DoubleDown Interactive Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Double Down Interactive's Earnings Conference Call for Second Quarter Ending September 30, 2023. My name is James, and I will be your operator this afternoon. Prior to this call, Double Down issued its financial results for the Q3 2023 in a press release, A copy, which has been furnished in a report on a Form 6 ks 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 homepage. Joining us on today's call are Double Down's CEO, Mr.

Operator

In Kook Kim and its CFO, Mr. Joe Siegrist. Following their remarks, we will be open for questions. Before we begin, Richard Land, the Company's outside Investor Relations advisor, will make a brief introductory statement. Mr.

Operator

Land?

Speaker 1

Thank you, James. Before management begins their formal remarks, we need to remind everyone that some 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. 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.

Speaker 1

Therefore, you should exercise caution in interpreting and relying on them. We refer you to Double Down's annual report on Form 20 F filed with the SEC on March 31, 2023, and other SEC See 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 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 period 2 in isolation or as a substitute for the financial results prepared in accordance with GAAP.

Speaker 1

A full reconciliation of these measures to the most Directly comparable GAAP measure is available in the earnings release and on our Form 6 ks 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 Double Down's website. With that, it's my pleasure to turn the call over to Double Down's CEO, In Kuo Kim.

Speaker 2

Thank you, Rich. Good afternoon, everyone. Thank you for joining us on our 2023 Q3 earnings call. Q3 revenue of $73,000,000 was down slightly on a quarterly sequential basis from $75,200,000 In Q2, 2023, the decline to a significant extent, it was led 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 3rd quarter.

Speaker 2

Adjusted EBITDA for the Q3 rose both year over year and on a quarterly sequentially basis to $29,700,000 where cash flow from operations for the Q3 increased $6,500,000 year over year to $28,700,000 Our flagship Double Down Casino or DTC continues to be the driver of our solid results. This includes contribution to operating cash flow of approximately $86,000,000 through the 1st 9 months of the year, excluding the final payment to the Benson class action settlement earlier this year. DTC continues to be very sticky with its existing core paying players as evidenced By the increase, we are achieving in average monthly revenue per pay year, 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, DTC revenue is primarily driven by those who have been playing our seamless 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 period. As we have discussed, this is supported by our marketing spend refinements and optimization as we focus on generating attractive and appropriate returns.

Speaker 2

Going forward, our marketing investment in the Sotia Casino business will depend on our ability to intelligently forecast improvement in the ROI of the acquisition 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 highest cash flow. We have previously discussed that the consistent cash flow generated by PTC 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 Sotagliflozinobusiness. In this regard, last week we completed the acquisition of Super Nation, which operates 3 real money iGaming Sites primarily focused on online gambling in Western Europe. Super Nation has strong and loyal player base in markets such as Sweden and the UK, and we believe they are poised for growth.

Speaker 2

In fact, while Superannation generated unaudited revenue of approximately $24,000,000 In 2022, it is estimated that the European online gambling market will be rich will reach $48,000,000,000 this year. So we do see a lot of opportunity before us with this transaction. We are working to Quickly leveraged Double Down's product development expertise to enhance the differentiated online casino player experience Supernation offers on their duels, NICE spin and Voodoo Dreams sites. We also expect to take advantage of Double Down's excellence in player acquisition and engagement and monetization. Let me provide a little color on Super Nation's recent progress and the opportunities we seek to scale the business.

Speaker 2

For the 1st 9 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 twenty twenty four. Following the opposition, we see opportunities to enhance the marketing efforts to accelerate growth, especially in Super Nations, largest current market of the UK and Sweden. At the same time, we will be fine tuning Supernations' operational processes, including with compliance tools, which will help position the business to handle larger player base at day scale. Autovusat Double Down are excited to welcome the Super Nation team to the company.

Speaker 2

And I'm Personally looking forward to working closely with Joakim Stockman and Henrik Anderson, the Co Chief Executive Officers of Super Nation and their entire team to help bring the business to the next level. The iGaming factory 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 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 Siegrist to walk you through our financials before providing my closing remarks.

Speaker 3

Joe? Thank you, IK, and good afternoon, everyone. Our revenues for the Q3 of 2023 were $73,000,000 compared to 78 $800,000 last year. As I. K.

Speaker 3

Mentioned, Q3 revenue was down 3% sequentially from the Q2 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 Q4 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 Q3, 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. Pair conversion ratio, which is the percentage of players who pay Double Down was up 70 basis points to 5.9 percent in Q3 2023 compared to 5.2% in Q3 of 2022. Average monthly revenue per payer increased 9% from $2.25 in Q3 of 2022 to $2.45 in Q3 of 2023.

Speaker 3

On a quarterly sequential basis, total operating expenses decreased sequentially from $47,700,000 in the Q2 of 2023 to $43,300,000 in the Q3 of 2023. The decrease was primarily due to lower cost of revenue and lower sales and marketing expenses. Sales and marketing expenses for the Q3 of 2023 were $10,600,000 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.

Speaker 3

Net income for the Q3 of 2023 was $26,900,000 or $10.87 per diluted share and $0.54 per ADS, compared to a net loss of $24,000,000

Operator

or a loss of

Speaker 3

$9.69 per diluted share and $0.48 per ADS in the Q3 of 2022. Note that Q3 2022 results were impacted by a non cash accrual of $70,100,000 related to legal proceedings for the pension class action. As a reminder, settlement of events and matter was finalized including all settlement payments in June of this year. Adjusted EBITDA for the Q3 of 2023 was $29,700,000 compared to $25,000,000 for the prior year quarter. Adjusted EBITDA margin was 40.7 percent for Q3 2023, representing an improvement from 31.7% in Q3 202236.7% in Q2 2023.

Speaker 3

Through the 1st 9 months of the year, we have generated adjusted EBITDA of $82,800,000 up 8% compared to the same period in 2022. And the adjusted EBITDA margin for the 1st 9 months of this year is 36.7%, up 5 30 basis points compared to the same period last year. Net cash flows from operations were $28,700,000 for the Q3 of 2023 compared to $22,200,000 in the prior year period, primarily reflecting higher operating income. And finally, turning to our balance sheet. As of September 30, 2023, we had $271,200,000 in cash, cash equivalents and short term investments.

Speaker 3

Our total debt as of September 30 was $37,200,000 After the payment of $36,500,000 in cash to acquire Super Nation at the end of the month of October and excluding the debt, Our net cash position is approximately $200,000,000 or $4 per ADS. This completes my financial summary. Now, I'll turn the call over to Daike for closing remarks. Thank you, Joe.

Speaker 2

Our core social casino platforms continues to generate attractive adjusted EBITDA margins and strong cash flow. And with the recent acquisition of Super Nation, 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 Sushi 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 appreciation of Super Nation now complete, we are moving quickly to integrate the business to bring our combined on the executing growth opportunity we see. As Joe highlighted, we have a very strong accommodate cash positions and continue to generate consistent high levels of free cash flow.

Speaker 2

This provides us with the foundation and flexibility to evaluate other M and A opportunities that would leverage our existing strengths in game development, engineering, marketing and business intelligence, allowing Double Down to further grow our top and bottom lines and create new value for our shareholders. We are now happy to take your questions. Operator?

Operator

Thank you. At this time, we will conduct a question and answer session. And our first question comes from Aaron Lee from Macquarie.

Speaker 4

Hey guys, thanks for taking my question. I wanted to start with Super Nation. First, congratulations on closing the deal. And second, I think you said Super Nation has been running at EBITDA breakeven. Can you help us think about the EBITDA contribution you expect for 2024 and any color on the synergy opportunity?

Speaker 3

Sure. Thanks, Aaron. Appreciate that. Relative to 2024, the main focus is for the business is to help them scale. We think they have really strong product and certainly with especially their Duals brand, strong brand and feature capability.

Speaker 3

And we really want to help them light the fire to gain more players. To that end, we will be assisting them in Investing more in marketing both on the dollar side and also with the assistance of our marketing acumen and capability that we have Created over the last 10 plus years with our social casino business. To that end, we do see them in 2024 becoming EBITDA positive, but I think that would be more towards the back half of the year. And That is kind of the focus of how we're looking at the business at least over the next 15 months or so.

Speaker 4

Understood. That's great. And then now that Super Nation is in the fold, I guess how are you thinking about the allocation of your development and marketing resources and time and effort? Is it roughly split between Super Nation and The legacy Social Casino portfolio or does it kind of lean one way over the other?

Speaker 3

Well, I mean, if you look at Even after the acquisition closes, I mean, Supernations business is still less than 10% the size of our social casino business. So from an allocation standpoint, the main business is our core business simply from a volume standpoint. That being said, we do see, as I mentioned previously, growth opportunities that are significant with A, the small market share they have now and B, the ramp that we see analysts suggests as far as how large the opportunity is in iGaming in general. So we definitely will be leaning into them relative to especially marketing as I said before. But there's no doubt that from just a sheer volume standpoint, The Social Casino business is still the largest by far part of our company.

Speaker 4

Okay, got it. Thank you very much. I'll hand it off.

Operator

Thank you. Please standby for our next question. Our next question comes from Greg Gibas from Northland Securities. Yes, Katy. Thanks

Speaker 5

for taking the questions. If I could follow-up on Super Nation, I thought you mentioned positive performance. I don't know if it was the most recent period, but just curious how they performed maybe year to date relative to Their 2022 revenue of $24,000,000

Speaker 3

Yes. I made a comment, Greg, that from a 9 month Perspective in 2023 versus 2022, their revenue was up about 5%. They are still at least for the first time 9 months and throughout the 2023 year, we'll be operating in the same markets that they were operating in and have been operating in, in 2022 with the largest being by far in the UK and in Sweden. They've been making good progress in those markets. And as I mentioned to the answer to Aaron's question, As we go into 2024, the scale we believe is going to come from assistance that they need and we will be giving them relative to Acquiring new players in their current markets with of course Estonia being a little bit of a frosting on the cake as they now have an additional market they could add to the business.

Speaker 5

Perfect. Yes, thanks for clarifying. And if I could follow-up there too as well, could you maybe speak to some of the levers or the strategies that you're aiming to use to improve their operations? I mean, I guess if you could just maybe readdress the synergies that would be helpful.

Speaker 3

Yes. No, it's good. I mean, I. K. Summarized at the end of his comments, I think well, which is game creation, which is development and assistance relative to Slot games, I mean, we have slot games that we are working on now to convert to the iGaming model that they'll be using, but also really technology that is the under as well as that is the underpinning of their games.

Speaker 3

And I think we've used in the past example of they don't have native mobile apps yet. So when you log on to any either Well, any of the 3 sites that they have on your phone, you're going through Safari, if it's an iPhone and playing essentially a website. And we think that it will be very helpful to help them develop a native app, for instance, for iPhone and for Android as well. So that's one area. The second is around marketing, which includes The primarily the acquisition of new players, but also retention, which is an Extremely important part of the Double Down business and how we believe we can assist them in marketing creative and different Strategies as far as the various partners that we use that we can bring to bear for them relative to Digital ads to again acquire, but as well retain players.

Speaker 3

And then the entire, Let's call it live ops category. So everything that starts with business intelligence and analyzing the player base And then taking the appropriate action relative to sales and offers and even how that feeds into product development relative to new meta features, etcetera. Those are all things that we're working very closely with them from the very start of the close of this acquisition.

Speaker 5

Great. Extremely helpful. I guess last one, regarding the pullback in sales and marketing spend, seems to have really driven the improvement in adjusted EBITDA. Just wondering if I could get your thoughts on that decision maybe retroactively or like after the fact. Did it from kind of your ROI expectations that you had regarding the decision to pull it back?

Speaker 3

Well, Did it confirm I mean, the reality is that the if I can use the word tuning of our marketing spend is it's almost like a real time process. So we don't go in necessarily saying it's going to be at this level or that level. We go in saying we need to achieve a certain ROAS return on ad spend or ROI. And then we Essentially in real time based on what we see from the results from 3 day and 7 day returns on various campaigns we run, various partners that are engaged in those campaigns, etcetera. So as IK highlighted in his comments, the focus is and I think we've been very consistent, we talked about that is on Getting the return, not on spending X or Y or Z amount of money, because if you get the return, then we're happy to spend the money, but if we're not, I don't know how to

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Earnings Conference Call
DoubleDown Interactive Q3 2023
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