2021 increased by $8.4 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, both of which were partially offset by the reduced platform fees
associated with a higher percentage of our revenues being derived through our
proprietary platforms.

Research and development expenses


Research and development expenses for the three and six months ended June 30,
2021 increased by $26.0 million and $50.4 million, respectively, when compared
with the same periods 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 the Playtika 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 three and six month periods ended June 30,
2021 with the same periods of 2020, long-term compensation expense under the
respective retention plan included within research and development expenses has
increased by approximately $1.5 million and $3.1 million, respectively. In
addition, the introduction of stock-based compensation plans has resulted in
approximately $7.0 million and $13.5 million, respectively, in additional
research and development expense for the three and six month periods ended
June 30, 2021 when compared to the same periods of 2020. The remaining increase
in research and development expenses was primarily due to increased headcount
and payroll costs, partially offset by a reduction in our third-party hosting
costs.

                                      -29-
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Sales and marketing expenses


Sales and marketing expenses for the three and six months ended June 30, 2021
increased by $20.7 million and $35.5 million, respectively, 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 $2.8 million and $6.1 million, respectively, when comparing the
three and six month periods ended June 30, 2021 with the prior year periods. In
addition, our stock-based compensation plans resulted in approximately $3.2
million and $6.0 million, respectively, in additional sales and marketing
expense for the three and six month periods ended June 30, 2021, when compared
with the prior year periods. The remaining increases in sales and marketing
expenses for both the three and six month periods ending June 30, 2021 were
primarily due to increased headcount and payroll costs, and increased media buy
expenses.

General and administrative expenses


General and administrative expenses for the three and six months ended June 30,
2021 decreased by $266.7 million and $235.4 million, respectively, when compared
with the same period of 2020. General and Administrative expense includes $15.3
million and $30.3 million, respectively, of stock-based compensation expense for
the three and six months ended June 30, 2021, as compared with $260.3 million
and $260.3 million, respectively, for the comparable periods of 2020. Also
included in general and administrative expenses for the three and six months
ended June 30, 2020, with no comparable amounts for the same periods of 2021,
are expenses associated with a legal settlement of approximately $37.6 million.
Also included in general and administrative expenses for the six months ended
June 30, 2020 are expenses for contingent consideration and merger and
acquisition related activity of approximately $29.9 million, compared with $6.8
million for the six months ended June 30, 2021. Included in general and
administrative expenses for the six months ended June 30, 2021, with no
comparable amounts for the six months ended June 30, 2020, are bonus expenses of
approximately $35.2 million paid as a result of the successful initial public
offering of the Company's stock in January 2021. Adjusting for these items,
general and administrative expenses for the three and six months ended June 30,
2021 would have increased by $15.9 million and $20.1 million, respectively, when
compared to the same periods of 2020. These increases were a result of an
increase in long-term compensation expense under the retention plan, partially
offset by other immaterial changes.

Other Factors Affecting Net Income

                                         Three months ended              Six months ended
                                              June 30,                       June 30,
                                          2021             2020         2021          2020
(in millions)                                             (Unaudited)
Interest expense                   $     23.1$ 48.4$   101.1$ 101.8
Interest income                          (0.1)             (0.2)          (0.3)        (0.3)
Foreign currency exchange, net            0.6              (2.5)          (0.2)         2.4
Other                                     0.4               0.3           (0.9)         0.4
Provision for income taxes               51.4              21.6           70.3         40.7


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
first quarter 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 six months ended
June 30, 2021 was lower than interest expense in the same period of 2020 due to
lower interest rates.
                                      -30-
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Provision for income taxes


The effective income tax rate for the three months ended June 30, 2021 was 36.4%
compared to (18.3)% for the three months ended June 30, 2020. The effective
income tax rate for the six months ended June 30, 2021 was 35.9% compared to
(64.5)% for the six months ended June 30, 2020. The effective tax rates were
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 and six months ended
June 30, 2021 include tax positions that do not meet the more likely than not
standard, the impact of repatriation of the undistributed earnings of certain
foreign subsidiaries and tax rates in foreign jurisdictions & the relative
amounts of income earned in those jurisdictions. The primary differences between
the effective tax rate and the 21% federal statutory rate for the three and six
months ended June 30, 2020 were tax rates in foreign jurisdictions & the
relative amounts of income earned in those jurisdictions and significant
non-deductible stock-based compensation expense for certain restricted stock
units granted during the period.

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 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.
                                      -31-
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                                           Three months ended            Six months ended
                                                June 30,                     June 30,
(in millions)                             2021           2020           2021          2020
Net income (loss)                      $   90.0$ (139.6)$ 125.7$ (103.8)
Provision for income taxes                 51.4           21.6          70.3           40.7
Interest expense and other, net            24.0           46.0          99.7          104.3
Depreciation and amortization              33.3           29.5          66.5           56.7
EBITDA                                    198.7          (42.5)        362.2           97.9
Stock-based compensation(1)                25.5          260.3          49.8          260.3
Acquisition and related expenses(2)         6.3            0.4          42.0           29.9
Legal settlement(3)                           -           37.6             -           37.6
Long-term cash compensation(4)             30.2           21.2          60.0           32.2
M&A related retention payments(5)           3.7            4.6           6.8            9.5
Other one-time items                          -            1.6           1.6            2.0
Adjusted EBITDA                        $  264.4$  283.2$ 522.4$  469.4
Net income (loss) margin                   13.7  %       (21.5) %        9.7  %        (8.8) %
Adjusted EBITDA margin                     40.1  %        43.5  %       40.2  %        39.6  %


_______
(1)  Reflects, for the three and six months ended June 30, 2021 and 2020,
stock-based compensation expense related to the issuance of equity awards to
certain of our employees.
(2)  Amounts for the six months ended June 30, 2021 primarily relate to bonus
expenses paid as a result of the successful initial public offering of the
Company's stock in January 2021. Amounts for the three and six months ended
June 30, 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)  Reflects a legal settlement expense of $37.6 million for the three and six
months ended June 30, 2020.
(4)  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, Appreciation and Retention Plan, of our consolidated financial statements
included in this document.
(5)  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, Appreciation and Retention Plan, of our
consolidated financial statements included in this document.

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 and short-term bank deposits totaled $1,229.7 million
and $520.1 million at June 30, 2021 and December 31, 2020, respectively. As of
June 30, 2021 and December 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.
                                      -32-

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Our restricted cash totaled $2.7 million at June 30, 2021 and $3.5 million at
December 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, short-term bank deposits, 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.

© Edgar Online, source Glimpses

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