Q4 2023 DoubleDown Interactive Co Ltd Earnings Call

Participants

Richard Land; Investor Relations; Everi Holdings Inc

In Keuk Kim; Chief Executive Officer, Director; DoubleDown Interactive Co Ltd

Joseph Sigrist; Chief Financial Officer, Director; DoubleDown Interactive Co Ltd

Aaron Lee; Analyst; Macquarie Group

Greg Gibas; Analyst; Northland Securities, Inc.

Presentation

Operator

Good afternoon, and welcome to DoubleDown Interactive's earnings conference call for the fourth quarter and full year ended December 31st, 2023. My name is Josh, and I will be your operator this afternoon.
Prior to this call, DoubleDown has issued its financial results for the fourth quarter of 2023 in a press release, a copy of which has been furnished and a report on Form 6-K filed with the SEC and is available in the Investor Relations section of the company's website at www.doubledowninteractive.com. You can find the link to the Investor Relations section at the top of the homepage.
Joining us on today's call, our DoubleDown CEO, Mr. In Keuk Kim; and our CFO, Mr. Joe Sigrist. Following their remarks, we will open the call 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, Josh. 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 excuse me, current 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. Forward-looking statements include and are not limited to those regarding the company's future plans, mergers and acquisitions, 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 obligation to update or alter the forward-looking statements, whether as a result of new information, future events or 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 now my pleasure to turn the call over to DoubleDown CEO, In Keuk Kim. Please go ahead, sir.

In Keuk Kim

Thank you, Richard, and good afternoon, everyone, and thank you for joining us on our 2023 fourth-quarter earnings call. Total Q4 revenue was $83.1 billion with $78.8 million generated by our social casino free-to-play games, and $4.3 billion coming from the operations of super nation in the month of November and December.
The Q4 revenue from our social casino free-to-play games was up nearly 8% on a quarterly sequential basis and up 3% compared to Q4 2022. Adjusted EBITDA for the first quarter rose both sequentially and year over year to $36.2 million, while cash flow from operations was $29.7 billion.
Our flagship social casino games, DoubleDown Casino, or DTC, continues to be the driver of our solid results as full year 2023, adjusted EBITDA reaching nearly $119 million and cash flow from operations for the 2023 truly year exceeded $116 billion.
Excluding the final pension class action settlement payment earlier in the year, we've continued to generate year-over-year increases in our some of our most important KPI, including average monthly revenue per payer and payer conversion rates, which indicates our great ability to offer compelling entertainment value to our core paying players these results largely reflect the propensity of DTC players to make in-app purchases and the continued increase in the amounts paid by players payers.
In addition, we released new device like meta features in the first quarter focused on increasing player retention and engagement, including the lucky or slim power features, which we believe eight overall monetization.
As we've discussed in the past, the BCO revenue largely reflects activity by our long-term base of players. We have enjoyed our casino stake gains in many cases for several years. To put this in perspective in 2023, approximately 94% of our revenue was generated from our 2010 to 2022 player cohorts. In other words, from players have hired in previous years last October, we have allocated a portion of our strong cash flow from operations to a higher superannuation, Western European focused gaming operator, whose two primary markets are Sweden and the UK for a total cash consideration of approximately $36.5 million.
This position is the first step in our goal to diversify our sources of revenue into new gaming categories. We have highly addressable market opportunities that are complementary to our core Social Casino super nation is appreciated by gaming operator, whose primary focus is on engaging. It's entertainment focused online slot player rather than the more volatile player. Its cures brand offers compelling features for these players such as peer-to-peer competition and elimination Parliament as players played flat games alongside one another supranational exit a tiny Phase three with an unaudited revenue run rate of approximately $6.5 million per quarter.
Going forward, we believe that as part of DoubleDown, we can help this business scale its top line, well-balanced ability to support and grow supranational business includes leveraging your expertise in game development, marketing and player engagement and monetization to execute on the exciting growth opportunities in gaming.
We are pleased to have it a condition complete and to be working closely with the supranational leadership team to help bring the business to the next level. We see the gaming sector as just one of the complementary gaming categories. We are we can deploy our resources and expertise to create new value for our shareholders.
For example, we are now in the process of launching our first game in the skill-based gaming segment. This game has now bingo, which was developed by one of our studios in Korea, allows players to compete against each other in Cubix bingo competition, we had the opportunity to win a portion of the apps that big currency and or we own cash that is paid by itself. The participating players. We began the launch of cashing out bingo during the latter part of 2023, and we are now ramping marketing investment in the current quarter to hire players as kill plane activities.
Now I will turn it over to our CFO, Joe Sigrist, to walk you through our financials before providing my closing remarks.

Joseph Sigrist

So thank you, Kate, and good afternoon, everyone. Our revenues for the fourth quarter of 2023 were $83.1 million and were comprised of $78.8 million in revenues from our social casino, free-to-play games and for $4.3 million of revenues from supranational for the 61 days when we owned the company following the October 31st acquisition closed This compares to revenues of $76.2 million last year.
As I came MENTIONED, Q4 Social Casino, free-to-play revenue, excluding supranational, was up 8% sequentially from the third quarter of 2023 and 3% year over year in the fourth quarter, several KPI metrics for our social casino business improved compared to the year ago period, including average revenue per daily active user, or our now increased to $1.24 in Q4 2023 from $0.98 in Q4 2022 pair conversion ratio, which is the percentage of players who play within the social casino apps increased to 6.4% in Q4 2023 compared to 5.4% in Q4 2022. And average monthly revenue per payer increased 23% from up from 22 hundred and 20 to $227 in Q4 2022 to $279 in Q4 of 2023. On a quarterly sequential basis, total operating expenses increased from $43.3 million in the third quarter of 2023 to $47.5 million in the fourth quarter of 2023, reflecting in part the new operating expenses associated with our ownership of super nations.
Even with these new operating costs, operating expenses for Q4 2023 declined from $51.5 million in Q4 last year. Excluding the noncash goodwill impairment charge of $269.9 million taken in that period. This decrease was primarily due to lower cost of revenue and lower sales and marketing expenses from the year ago period.
Sales and marketing expenses for the fourth quarter of 2023 were $9.9 million, a decline of 41% compared to Q4 2022 and 7% lower on a quarterly sequential basis. Our efforts to acquire new social casino players through advertising, which is still historically represented the primary cost in the sales and marketing category continued to reflect our focus on spending to ensure we deliver the best return on this investment for the first half of 2024. We anticipate that our overall sales and marketing expenses will increase from the Q4 total due to the combination of the expected full effect of the supranational acquisition and the launch of the new skill-based game IK. described earlier.
Net income for the fourth quarter of 2023 was $35.5 million or $10.27 per diluted share and $0.51 per ADS compared to a total net loss of $194.4 million or a loss of $78.47 per diluted share and a loss of $3.92 per ADS in the fourth quarter of 2022. Note that the Q4 2022 results were impacted by the non-cash goodwill impairment charge of $269.9 million I noted earlier. Adjusted EBITDA for the fourth quarter of 2023 was $36.2 million compared to $24.7 million for the prior year quarter. Adjusted EBITDA margin was 43.5% for Q4 2023, representing an improvement from 32.4% in Q4 2022 and 40.7% in Q3 2023.
For the 2023 full year period, we generated adjusted EBITDA of $118.9 million, up 17% compared to the 2022 full year period. And the adjusted EBITDA margin for 2020 23 full year pair of CDE for the 2023, 12 month period was 38.5%, an improvement from the 2022 full year of 31.6%. Net cash flows from operation were $29.7 million for the fourth quarter of 2023 compared to cash flow used in operations of $20.9 million in the prior year period. Which included the impact of a $50 million payment toward the Benson litigation settlement in Q4 of 2022. Excluding the $95.3 million payment in the 2023 second quarter for the Benson litigation settlement, cash flows provided by operating activities were $116.1 million for the year ended December 31, 2023.
Finally, turning to our balance sheet. As of December 31, 2023, we had $274.7 million in cash, cash equivalents and short-term investments excluding the loan with our controlling shareholder, we had a net cash position of approximately $235 million at year end or approximately $4.75 per ads. This completes my financial summary.
Now I will turn the call over to In Keuk for closing remarks.

In Keuk Kim

Thank you, Joe. We began 2024 with considerable momentum based on the Q4 results of our core social casino business, the recent close of our first post-IPO acquisition and the launch of our new internally developed game in the skill-based category in our core social casino business. We will continue to focus on enhancing the entertainment value of DoubleDown casino with our goal of driving more engagement and even greater on applications.
We also are focused on generating more of our social casino, particularly through direct-to-consumer methods, thereby improving margins in the largest part of our company's business with super nation. Our goal, our goal is to grow the business from its current revenue rental with a combination of increased marketing investments and by leveraging those skills and expertise.
DoubleDown brings to this combination and we will continue to pursue growth through participation in adjacent categories of gaming through both our organic efforts and as we continue to evaluate M&A opportunities.
So we are now happy to take your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Aaron Lee, Macquarie.

Aaron Lee

Hey, good afternoon. Thanks for taking my questions. I know it's just a few more months under your belt with supervision. Can you just help us with any guidelines to help us think about the growth potential in 2024? And are there any major milestones we should look out for as you grow that business?

Joseph Sigrist

Yes, thanks there, and appreciate it. As we've discussed, the most important near-term lever for us is marketing investment and we want to do that in support of the way they have already been marketing and acquiring new players and high ROI new players. And we also are augmenting that with assistance and other ways of find new players through, for instance, performance, marketing, that kind of thing. And relative to growth, as I think we've also discussed our primary again, this is very short term objective is to scale the business greater in their existing strong markets which are Sweden in the UK and only turned to newer markets after we have. And we worked on that for some time. So at this point, we aren't giving guidance relative to what we think the business can can ultimately on do in the shorter term. But I would just say that their market share in both Sweden and the UK is quite low. I mean single digit market share. And so there's there's significant opportunity. Just just it was in those two countries in the short term.

Aaron Lee

Got you. Okay. And then a quick follow up. I wanted to dig into your quarter average monthly revenue per payer, which was up really nicely over 20% year over year. Can you just kind of unpack what drove that and what you did differently versus past quarters?

Joseph Sigrist

Yes. I think the most important thing we want to highlight is the fact that we've been investing in the product itself in DDC. and maybe I can talk a little bit about some of our newer monetization and retention features. The meta features that we and have have especially started to implement Q4, and we'll do more this quarter. So I can you want to talk a little bit about our focus and in adding new meta features and how important that is to get payers to want to pay increasing amounts with us.

In Keuk Kim

Yes, higher and some I can explain about our new meta features like luxury or band 20 power and those meta features by getting more of the word features as users play more simply, it could raise slot playing users, retention board. So for example, about the future cell log yards are awarded on slots and best of times for more or has to be ordered from dedicated that big league Zingo and Adlea challenges, those all kind of rings matter features could increase user engagement and retention. So it helps users to play more and more. So that's last day. I just wanted to highlight our products should Okay, great.

Aaron Lee

Thank you very much. Great quarter.

Operator

Greg Gibas, Northland Securities.

Greg Gibas

Yes, I can, Joe, thanks for taking the questions and congrats on the nice results from. Wanted to just maybe dive in a little bit more like maybe what you attribute that and I think 8% sequential sequential growth in the core casino or social casino and then 3% year over year, what you kind of attribute that to and then also what's driving that lower cost of revenue year-over-year?
I'm sorry, what was the second part of that?

Joseph Sigrist

Greg, you were a little little light on the volume there from me sorry, sorry about that.

Greg Gibas

Yes, I think you spoke to a lower cost of revenue year over year, year over year. I'm just curious what's kind of driving that. Yes.

Joseph Sigrist

So let me start with that one and maybe I can I can both talk about what we what we've done better and what we see as it relates to the core social casino business to drive revenue growth relative to cost of revenue. As we have done over the course of the year, we, in Q4 own spent less on marketing, specifically acquiring new users as we continue to see a somewhat challenging environment to get the right ROI for the acquisition of new users. And as a result, we have continued to curtail our spend to acquire new users. Again, it's very early. It's a fact based. It's very much based on our evaluation of the seven three seven 21 day payback for the newly acquired cohorts and that is it had us continue to curtail marketing to acquire new players. I mean that was the primary driver of some of the reduction in cost of revenue for for this quarter. But relative to the top line, I mean, again, I think I can chime in if you have any other things to comment. I really do think the product features we have really helped it creates excitement for players, again, as I said, to return to play to want to be playing more and longer. And also, it gives us marketing opportunities so we can use of features in our arm, our content in the content, the ads themselves that we go out through our various partners in order to and to acquire new players to trying to reactivate lapsed players or even lapsed payers who may still be playing but haven't paid for a while. Both those new features are really exciting things for us to use to and to get players to reengage or to engage more.

Greg Gibas

Great. Very helpful. And I know you're not officially guiding, but wanted to get just maybe your high-level thoughts on financial expectations for next year, like you just spoke to kind of the product features driving player excitement that return to growth. You know, when I think about the core social casino business, should we think about this 3% growth year over year as being kind of fair, you know, assuming no other changes? Or just kind of wondering how you're thinking about them, you know, the top line in 2021.

Joseph Sigrist

Yes. No, I appreciate the question. And the reality is, as we all know on an especially if we look at the industry analyst reports. The casino category is a very mature category and estimates for the entire market suggest kind of a flattish market going forward from 2023 to 2024 and even beyond for the next couple of years after that. So I think that the core market is flat. The question is, can we, as we did in Q4 frankly, can we take share based on the things that we do, we uniquely and in a differentiated way do with DoubleDown casino, and we were successfully able to do that in Q4 and we strive to do that every quarter. That's our, frankly, that's our objective. That's our goal.
That's our challenge. And that term is something that we've we've been very focused on doing, but recognize that it's in the context of essentially a flat and that very profitable, very cash generative category of gaming, but essentially a flat category.

Greg Gibas

Got it. That's fair. And I think lastly for me, just wanted to follow up on super nation and since closing it being at the end of October and how is it kind of performed relative to your expectations. And I know it's just given it's been a couple of months here. If you spoke to kind of the initiatives that you implemented, I guess the focused earlier Sweden and the UK, when do you foresee kind of looking at new markets for that business?

In Keuk Kim

Yes, Greg, this is okay. And the most important thing for us about supranational is to find scalability to get a bigger market share. Although a traditional gaming casino business could only provide just playing casino content and experienced so far now we want to seek additional differentiated opportunities by offering compelling features for these players, such as peer-to-peer competition as I did as I pop the audience. So so far, November, December, we so a bit good results so far. So we've packed our ongoing development and improvement. If everything goes well, we will increase our marketing capabilities to scale up quickly.

Greg Gibas

Got it.

Joseph Sigrist

Thank you.

Greg Gibas

Thanks, Greg.

Operator

(Operator Instructions) One moment for questions, and I'm not showing any more questions at this time. I would now like to turn the call back over to Joe Sigrist for any closing remarks.

Joseph Sigrist

Great. Thanks, Josh. Appreciate it, and thanks, everyone, for your time today. And we look forward to talking to you again soon and have a great evening and a great Wednesday tomorrow. Bye.

Operator

Thank you for your participation. You may now disconnect.