Home Entertainment Lending PLAYTIKA HOLDING CORP. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

PLAYTIKA HOLDING CORP. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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Insight

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 operating results

Revenue

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
related to our research and development efforts.

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.

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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 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. 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.

Interest income includes interest earned on cash, cash equivalents and short-term bank deposits.

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 Austria, Germany,
Israel, the United Kingdom and the United States, 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.

Net Income

We calculate net profit as revenue minus the cost of revenue, research and development, sales and marketing, and general and administrative expenses, interest, and taxes.

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.

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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 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 the daily payer conversion as the total number of DPUs divided by the number of DAUs on a given day. The average daily payer conversion for a given time period is the average of the daily payer conversion rates for each day in that time period. We believe 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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Operating results

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                     Nine months ended
                                                     September 30,                          September 30,
(in millions, except percentages, Average
DPUs and ARPDAU)                                2022                2021               2022               2021
Revenues                                    $    647.8          $   635.9          $ 1,984.3          $ 1,934.0
Total cost and expenses                          516.4              481.4            1,641.2            1,483.8
Operating income                                 131.4              154.5              343.1              450.2
Net income                                        68.2               80.5              187.8              206.2
Credit Adjusted EBITDA                           203.5              217.0              602.5              672.6
Adjusted EBITDA                                  230.7              247.8              690.1              770.2

Non-financial performance metrics
Average DAUs                                       9.0               10.4                9.7               10.4
Average DPUs (in thousands)                        310                293                315                296
Average Daily Payer Conversion                     3.4  %             2.8  %             3.3  %             2.8  %
ARPDAU                                      $     0.78          $    0.67          $    0.75          $    0.68
Average MAUs                                      30.2               35.4               32.4               34.4



Comparison of three and nine months ended September 30, 2022 compared to the three and nine month periods ended September 30, 2021

                                                           Three months ended September               Nine months ended
                                                                        30,                             September 30,
                                                               2022              2021              2022               2021
(in millions)                                                                          (Unaudited)
Revenues                                                   $   647.8          $ 635.9          $ 1,984.3          $ 1,934.0
Cost of revenue                                            $   181.8          $ 179.2          $   554.8          $   546.1
Research and development                                       115.1             91.5              353.0              268.5
Sales and marketing                                            145.4            141.1              476.9              427.7
General and administrative                                      74.1             69.6              256.5              241.5
Total costs and expenses                                   $   516.4          $ 481.4          $ 1,641.2          $ 1,483.8



Revenues

Revenues for the three and nine months ended September 30, 2022 increased by
$11.9 million and $50.3 million, respectively, when compared with the same
periods of 2021. The net increase in revenues is primarily derived from the
combination of meaningful growth in select non-slot game titles and the
acquisition of Reworks in the third quarter of 2021, which were partially offset
by meaningful declines in certain of our slot-themed games. We continue to see
favorable impacts on revenues in certain of our games from our ongoing
improvements to monetization, new content and product features

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Revenue cost

Cost of revenue for the three and nine months ended September 30, 2022 increased
by $2.6 million and $8.7 million, respectively, when compared with the same
periods 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 associated with
both the acquisition of Reworks and with recently capitalized software
development costs.

Research and development costs

Research and development expenses for the three and nine months ended
September 30, 2022 increased by $23.6 million and $84.5 million, respectively,
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
employee compensation costs, including increased stock-based compensation
expense, and increased facilities costs associated with additional leased
premises.

Sales and marketing expenses

Sales and marketing expenses for the three and nine months ended September 30,
2022 increased by $4.3 million and $49.2 million, respectively, when compared
with the same periods of 2021. In addition to the impact of increased expenses
associated with the acquisition of Reworks, the increases in sales and marketing
expenses were primarily due to increased marketing promotions and increased
media buy expenses.

General and administrative expenses

General and administrative expenses for the three and nine months ended
September 30, 2022 increased by $4.5 million and $15.0 million, respectively,
when compared with the same periods of 2021. Included in general and
administrative expenses for the three and nine months ended September 30, 2022,
with no comparable amounts for the three and nine months ended September 30,
2021, are decreases to contingent consideration of $11.4 million and $14.1
million, respectively. Included in general and administrative expenses for the
nine months ended September 30, 2021, with no comparable amounts for the nine
months ended September 30, 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
administrative expenses would have increased during the three and nine months
ending September 30, 2022 when compared with 2021, primarily as a result of
increased headcount and employee compensation costs, including stock based
compensation costs, and expenses incurred in 2022 in connection with the
evaluation of strategic alternatives for the Company.

Other Factors Affecting Net Income

                                         Three months ended               Nine months ended
                                           September 30,                    September 30,
                                          2022             2021           2022            2021
(in millions)                                               (Unaudited)
Interest expense                   $     31.5            $ 23.7      $    81.1          $ 124.8
Interest income                          (5.8)             (0.2)          (9.1)            (0.5)
Foreign currency exchange, net           (1.5)              0.8            0.9              0.6
Other                                     0.1               0.6            1.3             (0.3)
Provision for income taxes               38.9              49.1           81.1            119.4


Interest expense

Interest expense for the three and nine months ended September 30, 2022
increased by $7.8 million and decreased by $43.7 million, respectively, when
compared with the same periods of 2021. Interest expense for the three months
ended September 30, 2022 increase as a result of higher average interest rates
on our variable rate debt. Included in interest expense for the nine months
ended September 30, 2021, with no comparable amounts in 2022, is the write-off
of approximately 22.9 million of
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original issue discount and the recording of approximately $14.5 million in
expenses, both recorded in connection with the March 2021 refinancing
transactions. Excluding the impact of these discrete components of interest
expense from 2021, interest expense declined by approximately $6.3 million for
the nine months ended September 30, 2022 when compared to 2021, primarily as a
result of lower average interest rates on our outstanding indebtedness in the
early part of 2022.

Provision for income taxes

The effective income tax rate for the three months ended September 30, 2022 was
36.3% compared to 37.9% for the three months ended September 30, 2021. The
effective income tax rate for the nine months ended September 30, 2022 was 30.2%
compared to 36.7% for the nine months ended September 30, 2021. 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% U.S. federal statutory rate for the three and
nine months ended September 30, 2022 were due to tax positions that do not meet
the more likely than not standard, the inclusion of Global Intangible Low-Taxed
Income, and nondeductible share-based compensation. The primary differences
between the effective tax rate and the 21% U.S. federal statutory rate for the
three and nine months ended September 30, 2021 were due to tax positions that do
not meet the more likely than not standard and rates in foreign jurisdictions
and the relative amounts of income earned in those jurisdictions.

Net revenue

Upon aggregating all of the components of our results of operations above, net
income for the three and nine months ended September 30, 2022 decreased by $12.3
million and $18.4 million, respectively, when compared with the same periods of
2021.


Reconciliation of Credit-Adjusted EBITDA to Net Earnings

Credit-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, or as an alternative to cash flow from operating activities as a measure. liquidity, or any other measure of performance. in each case, as determined in accordance with GAAP.

Below is a reconciliation of Credit Adjusted EBITDA to net income, the closest
GAAP financial measure. Our Credit Agreement defines Adjusted EBITDA (which we
call "Credit 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, and (viii) certain other
items. We calculate Credit Adjusted EBITDA Margin as Credit Adjusted EBITDA
divided by revenues.

Credit Adjusted EBITDA and Credit 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 Credit Adjusted EBITDA and Credit Adjusted EBITDA Margin should
not be construed as an inference that our future results will be unaffected by
unusual or unexpected items.
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                                          Three months ended            Nine months ended
                                            September 30,                 September 30,
(in millions)                             2022           2021          2022           2021
Net income                            $    68.2       $  80.5       $  187.8       $ 206.2
Provision for income taxes                 38.9          49.1           81.1         119.4
Interest and other, net                    24.3          24.9           74.2         124.6
Depreciation and amortization              39.6          36.5          121.7         103.0
EBITDA                                    171.0         191.0          464.8         553.2
Stock-based compensation(1)                31.6          23.0          106.8          72.8
Contingent consideration                  (11.4)            -          (14.1)            -
Acquisition and related expenses(2)         6.1           1.2           19.7          43.2
Other one-time items(3)                     6.2           1.8           25.3           3.4
Credit Adjusted EBITDA(4)             $   203.5       $ 217.0       $  602.5       $ 672.6
Net income margin                          10.5  %       12.7  %         9.5  %       10.7  %
Credit Adjusted EBITDA margin              31.4  %       34.1  %        30.4  %       34.8  %


_______
(1)  Reflects, for the three and nine months ended September 30, 2022 and 2021,
stock-based compensation expense related to the issuance of equity awards to
certain of our employees.
(2)  Amounts for the three and nine months ended September 30, 2022 primarily
relates to expenses incurred by the Company in connection with the evaluation of
strategic alternatives for the Company. Amount for the nine months ended
September 30, 2021 primarily relates to bonus expenses paid as a result of the
successful initial public offering of the Company's stock in January 2021.
(3)  Amounts for the three and nine months ended September 30, 2022, consists of
$1.9 million and $12.1 million, respectively, incurred by the Company for
severance and for the nine months ended September 30, 2022, $4.0 million
incurred by the Company for relocation and support provided to employees due to
the war in Ukraine. Amounts for the three and nine months ended September 30,
2022 also include $2.7 million and $6.1 million, respectively, incurred related
to the announced restructuring activities.
(4)  Executive management is compensated, in part, based upon achieving certain
Adjusted EBITDA targets as more completely described in our proxy statement.
Adjusted EBITDA for these purposes represents Credit Adjusted EBITDA shown
above, further adjusted to reflect certain elements of cash-based compensation
and other items as shown below.
                                        Three months ended            Nine months ended
                                          September 30,                 September 30,
(in millions)                           2022           2021          2022           2021
Credit Adjusted EBITDA              $   203.5       $ 217.0       $  602.5       $ 672.6
Long-term cash compensation(a)           27.0          28.5           79.9  

88.5

M&A related retention payments(b)         0.2           2.3            7.7           9.1
Adjusted EBITDA                     $   230.7       $ 247.8       $  690.1       $ 770.2
Adjusted EBITDA margin                   35.6  %       39.0  %        34.8  %       39.8  %


Adjusted EBITDA and Adjusted EBITDA Margin are key operating measures used by
our management to assess our financial performance and 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.
(a)  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.
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(b)  Includes retention awards to key individuals associated with acquired
companies as an incentive to retain those individuals on a long-term basis. The
amounts for the three and nine months ended September 30, 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.

Cash and capital resources

Capital expenditure

We incur capital expenditures in the normal course of business and perform
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 $1,255.4
million and $1,117.1 million at September 30, 2022 and December 31, 2021,
respectively. As of both September 30, 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 $1.6 million at September 30, 2022 and $2.0 million
at 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.

On October 10, 2022, we announced the acceptance for purchase of 51,813,472
Shares in the Tender Offer at a price of $11.58 per Share. Upon the closing of
the Tender Offer, we used approximately $600 million of the cash from our
balance sheet, excluding fees and expenses, reducing our balance of cash and
cash equivalents to approximately $650 million.

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.
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Cash flow

The following tables provide a summary of our cash flows for the periods indicated (in millions):

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