Chit Chat Stocks - PlayWay (PLW) with Spencer Cibelli

Episode Date: May 5, 2022

PlayWay produces PC and mobile games. The company is based out of Poland, but markets its games in Poland, Western Europe, North America, Germany, and internationally. Listen as Brett and Ryan ask Spencer questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail]  Timestamps Playway | (3:33) Types of Games | (15:00) Valuation | (27:27) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we talk to an individual on a single stock. And today we're talking about Playway, which is a video gaming stock most people probably haven't heard of. And we're talking with Spencer Sibeli. Did you have any highlights from the interview? I think the big takeaway is personally, it's going right up on the top of my research list. So if that entices anyone to get interested in listening to this, but if you like gaming stocks if you like that industry this is a i don't want to call it a hidden gem because we don't want to you know you have to listen to interview do your research yourself but it's quite interesting uh kind of an undiscovered company in poland um and i thought the most interesting

part was that their revenue was all in usd and euro and they're paying wages in poland so there's a natural arbitrage that gives them an advantage at least from a margin perspective that was the most fascinating part. And again, there's a lot of other stuff with these niche PC games that they've been doing quite well with. Yeah. And I'm just generally a big, I don't want to spoil too much, but I'm generally a big fan of these sort of, I guess you would call them video game holding companies where there's, you've got a lot of diversification in terms of the games that bring in revenue. Bracer Group, we had the CEO on, if you like that, this is a very similar business. Big fan of that structure. But before we get to

the interview. We want to talk about our friends, our sponsor. It's quarter for this episode and we're in the heart of earnings season right now. I'll tell you what, used quarter this morning, used it yesterday. I'm officially a two-time DAU now. You could put it on 1.1 speed. It really helps speed up that conference call when people talk slowly. Are you a skip to the Q&A kind of guy? Nah. Well, it depends. It really depends on the management team. A good executive team, no. But if you're one of those executive teams and if you're listening executives, please stop repeating just your financials from your letter. If it's someone that just repeats their financials from their letter over and over, like 20 different metrics,

I will be skipping. But if it's usually a short one that a company just highlights some things that were in the letter or some qualitative stuff, I'll listen. Yeah. I listened to the Spotify one this morning. They got that up pretty quick. They also get the transcripts up pretty quick too. So if you're not sure what it is, I guess I should explain. Quarters is an investor Relations app for your phone. They have it on iOS, Android. You can listen to conference calls, read transcripts, read presentations, all from one app. It's pretty nice. It's 100% free. It's Q-U-A-R-T-R. You can also check them out on Twitter at quarter underscore app. They have tons of companies. So go ahead. Like I said, check them out. Without further ado, let's get

to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. welcome in today we are joined by spencer sabelli he is an investment associate at roboti and company uh and he actually contacted us via email and we were able to read one of

his research pieces on a company called playway which kind of piqued our interest because it's in the gaming space and we follow gaming so how did you come across uh playway to start and then what what interests you particularly about the polish gaming market yeah definitely um so how i actually found it is yeah i was a i still am a big shareholder in cd project it's one of my largest holdings um and you know that's had a pretty unfortunate run um but i guess what got me interested in cd project is you know the year they released cyberpunk so fiscal year 20 they like a 54 net income margin right and just super super high i think take two that same year that you know 13 um so i was like oh that's a bit strange and yeah just kind of started to look

why and you know saw 70 of their revenues or you know usd in canadian the entirety of their costs are in poland um so just giving them this huge sort of margin ball um and then yeah from there I just, you know, wanted to see, are there any other players in Poland that do this? And, you know, it turns out there's just a massive sort of ecosystem in Poland. I think there's, I think there's 65 public, you know, video game developers. And then maybe like 10 to 15 kind of video game related companies. You know, there's one that operates like a digital skin, like exchange platform. There's one that's like kind of a knockoff Steam.

so there's just like a massive massive um sort of ecosystem there and it's super super interesting um i think i sent it to you in the original email but the so the entire industry like i think 96 percent of revenues are you know exports so they're they're outside of poland i think 50 industry-wide comes from the u.s you know the second biggest market is germany third biggest is france and i think fourth asia is about like 10 you know mainly japan's and china um so just the entire industry you know experiences the same phenomenon of you know revenue and stronger kind of western currencies with really really cheap input costs um i think the average wage in poland is one third of germany it's a quarter of the u.s so you know you have really really cheap really

good programmers you know a really strong kind of revenue base um and you know they're all paid paid in slotty the slotty has been been weakening pretty uh significantly against the dollar and euro um you know past six six something months um and then in addition to that there's just like a really strong culture of you know i guess like mathematics and engineering um so there's just an abundance of local programmers it's just like kind of in the culture um so that also like pushes down average prices and you know just the supply of workers in that arena is pretty strong so you kind of have this like three-fold phenomena where you know they're all earning money in usd and euros you know wages are a third of you know us a third of germany fourth of the us and you know

just a plethora of programmers. So they, they really, really high margins. You know, the 54% for CD project is kind of, you know, the thing that caught my eye. I mean, there's other studios, there's 11 BIM just public that does, you know, the mid 40% range, you know, PCF group does 20 to 30% range consistently. Pre-PGR does like the 50% range. So, I mean, that's what i really kind of liked about the market and you know you can some of them are still expensive but you could find you know a lot of these players you know and arguably they trade

at much higher multiples in the u.s um so you kind of get that uh get that discount and then i came across playaway uh playaway is the second largest by market cap when i found it it may it may be like third or fourth now um but basically what playaway does it operates as this massive sort of umbrella sort of ecosystem i call it um so they basically have direct stakes in i think it's 126 something companies now um so i think there's like 460 something public and private in poland so they basically have stakes in a quarter of all you know incorporated video game companies there and yeah basically what they do um is they give these companies money you know on average one to two million slotties so you know five hundred thousand uh two million dollars and they

say come back to us in five years it'll be um you know it's pretty decentralized you know it gives them uh independence um and you know he kind of lets them lets them do their thing and you know Playway kind of, you know, they have, I think, 30, 40 full-time employees, kind of quality assurance and different things. So the studios they make investments in, they have the opportunity to, you know, to kind of utilize Playway's network and, you know, just get help with testing and, you know, prepping for launch and different things like that. So, yeah, it's just, you know, they they have really you know and obviously there's a lot of boss too um i think at the height of it they were you know christoph is the guy who founded and runs it you know he was taking

you know 10 companies per quarter like five good five bad um and that you know that's kind of slowed down now um you know just because as they've already built this this huge network but yeah it's just you know it's sort of a numbers game and he feels he has you know some really really good companies some really really good teams i know they have over 100 uh 100 games of developer development right now um and i know over half his subsidiaries that he signed on have released a game um so it's just this kind of massive sort of system ecosystem playaway is the kind of the central organization that you know can help where needed with these different subsidiaries you know they need uh some help with programming or they need to tweak something or

you know just questions about marketing finance they're the kind of bedrock of this entire organization um similar i guess let's play in a nutshell so they're basically if i'm understanding right they're essentially just the holding company for all these independent studios um there isn't they themselves aren't publishing any games but they're doing i guess through these subsidiaries we so they they actually do publish it a lot of the games the holding company and they also do have some internal studios okay um but yeah i i'd say that's that's probably a good way to describe it it's just this big holding company um it's got its fingers and all these different you know sub-organizations um you know a bunch of them they own over 50 so it's fully

consolidated some are minority positions and the minority positions a lot of the times pay dividends too um so they get real kind of money from that consistently um and yeah i mean i think over 23 24 of them are public now about 100 million um total market value with those and And yes, that's kind of the general strategy right now. Okay. And with a capital allocation business like this, management is very important. The people that are making these decisions to invest in all these other companies. What are your thoughts in general on management and what,

you know, why have they become the dominant kind of player in the Polish market, at least in investing in these other studios? Talking about the management and whatnot. So I guess, like, it's important to explain a bit of the history. So the guy who founded it, Krzysztof Kostowski, he has a long sort of history in the video game industry in Poland. So he actually started, you know, doing a wholesaling company

and kind of skirting around copyright laws. There was a bunch of loopholes. So basically he would import games from the West and kind of sell them pretty cheaply in the Polish market. So he got some money from that. And the way he explained it is, you know, instead of buying a Porsche or a flat, he would just invest the money in video game developers.

Very, very young, kind of early 2000s and stuff. And, you know, he just kept doing that, kept building up this network. And then he kind of realized that there was this, you know, phenomenon that like, you know, investors wanted to invest in these companies, but the risk of, you know, investing in a small team of five Polish developers,

you know, in their flat in Warsaw is pretty risky. Um, so then what Chris realizes, you know, maybe these investors would rather have me do it, deal with a bunch of them and they can kind of own that exposure through me and this company I build. So he, he just kind of started like that. He started investing in these teams, um, you know, just five, six, seven, as it grows, you know, he, he's now, you know, pretty appealing to, to the investor class. We want exposure to this, you know, pretty quickly growing market, um, without having

the the you know hit or miss risk that kind of plagues a lot of a lot of video game developers so he was through that he kind of developed a name for himself as kind of the go-to guy right if you're a young group of developers you go to christoph like he's willing to give you money he's going to take the risk and as he grows right each new investment is you know less risky um in terms of kind of his total exposure so he just really built a large name for himself um And, you know, 10, 15 years later, he's just known as a very experienced kind of, you know, trustworthy operator who's kind of nailed the process down. You know, we talked to him in the past and he said, you know, people didn't think he'd get, you know, one successful company. And then he had one very successful. And then, you know, can he get to three to five more?

And he's kind of hit all the roadblocks and, you know, you know, points that people said he wouldn't cross. um so i think in terms of operating yeah he's a great operator um and i mean besides that he's he's just very passionate about the company you know he met with us uh i think three times you know one time some people in the west coast like he literally met with us at 9 p.m warsaw time for hour and a half two hours like he was just very willing to to go into the nitty-gritty details um you know he doesn't have a salary um you know he he kind of lives off the dividend he owns 40 percent of the stock so yeah that amounts to to a decent amount um i think it's like a four and a half five percent yield right now um but you know they don't have you know company cars lavish

offices um you know they rent some studios out for their subsidiaries and more so in other cities that's about it so he runs a very low cost sort of clean shop um and he owns a ton of stock no salary he'll meet with you whatever um and you can just tell when he's talking he's very uh very passionate about about the company and what he's built plural site a tech workforce development company provides the solutions high performing engineering teams need to tackle today's biggest challenges whether it's building the skills individuals and teams need to tackle mission critical projects driving cloud transformation or helping software teams to ship reliable scalable and secure code harness the collective power of hindsight

foresight and insight with plural site at pluralsight.com slash vision what types of games does playway make uh are there any that maybe people in the west would know of like any hits are they more kind of niche um they are more kind of niche um so i mean they really focus on simulator games um so they just kind of simulate real in-person sort of activities um you know so their two most popular games are called car mechanic and then house flipper so i mean car mechanic is a pretty extensive um real life simulator of like a you working in an auto shop so you get various jobs and missions and like there's these detailed engines and you have to like you know screw stuff in and you know fix the tires and go on the

computer and order tires with the right dimensions and stuff it's like really really extensive um that was their first major hit in 2014 they've had two sequels since then um one just released this past year and yeah i mean like like like you could have uh i don't know like a mercedes benz you take off the whole thing you know rework the engine and give it a new paint job and try and grow this like you know mini operation within the game um another big example is called house flipper you know that's just simulating kind of you know a fixer-upper like flipper business so you'll you'll go on a computer in game you'll buy a house it's a dump there's trash everywhere you gotta like physically pick up the trash and physically like scrub the walls make it clean

repaint people are playing this people are playing dude house flipper has over with mobile 35 million individual dollars that is insane it's like the last thing i would think maybe it's it's the appeal of not having to do the actual labor but just exactly exactly yeah and then look you make cool houses you can kind of show them to your friends see the different designs and stuff you know it definitely appeals to a certain niche um that's a really cool thing about playways they have all these realistic simulators but i mean if you're passionate about engineering and like building cars like you'll love car mechanic if you you know are more creative and you know like interior design or just architecture like

house flipper you'll probably really enjoy um and they do that with a with a bunch of their other games as well just they pick kind of really niche environments or games that will appeal to a small percentage of people and then i mean some of them are also just fans of the simulator genre in general so you have people that'll just you know follow play away and almost like a you know cult like and you know buy whatever uh new game they have you know they have one really interesting game it's called u-boat so it's like like you you simulate uh german world war ii u-boat there's like crew management like there's there's missions like first person combat um so that's a really unique game there's one called thief simulator where you just you're a robber and

you have to go in the neighborhoods and rob different homes and see what loot you can find there's there's another one called gold rush where it's just like you you simulate kind of a big gold mining operations climb into the mining machine go into the caves or whatever you kind of dig out of the ground um there's one called mr prepper that's sort of like uh you know it's like a base building game almost but it's like you're building out a bunker so like you have all these underground rooms and stuff and customize them and build them kind of grow that um so these games these games are more it sound they sound very niche but uh it sounds like they have certainly have their target audience are they more like you pay up front versus is there any sort of live services component or is

it all like the purchase of the game up front is really the primary revenue yeah it's it's mainly the purchase of the game up front um so normally they they would sell for twenty dollars um and yeah i mean given the the recent inflation problems especially in poland they've they've pretty much raised prices across the board so you know car mechanic and house flipper would normally sell for 20 they're now going for 25 um so that's that's the main source of revenue at the same time there are also tons of dlcs um and just like different content packages so when car mechanic launched last august which took the number one steam global uh bestseller by the way on the day of the launch they they launched with like a launch day starter pack

you know ten dollars to get all this content or whatever um that actually took the number two spot and beyond that yeah there'll be like you know five to ten dollar dlcs add-ons um you know house flipper they have a new dlc coming out called farm flipper so you need the the base game to run to run it um and you know it's obviously less money you know maybe like ten dollars um and you get kind of a whole new, you know, content package. So that also that also helps as well. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad?

I get it. I'm Ciaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Okay, and I want to clear maybe this part up

because you talked about it a bit, but Playway itself, are they making any of the decisions telling the studios, or not the studios, whoever is making the game, like, oh, we're going to sell this DLC, we're going to sell it at this price, or are they giving all the monetization strategy? Are they separating themselves from that?

or are they making decisions of how to price this stuff in the market well it depends um i think playaway does definitely have a big role um in terms of pricing and i guess we'll get into the to the marketing strategy a bit later in economics um but they're really good at publishing games and kind of getting people to buy them um and you know as they call it kicking the app the algorithm like you know there's if you go on one of their pages it'll show a bunch of different games from the same uh developer or publisher um so they kind of manage all the front-facing stuff and the consumer stuff and feel like they really have that down you know in terms of like control you know so some like house flipper and car mechanic or internal studios um so they have much more

discretion and you know kind of telling them what to do than they would a company they have 20 or or 30% saving. Right. And that leads to the next question. You mentioned you didn't economics. I think that's something people are going to be interested in hearing about because they're so strong. Um, how does it work? Like, can you go through just the margin structure and the cost of the business and why they have such strong margins? Sure. Um, so, so overall it has very low overhead. Um, and you know, they, they, they have a bunch of different strategies that make them very very unique i guess off the bat you know on a 20 sale play well you the you know the holding company playaway group will usually net like 11 to 12 dollars per game um so that's on

average across you know the organization obviously in a minority investment you know that'll be different and they'll usually get a dividend or just depends on the agreement with the with the group itself you know including dlcs and all content packages so kind of everything they sell that brings them down to about six dollar average net but you know just on average for an actual video game like a house flipper or car mechanic twenty dollars they get 11 to 12 um and so you know breaking down the costs it's it's super interesting um so for example with the car mechanic simulator playaway doesn't pay them it's internal studio but playaway doesn't pay them any salaries right so it costs them pretty much you know zero dollars to maintain the group

so what happens is playaway will give them a 15 royalty in all sales of the game that they produced right so the net copy per game that's how it ends up being 11 12 right steam will take 30 you know 20 30 and then car mechanic that physical team you know that group or whatever five six seven people they'll get 15 ongoing so that covers everything pretty much um and it's it's they do that with a lot of their teams um one i mean it really incentivizes teams to stick with play away um you know it's it's just you know they get ongoing royalty for the games i I think most developers, you get a salary, maybe some company stock, but you don't really get skin in your own, you know, game you develop and the actual sales that it does. So, I mean, there's other examples as well.

You know, the House Flipper team, it's a team of nearly 40 people. PlayAway does pay out some salaries there, not large ones, but they also pay out, you know, 20% royalty on House Flipper sales to that team. so that's a kind of another scenario where they'll pay some salaries and they'll um you know kind of pay out that royalty um and then the third example is minority positions right they don't really take on the cost but part of the initial agreement is that these minority positions have to pay play away an annual dividend um so you know if it's 20% stake you can assume it's 20% of net profit um it differs because there's just so many subsidiaries and different agreements um but i guess those are kind of the three uh you know main kind of structures that they have with these

minority uh or just subsidiaries in general and also i'd say on the minority positions like the companies are happy to do it and like i'll explain about the marketing in a second but you know getting access to play away sort of massive you know marketing infrastructure is is really a game changer. Um, so I think companies are happy to, to, um, you know, kind of pay play away consistently. Um, but yeah, I guess in general, it's, it's, it's pretty simple, you know, $20 game, 11 to 12 net, like I think salaries, you know, I kind of have this written down, you know, the nine months ending September 21, you know, did 175 million PLN revenue you know over over 40 pln uh million pln was the royalty payments and then salaries is only

about 15 million pln so they're receiving the revenue up front the main expense is just paying the you know the associated royalties and just having very low expenses in general and you know that's evidence in 2020 they didn't have any major releases right so no house flipper no car mechanic no really big games that was their best game ever uh best year ever so you know they they didn't have to pay any salaries for the most part you know they just pay out 20 15 and everything goes to the bottom line um so that's it's super unique and interesting thing about playaway and creates this very strong sort of incentive structure um and you know i asked him is are you do you ever fear that you know teams will leave or you know all the talent will go somewhere else he's like

why would they you know they they make a lot of money from their games and kind of we support them on the marketing front and so i mean super strong incentive structure and you know everyone's happy pretty much at the end of the day um and i will say another another interesting thing that playaway does you know i'm going through the economics is that they recognize all the costs up front when they arrive so you know a lot of bigger developers like cd project for example they'll amortize you know the development costs for cyberpunk you know i think it was like three percent a quarter for for you know x amount of years um so that makes them look more profitable you know the year of release and then you know the next quarter they're not as profitable um

and you know it's not kind of a true you know true way to to do it um so playboy just recognizes all their costs up front on average they fully recoup the development costs within three days um so pretty much anything after that is just you know goes right to to the bottom line having you know paid steam and then paying the royalties to these uh subsidiaries this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at lakinta by windham they have free high speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center. Either way, you're ready

to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Right. What does Playway's valuation look like today? And I guess what is the last uh few months have definitely been sort of a tumultuous time period in that section of the world so what's going to happen has have they seen any um reaction to that and their stock price at all yeah sure let me let me i gotta add one more thing on the economic front yeah why the the margins are so high so and this is this is very important playboy all like spends nothing on market like i don't even think they they break it down and income statements like marketing spend line nothing like that and so they kind of have you

know three major strategies is one they release free demos and prologues you know so it's a very limited kind of playable version of the game you know it'll be free you know and they just hope you know the game spreads the word of mouth and they can see what needs to be improved if it's worth developing more and you know do that for about half their games another super important part of that is the wish list so on steam you can add it you can add a a game or you know a prologue to your wish list and play away can monitor how many people um have added it to their wish list so i mean it's super smart i mean you know so they throw out 10 concepts right and the top three basically get all the the people adding to their wish list they basically know which games are

are going to do well before they fully develop them so i mean there's just no need to to spend anything on marketing because they know which games are going to be hits um so i mean it's just it's a super smart way to to kind of align themselves you know with their fans as well and like all right let's cut the bs like here's some concepts what do you guys like the best and then they'll develop those kind of more fully and put the you know the the lower kind of ranking games to the back um another super important thing is the steam layout and cross-selling i mentioned this a bit before but you so if you're on the house looker page steam will show kind of recommended games from the same you know producer developer whatnot so that's super important and

you can kind of swap out the recommended titles and stuff and really take advantage of that algorithm um so there's about 600 pages playaway has 65 of them generate 90 of the traffic it um so play away whenever there's a big release coming they want a fan to see it they'll put it there and you'll see right so you don't need to do any traditional marketing in out banners anything like that um so i mean that that allows them to get that income margins in the mid 60 percent range you know even higher some years um just just zero spend on marketing which is super important and one last thing i'll say on that is the sequels and dlcs um kind of once you have a base game down it's super cheap to you know to quickly kind of remodify it you know either make a dlc like farm

flipper for the house flipper series you know u-boat um was a big game they have a new game called aircraft carrier survival it's a very similar layout you know same engine all that but it's just you know you're simulating aircraft carriers let's say you vote so you know maybe it costs a fourth of the cost of the original game to develop but you know you can sell for the same price um so there's a lot of things that just kind of allow them to have such high margins um and yeah zero marketing spend is obviously uh a big problem yeah and how about the evaluation yeah so i mean the valuations really come down um you know there's a wig dot games index that's the the five largest by volume game developing companies in Poland.

That's down to about March 2020 levels. I mean, it's been really destroyed. I think a lot of that is the CD Projekt. They've been crushed. But there's been some pretty poor reports. Ten Square Games has had a bad report. CD Projekt just reported the market didn't like their report. So there's just been an overhang in general in the industry.

you know it trades at about you know low to mid 13 times uh trailing earnings you know so september 2021 trailing 12 months um and you know i think that's cheap you know the warsaw index as a whole trades at about a 10 times pe i mean and there's you know much slower growing companies that aren't as profitable or super levered aren't aren't necessarily you know as clean or in such a popular industry um so i really think it should demand more of a premium and you know it traded at you know over two times the current valuation you know in 20 earlier in 2021 and goes out like mid 600s pln it's about like 240 today um and there's there's other factors as well right inflation's pretty high in poland uh government's been raising

interest rates pretty aggressively um but you know if you just kind of take a not super aggressive stance and you know they could they could grow you get the 25 percent a year you know and that's that's historically been pretty low for them um you know it could generate 50 million in earnings and you know two to three years and you have a 400 million dollar market cap right now that's you know what eight times or something not not super expensive um you know you have companies like take two trading at 30 times earnings and obviously very high quality business but you could argue the the growth prospects are you know not as strong um as a as a playway um so i mean it's you know obviously you're in poland it's a small cap there's lower body and

those things do weigh on the multiple um so you can either way you know collect a nice dividend and let this thing grow over time or you know maybe there's a change in sentiment in the market as well um but i think 13 times this is a great price and happy to pay it how does the company grow from here another focused on these niches i think that's maybe a big concern people have and why the focus on computer or pc games instead of mobile it seems like these type of simulator games would be perfect for uh smartphones but correct me if i'm wrong uh that's right um so i think you know the pc culture is just very strong in poland so it kind of started as that and a lot of these developers started on pc games um having talked to to kristoff you know mobile is very much

a strong focus for them and and you know will be a likely a strong driver um going forward i mean house flipper game you know 30 something million downloads on mobile um and that's just like super super impressive like it's one thing to uh you know if you're super into designing homes and stuff and playing it at home on your computer versus just like buying it and you know playing it on the way to work or you know when you're on an airplane or something like that um so that is something that can be a very strong kind of growth driver for them but i'd say they just started in the pc world because that's you know i guess that's the culture in poland a lot of people yeah what about competition who who are i guess playways big competitors or are they really just

competing uh for consumers times at consumers time at the end of the day yeah um so i mean not many big competitors i think a lot of it is smaller studios just independent you know studios um you know nakon in france they have tried to enter the genre a bit n-a-c-o-n um so they have some recent games like you know b simulator pro fishing simulator hunting simulator things like that um i mean i just checked it yesterday you can see active players on schemecharts.com yeah their fishing simulator had one person and playways have like 60 playing at that moment um So, you know, I think, you know, there is some risk that other companies kind of see this niche and how popular it can be and enter it. But I think it's a lot harder. You know, the House Flipper game took four years and 40 people to develop.

So it's a much kind of larger thing than, you know, it would seem on the outside. But, yeah, I mean, I think Playway is still better and just has tons of experience in creating these games. um not saying that people kind of you know won't try and emulate it but they have a you know a really really strong position um and i also think they're they're kind of pivoting as well in their overall strategy i guess we could talk about a bit um yeah go ahead go ahead on that if that's important yeah so i think you know kind of chris has gotten over the most difficult part you know you know years ago he would take 40 companies per year half of them will be good half of them will be bad and you know he has 120 something really strong you know not all of them are really

strong but just a you know well-run diversified group of low-cost programmers right they're under his wing they're incentivized well they get percent royalties you know most people are happy um so talking to chris he's gonna start slowing down it sounds like um you know he took a bunch in 2020 because that was a you know just an exceptional year for gaming um and the market in general um but it sounds like he's going to start slowing down and on a call with him he said they're kind of shooting for one game in one new company per quarter and you know he has gotten much more um you know i'd say rigorous in his due diligence right before he would just shell lot of money all right take take half a million and come back to me so it happens now he needs

to get to know them he spends three to six months with them and really wants to make sure they're good guys they'll do something good he likes the project etc um so you know i'm not sure the the net rate maybe will kind of be the same of teams that are successful you know that versus just having a bunch of busts um but they already have the network they got over that it could slow down and really utilize this network. Over half the companies haven't even released a game yet. There's over 100 games in production right now. I think that's a super important part of the story. Then there's also new monetization options. I think this is also a huge part of the potential growth story. For example, they had a German publisher approach them. I think it was a

two to three million euro deal you know they had this idea they basically gave play all the money up front right covers all the development costs they say build this game for us with your low cost you know polish programmers and then we'll split 50 50 once it's released right so it's kind of a risk-free option you know for playway to utilize this network they have they get all the money up front they build the game for this german publisher and then they split the profits so he he said a lot they're getting approached by a lot of deals a lot of uh publishers like that want those deals then also on the flip side you know if if a small development team has a finished game and and you know they want to publish it they will come to play away and kind of do the reverse

um so play away is like all right you have this game it looks good we'll publish it for you but we want 50 so just because they have this massive kind of infrastructure programmers and then this marketing infrastructure of steam and the layout and stuff they can kind of utilize that and almost get kind of risk-free royalties going forward um so i think that that could be a major driver as well then i'll say one thing um he does like to ipo his subsidiaries a lot so i think they have 23 public ones um he he kind of sees you know one ipo per year going forward and kind of of the 120 so companies thinks 10 to 20 could be good ipo candidates but it's super interesting and you know obviously you want to wait until the the market catches a bit and gets a bit stronger

um the polish game dev market but like the house flipper team right that's it's a huge part of the company he can go and create an llc have the same incentive structure and just ipo that on the market and it gets a multiple um you know thus increasing playaways nav they get money up front from the sale um so there's some optionality in that regards as well and they've done that several times all right i think everyone's and their minds talk you know it's poland and that place of the world right now is very uh chaotic i guess there's a lot of risk geopolitically how does the company are they worried about that risk or is there a way like will they be since they have the developers like it's not like they need the to literally be in

Warsaw to build the games? Could they, you know, get everyone out of the country if need be? I mean, what's the risk there? Have they talked about it at all? Yeah, I mean, there's definitely some risk. You know, Poland is supporting Ukraine, supporting Belarus. I think he's supporting Russia too, the Kaliningrad region. So, you know, any escalation or further destabilization, you know, in the Ukraine crisis will have a negative impact, you know, on the market in general their equity markets and you know inflation consumer markets all of that I will say as a response you know Poland is a member of the EU it's a member of NATO so I think they're pretty well protected from any worst case scenario right any direct confrontation NATO gets involved and

it gets a lot more serious so that's a pretty strong you know buffer and then you know as long is that doesn't happen i think things will likely be okay and they might even benefit right i mean this thing may go on for a while and the zloty will likely stay weak for a while and you know in that scenario you know they're earning i think it's 90 percent of their revenues in usd and euros and all their costs are in zloty so a week's zloty for an extended period of time is actually a good thing for the company um you know other risks are you know inflation inflation is really high in poland a lot of that is energy um you know there's news yesterday that russia stopped inflow of gas to poland um so that's obviously a big problem you know playaway can

easily mitigate that right 20 to 25 most of the games just like that boom um so they're pretty well covered on the inflation aspect um so i don't think for them specifically that's that's huge issue i will say though poland is probably pretty prepared for you know just the situation in general they have a new baltic pipeline um with with norway that's that's coming online in a year or two and that will you know they're saying it's gonna you know completely um you know fill the the gap from the you know not importing russian gas um so you know there are problems but you you kind to have to just you know i mean i think a lot of it's priced in probably too um you know that the stock has been absolutely crushed uh interest rates have been raised um and you know this was

at 30 times earnings a couple months ago it's at 13 now um and nothing's really fundamentally changed about the company um so yeah i don't worry about it too much um i think they're well protected i think that's all the questions we have is there anything else that we forgot is there anything important i guess to the thesis that we didn't touch on yeah i mean you know i think as this grows too um it's an economies of scale thing right you grow larger you have more money like the 40 45 million net cash all u.s dollars um you know so they're now sounding on you know companies that specialize in strategy games right they're making some uh you guys know sydney years like civilization kind of games like that more city builder games um more uh complicated

getting more more more complex games since they have more complex games uh shooter games um you know survival games you know i think they have five companies just focused on vr you know three companies just focused on the nintendo switch i know they're they're going more after mobile going more after console so as this grows larger you know kristoff can kind of shell out more money and they can work on stronger projects um and each time they get a hit right you know they recoup the cost in a couple of days and it's just you know flowing right to the bottom line for you know for as long as the game is selling um and they're doing cool things too like they have this new joy venture with uh robert lewandowski as i'm sure you guys know being

soccer fans so it's a 50 50 jv with him and they're building this this kind of pretty big uh it's called football manager or something like that so you kind of build out a football team yeah your stadium uh your colors and you can you can play as a striker and it's kind of like uh you know i guess manager mode in fifa that is this much playing um but that's something really cool and robert talks really huge um and i just think in general they're they're a low-cost producer like you know with such low wages they have the ability to take more risk they have the ability to you know do more publishing deals like the one i mentioned the german company and just really utilize this this large network and christoph can kind of go where he wants i

mean he's i think he's got over the the most difficult part that's why slowing down taking on new teams and stuff um and there's just many different ways to to monetize this thing um so yeah wait i have one more that just came to my mind they have so there's that advantage with the usd and euro situation do you think that gives them a hiring advantage in poland because they can yeah compared to almost any other company in poland i'm sure there's other ones that have that advantage too but compared to most other companies they could say double someone's salary and still have very comfortable profit margins like do you think that's an advantage of convincing people to come work for them for sure um and i think that ties into the royalties right

so i mean almost all of their sales are earned usd euros uh pounds um things like that so i mean giving the intern even internal teams so teams that aren't you know kind of outside subsidiaries or studios they give them direct royalties um so it's super important and i'd also say kind of you know if if you come to play away and join the group right you're now part of this marketing infrastructure you know there there's a much stronger chance that your game will catch on and kind of be seen by by steam players in general and play away fans um and i think studios know that and that that's a competitive advantage though makes sense all right i think that's all the questions we have uh spencer thanks for uh thanks for coming on where can

people find you is there any way for like we have a i guess a big twitter presence is there any way for people to find you there or online or if they don't have a twitter uh you can search me on linkedin love to connect and channel playway or investing in general um so just sponsor civility okay perfect all right well that's going to do it we want to remind our listeners that brett and i are not financial advisors anything we say or discuss here on chit chat money is not formal advice or recommendation we are however general partners at arch capital so clients may have positions and the securities discussed in this podcast. Thank you all for listening. We'll see you next time. Don't you wish you could just hit skip on the worst parts of your life? You know,

the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.