DoubleDown Interactive Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Afternoon, and welcome to Double Down Interactive's Earnings Conference Call for the Q2 Ended June 20, 2023. My name is Sean, and I will be your operator this afternoon. Prior to this call, Double Down issued its financial results for the Q2 of 2023 in a press release, a copy of which has been furnished in a report on Form 6 ks 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 are Double Down's CEO, Mr.

Operator

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

Operator

Lant?

Speaker 1

Thank you, Sean. Before management begins For 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 33 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 Plans, mergers and acquisition strategy, strategic and financial objectives, expected performance and financial outlook. Forward looking statements are subject 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 filings for a more detailed discussion of the risks that could impact future operating results and financial condition.

Speaker 1

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 otherwise, except as required by law. During the call, management will discuss non GAAP measures, which are believed by management to be useful in guiding the company's operating performance. These measures should not be considered superior to in isolation or as a substitute 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 ks filed with the SEC prior to this call.

Speaker 1

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 now my pleasure To turn the call over to Double Down's CEO, In Kuo Kim. Please go ahead, sir.

Speaker 2

Thanks, Richard. Good afternoon, everyone. Thank you for joining us on our 2023 second quarter earnings call. Q2 revenue of $75,200,000 was down slightly on a quarterly sponsored basis from $77,600,000 in Q1 2023. This decline is not typical given the historical seasonality in our business.

Speaker 2

We continue to generate consistent profit and cash flow with adjusted EBITDA in the 2nd quarter rising on a quarterly sequential basis to $27,600,000 And cash flow from operations almost doubling year over year to $38,400,000 when the final payment for the Benson litigation is excluded. Our flagship Double Down Casino or DTC gaming app continues to be the driver of our solid financial results. DTC is very sticky with its Core paying players, which has established the foundation for our consistent financial results, including attractive adjusted EBITDA margin and cash flow from operations. As many of you know, DTC revenue is primarily driven by those who have been Players for several years. As we've described in the past, 92% of our 2022 revenue was generated by players higher in the years prior to 2022.

Speaker 2

It's clear from our results that we have scaled back on our marketing spend as we focused on generating attractive and appropriate return. Going forward, our marketing investment may increase In the social casino business, when we see improvement in the ROI of the execution of new players and in the retention of existing players. Given the consistency of the cash flow Dobzhong casino delivers, we believe we have significant flexibility to allocate Capital Tours establishing a presence in new gaming categories with highly addressable market opportunity. The new gaming categories that are of interest to us are ones that would be complementary to our core social casino operations, where we can leverage our game developers' expertise in game creation and our marketing platform to scale those businesses profitably. Our One example of our focus on expanding our addressable market is our pending acquisition of Super Nation, which operates 3 real money iGaming sites in Western Europe.

Speaker 2

We continue to make progress Towards gaining the required regulatory approvals to complete this transaction and now expect to Close the position by the end of the year. We believe the position of Super Nation will diversify our revenue sources as it will mark our entry into the high growth iGaming sector. We are excited to be moving closer to completing this transaction. And once we do, we will provide additional information for you on our plan to drive growth in this business and build from there. IGaming is just one game category adjacent to our core social casino business that we are evaluating for opportunity to leverage our expertise in player engagement and monetization with our game development expertise to drive growth.

Speaker 2

We continue to invest in our own app development initiatives outside of the social casino category to address A very large casual mobile game category, including 4 games in the action, casual casino, merchant adventure genre. Over the balance of the year, we expect to introduce new gaming apps outside of the social casino category and we'll support them in a capital efficient manner to deliver appropriate return. Now I will turn it over to our CFO, Joe Siegrist, to walk us through our financials before providing my closing remarks. Joe?

Speaker 3

Thank you, IK, and good afternoon, everyone. Our revenues for the Q2 of 2023 were $75,200,000 compared to $80,600,000 Q2 2022. As IK mentioned, Q2 revenue was down 3% sequentially from the Q1 of 2023, primarily reflecting the seasonality in the business. Several KPI metrics improved compared to the year ago period, including Average revenue per daily active user or ARPDAU increased to $1.05 in Q2 2023 from $0.95 in Q2 2022. Payer conversion ratio, which is the percentage of players who pay Double Down was up 80 basis points to 6.0% in Q2 2023 compared to 5.2% in Q2 20 22.

Speaker 3

Average monthly revenue per payer increased 4% from $2.26 in Q2 2022 to $2.35 in Q2 2023. On a quarterly sequential basis, Total operating expenses decreased from $52,200,000 in the Q1 of 2023 to $47,700,000 in the Q2 of 2023. The decrease was primarily due to lower cost of revenue and lower sales and marketing and depreciation expenses. Sales and marketing expenses for the Q2 of 2023 were $13,100,000 a decline of 27% compared to Q2 2022 and 18% lower on a quarterly sequential basis. We believe that our advertising efforts to acquire new and retain existing players, The primary cost in the sales and marketing category will continue to be in this Q2 range over the next several quarters.

Speaker 3

But as IK indicated, we will continue to evaluate such spend with a focus on delivering the best return of these investments, including with the launch of new gaming apps. It is also worth noting that depreciation and amortization expense has been consistently staying below $100,000 for the last four quarters, a significant decline from prior periods due to the completed amortization of certain identifiable intangible assets for which we used purchase price allocation at the time of the 2017 Double Down Interactive acquisition. Net income for the Q2 of 2023 was $24,400,000 or $9.83 per diluted share and $0.49 per ADS compared to a net loss of $34,100,000 or $13.75 per diluted share and $0.69 per ADS in the Q2 of 2022, which at the time included the impact of a non cash accrual of $71,500,000 related to legal proceedings for the Benson class action complaint. Adjusted EBITDA for the Q2 of 2023 was $27,600,000 compared to $25,000,000 for the prior year quarter. Accordingly, adjusted EBITDA margin rose to 36.7% for Q2 2023, representing an improvement from 31.0 percent in Q2 202232.8% in Q1, 2023.

Speaker 3

Net cash flows used for operations were $56,800,000 for the Q2 of 2023, which primarily reflects the payment of $95,300,000 towards the litigation settlement. This was our final payment for this matter and excluding this payment, net cash flows from operations was $38,400,000 almost double the net cash flows from operations in the prior year period. Finally, turning to our balance sheet. As of June 30, 2023, we had a total of $245,100,000 in cash and cash equivalents and short term investments. Our total debt as of the 30th June was $38,100,000 With regard to our current cash position, with the final payment for the Benson settlement now behind us and excluding cash For closing of our pending Super Nation acquisition and payment for our debt, our balance sheet currently reflects the total Uncommitted cash and cash equivalents and short term investment position of well over $150,000,000 or over $3 per ADS.

Speaker 3

This completes my financial summary now. I'll turn it over to Daike for closing remarks.

Speaker 2

Thank you, Joe. We believe the financial power of our social casino platform, including attractive adjusted EBITDA margins and strong cash flow positions us to continue investing in multiple areas of potential growth through both organic development and M and A. For our core social casino business, we are focused on driving further and consistent player entertainment value and engagement, which drives higher monetization. Our development team Continue to make enhancements to our flagship app, Douzoung Casino. This development focus includes additional slot game launches as well as As I highlighted earlier, We are making progress towards completing our acquisition of Super Nation following which we plan to work to ramp up The business is the high growth iGaming market.

Speaker 2

At the same time, we are continuing to evaluate other M and A opportunities that We'll leverage our existing strengths in game development, engineering, marketing and business intelligence to Enter new gaming categories in order to further grow our top and bottom line. As Joe highlighted, we have a very strong uncommitted cash position and have continued to generate consistent High level of free cash flow. We are confident to believe that this position Double Down to act on opportunity that will create new value for our shareholders. We are now happy to take your questions. Operator?

Operator

Thank you. We will now conduct the question and answer Please standby while we compile the Q and A roster. Our first question comes from Aaron Lee with Macquarie.

Speaker 4

Hi, good afternoon. Thanks for taking my question and congrats on the nice result. Wanted to touch on the Super Nation deal even though it hasn't closed yet. It has been almost 8 months since the announcement. So just curious whether there has been any updates or changes with regard to how you're thinking about your strategy around real money iGaming or your confidence in the size of the opportunity?

Speaker 3

Yes. Thanks, Aaron. Thanks for the question. I guess the short answer is no. We're still extremely excited about Igaming.

Speaker 3

The premise around the acquisition, the basis for the acquisition continue to hold and we just look forward to getting through the regulatory approval process. And as IK mentioned hope to have that done certainly by the end of this year.

Speaker 4

Understood. Thank you. And then just On capital returns, so you guys have been patient and disciplined with your growth investments.

Speaker 3

And I

Speaker 4

know you guys have said that you're still looking at other M and A opportunities. But as you guys continue to generate free cash flow, build up cash and just given the strength of your balance sheet, can you just update us on how you're thinking about any potential capital returns?

Speaker 3

Sure, Aaron. As we discussed, our primary objective And we believe the thing that will provide the greatest return to shareholders over time is growth. And that's why the focus is on growing the business through various investments that we are looking at relative to, As IK mentioned, new gaming areas and certainly also investing in our current business in the social casino business. And so again, that's our prime objective and that's where we have continued to focus and will We continue to focus for the foreseeable future.

Speaker 4

Got it. Appreciate the color. Thanks, Joe.

Operator

One moment for our next question. And our next question comes from David Bain with B. Riley.

Speaker 5

Great. Thank you. Congrats on the EBITDA and Free cash flow result as always. The first question I had related to the core social casino growth. Do you think we could see MAU growth quarter over quarter in this current quarter?

Speaker 5

And I mean player conversion and ARPDAU looks great. I mean you guys clearly know how to I look at, Sai played out tonight, margins were 30%, yours were 37%, but their growth was higher. It seemed like IK Indicated we may see more offense on sales and marketing. Is that a sign you're seeing some stability and opportunity in the core social casino market From a growth perspective or Dimas read that?

Speaker 3

Well, I can start and IK you can chime in if you want. I mean, certainly from A player engagement standpoint, and if you look at this industry over the last many quarters, As it's matured, the MAU DAU numbers for the industry as a whole and for most of the major players has contracted. And the focus of Double Down as well as I think of our major peers has been less on growing the number of players per se MAU, DAU and making sure that we're being efficient in how we acquire new and retain existing payers as it relates to the payer and monetization metrics. So, we are continuing to do what we can certainly do relative to a player acquisition, but both in the way we're using our marketing dollars And especially in our new features, and the things that we're doing for Double Down Casino, we're very focused on monetization. I'll give you an example.

Speaker 3

We rolled out very recently something called the super high limit room, where the We have the ability now for players to wager large, large numbers of chips per spin, even more than they could in the past. And those kinds of features that are very much focused not on your, let's call it, casual player, but certainly on your engaged playerpayer. And those are the kinds of objectives that we have relative to both again and how we're spending our marketing dollars, but especially as we invest in new enhancements to the product itself.

Speaker 5

Okay, great. So and just to be clear though then, we should continue to See just kind of stability and a continuation on a real focus on monetization relative to any kind of uptick And sales and marketing to promote growth as a percentage

Speaker 3

of revenue. Yes. And just to be clear also, I mean, I did say that relative to Our marketing spend over the next few quarters, I think I mentioned that we see the level of spend Or at least the next couple of quarters to be consistent, all else being equal to be consistent with where we were in Q2.

Speaker 5

Got it. Okay, great. And then Have you begun to look at your or look to your content portfolio and build a strategy with regard to game conversion, diverse Super Nation? I don't know if that's a relatively seamless technical transition to put it to RMG games from social casino. And then, if you could touch on your ability to kind of port what you've done in Social Casino in terms of sales and marketing promos, How is that going to look different than most B2C real money gaming companies out there?

Speaker 3

Yes. Well, starting with the content, It has taken quite a while to get through the regulatory process and we have folks champing at the bit to help Super Nation take our existing content. So yes, we're as ready as we can be recognizing the deal hasn't closed yet. And We're very excited and there's a number of folks in our slot development team who were very excited about bringing the content to Super Nation as soon as possible. Relative to the marketing, I think that's going to take a little bit more time To figure out, I mean, certainly the way players are acquired in iGaming is somewhat different than in Social Casino.

Speaker 3

And I think as we mentioned in the past, for instance, Super Nation, like a lot of iGaming companies, heavily use affiliates for player acquisition. And so there's I think a lot of leverage and certainly from a marketing Content and from just a general social media promotion perspective, there's a lot of overlap, But we're going to have to it's probably taking a little bit more time frankly on the marketing side than I'd say on the content side.

Speaker 5

Awesome. Thanks, Joe. Thanks, IK.

Operator

One moment for our next question. And our next question comes from Greg Gibas with Northland Securities.

Speaker 6

Hey, good afternoon, IK and Joe. Thanks for taking the questions. If I could just follow-up, I think you said sales and marketing was kind Trend near Q2 is like a baseline for the coming quarters. Wondering just because you don't guide, if you could touch on Other OpEx trends, G and A and then R and D? And then maybe Ross, like kind of seasonality to the top line that you would expect to see in Q3 and Q4?

Speaker 3

Yes, sure. So relative to the other OpEx lines, I We don't see much change going forward in Q2 from Q2, excuse me. If you look at our EBITDA result, It really was the highest EBITDA margin that we've had in actually several years. And that's thanks to the fact that Obviously, we spent less in sales and marketing, but for instance, we also spent less than we have done in the last Few quarters on G and A. Now part of that is because thank goodness we're not spending a lot of money on legal fees for the Benson case any longer.

Speaker 3

And so I think that G and A will continue to be at the Q2 level for the next few quarters. And then R and D at around $5,000,000 a quarter has been pretty constant and I see that being the same going forward. I'm sorry, Greg, there was a second part of your question, I think. I

Speaker 6

guess, this kind of seasonality expectations. Yes. Obviously, it kind of depends on how the whole peer group trends, right, social casino, but Just general, maybe if you expect anything different in the second half relative to typical?

Speaker 3

Well, I mean Q2 It's generally a bit of a again, if you just look historically, it's a bit Lower than Q1, primarily because Q1, there's a lot of General engagement with players in January after the Christmas season, people get new devices, people get excited about using them and playing. There are some great holidays where people love to play social casino, like on St. Patrick's Day, for instance, and Valentine's Day even, that you don't have in Q2. And then of course, Q4 is generally like Q1 quite strong, Again, holiday driven and people having less time outside and more time inside. So those are kind of the main trends that we see Generally, we think those will hold.

Speaker 6

Okay. It makes sense. Apologies if I missed Do you have an updated timing on the Super Nation acquisition in closing? Like is that going to be a late Q3 event or do you think it kind of pushes into Q4? And then just How is that business trended maybe since you first announced that acquisition?

Speaker 3

Yes. So listen, I'd love to think We could close it in Q3. I mean the regulators who are going through hopefully the final Phases of their approvals are in Europe and August is a tough time to get much done in Europe with the holiday season, etcetera. Generally believe that it's more likely a Q4 event to close the deal. And generally, I'd say, we're as I mentioned earlier, excited about the business.

Speaker 3

We're excited about what Super Nation has developed and they're continuing to leverage what they have done and are doing now Continue that forward. So, I just we all just can't wait to get it closed.

Speaker 6

Great. Thank you.

Operator

One moment for our next question. And our next question comes from Bryant Riley with B. Riley.

Speaker 7

Hey, guys. I'm representing the investment side, just a while. So can So W went public in 15%, I think, and it's down 30%. You're cut in half. Stick put a proposal in front of your company that was voted down.

Speaker 7

I've told you that I think this is probably the worst Experience I've had in investment in my 27 years of owning B. Riley. Like what's your response to that? Like why do you think Your stock trades, I mean, obviously, you're going to make acquisitions, nobody knows what you're going to make and it's very much more like a fiefdom. But I just think like what's your reaction to that?

Speaker 3

Well, Brian, thanks for being on the call. As it relates to the shareholder vote, obviously, W owns majority of the shares of the company and I can't we can't speak for them or how or why they vote the way they vote. So I mean, I just it's not possible to comment on what WU does. Obviously, we from a share price perspective, We think the share price is undervalued. I mean, as I mentioned in my comments earlier, we have well over $3 per share per ADS in the bank essentially.

Speaker 3

And the stock is trading around $9 So a third of our value is in cash. And we believe that and that absolutely are committed to growing the business and showing that with growth that in fact the stock is considerably undervalued?

Speaker 7

Well, I guess I would say this, as I run a public company, my shareholders are really important to me. I talk to them all the time. I consider them partners. This is not a partnership. It's a you've made a decision, not you, Your owners made a decision to act independently, I think, from what shareholders would like, namely At least a dollar dividend or something that while you go out and make your acquisitions or while you do things, at least we get paid Part of the cash flow that you generate for our business.

Speaker 7

And that decision hasn't been made. It's been met with resistance. And I actually, I honestly think Like the worst I've seen. So I know you guys are managing the business. I commend how you run it.

Speaker 7

You run it tight. You run it for cash flows. And But it's just I don't think you're ever going to get incremental shareholders based on the Relationship you have with current shareholders, being the underwriter who actually tender because I was so kind of Embarrassed by the communication that the company had with their shareholders. So I just think I really think that I maybe I'm speaking to you or maybe I'm speaking to you on or I think Shame, and I think it could be fixed really quickly by treating your shareholders like partners. I don't have anything else, operator.

Operator

I'm showing no further questions at this time. I'd now like to turn the conference back to Mr. Seegress for closing remarks.

Speaker 3

Great. Thanks, John, and thanks everyone for joining the call and we look forward to continuing to update you with Progress towards the growth of the company and look forward to talking to you all again soon. Thanks.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.

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