PLAYTIKA HOLDING CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (kind 10-Q)

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. 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 direct-to-consumer 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, including servers and internal use

software. 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 direct-to-consumer 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. We also expect that research and

development expenses specifically associated with new game development will

fluctuate over time.

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

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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. We expect non-discrete general

and administrative expenses will increase in absolute dollars to support our

expected growth initiatives.

Interest expense and other, net

Interest expense is primarily related to borrowings under our Credit Agreement

dated as of December 10, 2019 (as amended, the “Credit Agreement”). 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. In March 2021, we entered into two interest rate swap

agreements, each with a notional value of $250 million, reducing our overall

exposure to variable interest rates.

Provision for income taxes

The provision for income taxes consists of current income taxes in the various

jurisdictions where we are subject to taxation, primarily the United States, the

United Kingdom and Israel, as well as deferred income taxes reflecting the net

tax effects of temporary differences between the carrying amounts of assets and

liabilities in each of these jurisdictions for financial reporting purposes and

the amounts used for income tax purposes. 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 uncertain tax positions, 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 income, and operating metrics,

including Daily Active Users, Average Revenue per Daily Active User, Paying

Users, and Average Revenue per Paying User. These operating metrics help our

management to understand and measure the engagement levels of our players, the

size of our audience and our reach. See “Basis of Presentation” and “Summary

Consolidated Financial and Other Data” for additional information of these

measures.

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

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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 could 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.

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

March 31,

(in millions, except percentages, Average DPUs and ARPDAU) 2022 2021

Revenues $ 676.9 $ 638.9

Total cost and expenses 556.5 508.6

Operating income 120.4 130.3

Net income 83.2 35.7

Adjusted EBITDA 220.5 258.0

Non-financial performance metrics

Average DAUs 10.1 10.4

Average DPUs (in thousands) 323 296

Average Daily Payer Conversion 3.2 % 2.8 %

ARPDAU $ 0.74 $ 0.68

Average MAUs 31.7 31.4

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Comparison of the three and three months ended March 31, 2022 versus the three

and three months ended March 31, 2021

Three months ended

March 31,

2022 2021

(in millions) (Unaudited)

Revenues $ 676.9 $ 638.9

Cost of revenue $ 186.9 $ 183.0

Research and development 112.7 85.2

Sales and marketing 179.7 140.1

General and administrative 77.2 100.3

Total costs and expenses $ 556.5 $ 508.6

Revenues

Revenues for the three months ended March 31, 2022 increased by $38.0 million

when compared with the same period of 2021. The increase in revenues was

primarily due to the acquisition of Reworks in the third quarter of 2021, 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 months ended March 31, 2022 increased by $3.9

million when compared with the same period of 2021. The favorable impact of

reduced platform fees associated with a higher percentage of our revenues being

derived through our direct-to-consumer platforms was more than offset by the

increased platform fees associated with revenue from Reworks, and an increase in

amortization expense for recently capitalized software development costs.

Research and development expenses

Research and development expenses for the three months ended March 31, 2022

increased by $27.5 million when compared with the same periods of 2021. In

addition to the impact of increased expenses associated with the acquisition of

Reworks, the increase in research and development expenses was primarily due to

increased headcount and payroll costs, and increased facilities costs associated

with additional leased premises.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2022 increased

by $39.6 million when compared with the same period of 2021. In addition to the

impact of increased expenses associated with the acquisition of Reworks, the

increases in sales and marketing expenses for the three month period ending

March 31, 2022 were primarily due to increased media buy expenses, increased

headcount and payroll costs, and increased facilities costs associated with

additional leased premises.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2022

decreased by $23.1 million when compared with the same period of 2021. Included

in general and administrative expenses for the three months ended March 31,

2022, with no comparable amounts for the three months ended March 31, 2021, is a

reduction of contingent consideration of $23.0 million. Included in general and

administrative expenses for the three months ended March 31, 2021, with no

comparable amounts for the three months ended March 31, 2022, are bonus expenses

of approximately $35.4 million paid as a result of the successful initial public

offering of our stock in January 2021. Excluding these specific discrete items,

general and

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administrative expenses would have increased during the three months ending

March 31, 2022 when compared with 2021, primarily as a result of increased

headcount and payroll costs and expenses incurred in connection with the

evaluation of strategic alternatives for the Company.

Other Factors Affecting Net Income

Three months ended

March 31,

2022 2021

(in millions) (Unaudited)

Interest expense $ 23.7 $ 78.0

Interest income (0.8) (0.2)

Foreign currency exchange, net 4.6

(0.8)

Other –

(1.3)

Provision for income taxes 9.7 18.9

Interest expense

In March 2021, we refinanced our 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, we recorded approximately $14.5 million in

expense associated with the Refinancing Transaction. Excluding the impact of

these discrete components of interest expense, interest expense declined by

approximately $16.9 million for the three months ended March 31, 2022 when

compared to 2021, primarily as a result of lower interest rates on our

outstanding indebtedness.

Provision for income taxes

The effective income tax rate for the three months ended March 31, 2022 was

10.4% compared to 34.6% for the three months ended March 31, 2021. The effective

tax rates were determined using a worldwide estimated annual effective tax rate

and took discrete items into consideration. The primary difference between the

effective tax rate and the 21% federal statutory rate for the three months ended

March 31, 2022 was due to a discrete tax benefit for the release of a valuation

allowance on certain foreign deferred tax assets resulting from the commencement

of changes to our organizational structure. The primary difference between the

effective tax rate and the 21% federal statutory rate for the three months ended

March 31, 2021 was due to a discrete tax benefit for the release of a valuation

allowance on certain foreign deferred tax assets.

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)

contingent consideration, (vii) acquisition and related expenses, (viii) expense

under our long-term compensation plans, (ix) M&A-related retention payments, and

(x) certain other items. 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

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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) 2022 2021

Net income $ 83.2 $ 35.7

Provision for income taxes 9.7 18.9

Interest expense and other, net 27.5

75.7

Depreciation and amortization 39.5 33.2

EBITDA 159.9 163.5

Stock-based compensation(1) 39.8 24.3

Contingent consideration (23.0) –

Long-term cash compensation(2) 24.9

29.8

Acquisition and related expenses(3) 9.0

35.7

M&A related retention payments(4) (1.9) 3.1

Other one-time items(5) 11.8 1.6

Adjusted EBITDA $ 220.5 $ 258.0

Net income margin 12.3 % 5.6 %

Adjusted EBITDA margin 32.6 % 40.4 %

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(1) Reflects, for the three months ended March 31, 2022 and 2021, stock-based

compensation expense related to the issuance of equity awards to certain of our

employees.

(2) 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

13, Appreciation and Retention Plan, of our consolidated financial statements

included in this document.

(3) Amount for the three months ended March 31, 2022, primarily relates to

expenses incurred by the Company in connection with the evaluation of strategic

alternatives for the Company. Amount for the three months ended March 31, 2021

primarily relates to bonus expenses paid as a result of the successful initial

public offering of the Company’s stock in January 2021.

(4) Includes retention awards to key individuals associated with acquired

companies as an incentive to retain those individuals on a long-term basis. The

amount for the three months ended March 31, 2022, primarily relates to the

reduction of contingent consideration payable to employees of the Company that

were also selling Shareholders of Reworks. This portion of the contingent

consideration is being accounted for as an M&A retention payment to these

employees, with changes in the amounts recognized as compensation expense.

(5) Amount for the three months ended March 31, 2022, consists of $8.8 million

incurred by the Company severance and $3.0 million incurred by the Company for

relocation and support provided to employees due to the war in Ukraine.

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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 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 under our Credit Facility and Revolver.

Our cash and cash equivalents and short-term bank deposits totaled $1,107.9

million and $1,117.1 million at March 31, 2022 and December 31, 2021,

respectively. As of both March 31, 2022 and December 31, 2021, we had $600

million in additional borrowing capacity pursuant to our Revolving Credit

Facility. Payments of short-term debt obligations and other commitments are

expected to be made from cash on the balance sheet 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, if necessary,

additional term loans or issuances of equity.

Our restricted cash totaled $2.0 million at both March 31, 2022 and December 31,

2021. Restricted cash primarily consists of deposits to secure obligations under

our operating lease agreements and to secure company-issued credit cards. The

classification of restricted cash as current and long-term is dependent upon the

intended use of each particular reserve.

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.

Cash flows

The following tables present a summary of our cash flows for the periods

indicated (in millions):

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