DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) Q3 2023 Earnings Call Transcript

DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good afternoon, and welcome to DoubleDown Interactive's Earnings Conference Call for Second Quarter (sic) [Third Quarter] ending September 30, 2023. My name is James, and I will be your operator this afternoon. Prior to this call, DoubleDown issued its financial results for the third quarter 2023 in a press release, a copy which has been furnished in a report on a Form 6-K filed with the SEC and is available in the Investor Relations section at the website www.doubledowninteractive.com. You can find the link in the Investor Relations section at the top of the home page. Joining us on today's call are DoubleDown's CEO, Mr. In Keuk Kim; and its CFO, Mr. Joe Sigrist. Following their remarks, we will be open for questions. Before we begin, Richard Land, the company's outside Investor Relations adviser, will make a brief introductory statement. Mr. Land?

Richard Land: Thank you, James. Before management begins their formal remarks, we need to remind everyone that some of management's comments today will be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and we hereby claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements about future events and include expectations and projections, not present or historical facts, and can be identified by the use of words such as may, might, will, expect, assume, believe, intend, estimate, continue, should, anticipate or other similar terms.

A gaming enthusiast in front of a widescreen monitor, lost in the game.

Forward-looking statements include, and are not limited to, those regarding the company's future plans, mergers and acquisition strategy, strategic and financial objectives, expected performance and financial outlook. Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially and adversely from what the company expects. Therefore, you should exercise caution in interpreting and relying on them. We refer you to DoubleDown's annual report on Form 20-F filed with the SEC on March 31, 2023, and other SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition. These forward-looking statements are made only as of the date of this call.

The company does not undertake and expressly disclaims any obligations to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, management will discuss non-GAAP measures, which are believed by management to be useful in evaluating the company's operating performance. These measures should not be considered superior to, in isolation or as a substitute for the financial results prepared in accordance with GAAP. A full reconciliation of these measures to the most directly comparable GAAP measure is available in the earnings release and on our Form 6-K filed with the SEC prior to this call. I would like to remind everyone that this call is being recorded and will be made available for replay via a link in the Investor Relations section of DoubleDown's website.

With that, it's my pleasure to turn the call over to DoubleDown's CEO, In Keuk Kim.

In Keuk Kim: Thank you, Rich. Good afternoon, everyone. Thank you for joining us on our 2023 third quarter earnings call. Q3 revenue of $73 million was down slightly, on a quarterly sequential basis, from $75.2 million in Q2 2023. The decline to a significant expense reflect our continued focus on optimizing our advertising spend to deliver profitable revenue. As such, we continue to generate consistent profit and adjusted EBITDA in the third quarter. Adjusted EBITDA for the third quarter rose both year-over-year and on quarterly sequential basis to $29.7 million, while cash flow from operations for the third quarter increased from $6.5 million year-over-year to $28.7 million. Our flagship DoubleDown Casino, or DDC, continues to be the driver of our solid results.

This includes contribution to operating cash flow of approximately $86 million through the first nine months of the year, excluding the final payment to the Benson class action settlement earlier this year. DDC continues to be very sticky with its existing core paying players, as evidenced by the increase. We were achieving an average monthly revenue per payer, which have established the foundation for our consistent financial results, including attractive adjusted EBITDA margins and cash flow from operations. As many of you know, DDC revenue is primarily driven by those who have been playing our single style games for several years as opposed to newly acquired players, with the majority of revenue in any quarter generated by players acquired in previous periods.

As we have discussed, this is supported by our marketing spend refinement and optimization as we focus on generating attractive and appropriate returns. Going forward, our marketing investment in the social casino business will depend on our ability to intelligently forecast improvement in the ROI of the application of new players and in the retention of existing payers. Simply said, we are managing the business for appropriate ROI on marketing spend to deliver the high cash flows. We previously discussed that the consistent cash flow generated by DDC provides us with the flexibility to allocate capital towards establishing a presence in new gaming categories that have highly addressable market opportunities and that are complementary to our core social casino business.

In this regard, last week, we completed the acquisition of SuprNation, which operates three real money iGaming sites, primarily focused on online gambling in Western Europe. SuprNation Nation has strong and loyal player base in markets such as Sweden and the U.K., and we believe they are poised for growth. In fact, while SuprNation generated unaudited revenue of approximately $24 million in 2022, it is estimated that the European online gambling market will be reached - will reach $48 billion this year. So we do see a lot of opportunity before us with this transaction. We are working to quickly leverage DoubleDown's product development expertise to enhance the differentiated online casino player experience SuprNation offers on their Duelz, NYspins and VoodooDreams sites.

We also expect to take advantage of DoubleDown's excellence in player acquisition and engagement and monetization. Let me provide a little color on SuprNation's recent progress and the opportunities we see to scale the business. For the first nine months of 2023, their revenue rose approximately 5% compared to the same period a year ago, and they continue to operate at essentially adjusted EBITDA breakeven. Earlier this year, the company obtained licenses to operate in Estonia, and we expect to launch in this market in the first half of 2024. Following the acquisition, we see opportunities to enhance the marketing efforts to accelerate growth, especially in SuprNation's largest current market of the U.K. and Sweden. At the same time, we will be fine-tuning SuprNation's operational processes, including with compliance tools, which will help position the business to handle a larger player base as they scale.

Moreover, we, at DoubleDown, are excited to welcome the SuprNation team to the company. And I'm personally looking forward to working closely with Joakim Stockman and Henric Andersson, the Co-Chief Executive Officers of SuprNation, and their entire team to help bring the business to the next level. The iGaming sector is just one of several complementary gaming categories that are of interest to us. Additional high-growth gaming categories, where we can leverage our core competencies, include the very large casual mobile games category, which has games in the puzzle, casual casino and skill match and adventure genres. We plan to support these apps in a capital-efficient manner to deliver appropriate returns. Now, I will turn it over to our CFO, Joe Sigrist, to walk you through our financials before providing my closing remarks.

Joe?

Joe Sigrist: Thank you, IK, and good afternoon, everyone. Our revenues for the third quarter of 2023 were $73.0 million compared to $78.8 million last year. As IK mentioned, Q3 revenue was down 3% sequentially from the second quarter of 2023, primarily reflecting the lower marketing expense, coupled with our belief that consumers remain somewhat cautious about the global economic environment and the prospects for continued inflationary pressures. That said, our current quarter, the fourth quarter of the year, is historically a seasonally positive one, and we have seen encouraging payer behavior trends since early October of this year. In the third quarter, several KPI metrics improved compared to the year-ago period, including average revenue per daily active user, or ARPDAU, increased to $1.06 in Q3 2023 from $0.96 in Q3 2022.

Payer conversion ratio, which is the percentage of players who pay DoubleDown, was up 70 basis points to 5.9% in Q3 2023 compared to 5.2% in Q3 of 2022. Average monthly revenue per payer increased 9% from $225 in Q3 of 2022 to $245 in Q3 of 2023. On a quarterly sequential basis, total operating expenses decreased sequentially and from $47.7 million in the second quarter of 2023 to $43.3 million in the third quarter of 2023. The decrease was primarily due to lower cost of revenue and lower sales and marketing expenses. Sales and marketing expenses for the third quarter of 2023 were $10.6 million, a decline of 39% compared to Q3 of 2022 and 19% lower on a quarterly sequential basis. Our efforts to acquire new players through advertising, which represents the primary cost in the sales and marketing category, continue to reflect our focus on spending to ensure we deliver the best return on this investment.

At this point, we believe that near-term sales and marketing expenses for the core social casino business will remain consistent with the trend over the last few quarters. Net income for the third quarter of 2023 was $26.9 million or $10.87 per diluted share and $0.54 per ADS compared to a net loss of $24.0 million or a loss of $9.69 per diluted share and $0.48 per ADS in the third quarter of 2022. Note that Q3 2022 results were impacted by a noncash accrual of $70.1 million related to legal proceedings for the Benson class action. As a reminder, settlement of the Benson matter was finalized, including all settlement payments, in June of this year. Adjusted EBITDA for the third quarter of 2023 was $29.7 million compared to $25.0 million for the prior-year quarter.

Adjusted EBITDA margin was 40.7% for Q3 2023, representing an improvement from 31.7% in Q3 2022 and 36.7% in Q2 2023. Through the first nine months of the year, we have generated adjusted EBITDA of $82.8 million, up 8% compared to the same period in 2022. And the adjusted EBITDA margin for the first nine months of this year is 36.7%, up 530 basis points compared to the same period last year. Net cash flows from operations were $28.7 million for the third quarter of 2023 compared to $22.2 million in the prior-year period, primarily reflecting higher operating income. And finally, turning to our balance sheet, as of September 30, 2023, we had $271.2 million in cash, cash equivalents and short-term investments. Our total debt, as of September 30, was $37.2 million.

After the payment of $36.5 million in cash to acquire SuprNation at the end of the month of October and excluding the debt, our net cash position is approximately $200 million or $4 per ADS. This completes my financial summary. Now, I'll turn the call over to IK for closing remarks.

In Keuk Kim: Thank you, Joe. Our core social casino platform continues to generate attractive adjusted EBITDA margins and strong cash flow. And with the recent acquisition of SuprNation, we are investing in a new high-growth gaming category that we believe will be a long-term growth driver for the business. For our core social casino business, we will remain disciplined in our focus to drive ongoing improvements in player entertainment value, driving higher engagement and greater monetization. As I highlighted earlier, with the application of SuprNation now complete, we are moving quickly to integrate the business to bring our combined expertise in game creation, marketing, player engagement and monetization to bear to execute on the - executing growth opportunity we see.

As Joe highlighted, we have a very strong and committed cash position and continue to generate consistent high levels of free cash flow. This provides us with the foundation and flexibility to evaluate other M&A opportunities that would leverage our existing strength in game development, engineering, marketing and business intelligence, allowing DoubleDown to further grow our top and bottom lines and create new value for our shareholders. We are now happy to take your questions. Operator?

See also Top 10 Publicly Traded Consulting Firms by Revenue and 20 Most Valuable Video Game Companies in the World.

To continue reading the Q&A session, please click here.