DoubleDown Interactive Co., Ltd. Q4 FY2021 Earnings Call

Good afternoon and welcome to DoubleDown's Interactive Earnings Conference Call for the Fourth Quarter and Full-Year 2021 Financial Results ended December 31, 2021. My name is [indiscernible], and I will be your operator this afternoon. Before this call, DoubleDown issued its financial results for the fourth quarter and full-year 2021 in a press release, a copy of which has been furnished in a report 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 a link to the Investor Relations section at the top of the homepage. Joining us on today's call are DoubleDown's CEO, Mr. In Keuk Kim; and CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. Before we begin, Mr. Grampp, the company's outside Investor Relations Adviser, will make a brief introductory statement. Mr. Grampp?

Thank you. 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. Forward-looking statements include and are not limited to those regarding our 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 we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to DoubleDown's annual report on Form 20-F 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 otherwise, except as required by law. During the call, management will discuss non-GAAP measures, which are believed 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 measures 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 available in the investor relations section of DoubleDown’s website. Now, I would like to turn the call over to DoubleDown’s CEO, Mr. In Keuk Kim.

Thank you, Jeff. Good afternoon everyone. Thank you for joining us on the earning call for our Q4 and full-year 2021 results. In the first quarter of 2021, we continued to execute on our strategy to both leverage our leadership in the social casino game through our flagship DoubleDown Casino and expand through the launch of gaming apps adjacent to social casino. Q4 revenue was down slightly from the Q3 2021 results, consistent with our understanding of the performance of the overall social casino gaming industry. To maximize the ongoing opportunity in social casino games, we plan to continue to launch exciting new slot games within DoubleDown Casino every one to two weeks, as well as to integrate new meta features focused on further improving our industry-leading monetization metrics. We finished a successful 2021 by growing revenue to a record of over $363 million, which represents 33% growth compared to 2019 results. Adjusted EBITDA at approximately $120 million remained relatively stable compared to 2020 and represents growth of 18% compared to our 2019 results. I highlight 2019 since 2020 represents a difficult comparable period for this year, given the worldwide stay-at-home measures that significantly benefited our business, especially at the onset of the COVID-19 pandemic. The fact that our 2021 results were materially better than our 2019 results demonstrates the value of our platform and the importance of ongoing player engagement with our games. Throughout 2021 and inclusive of the first order, we continued our run of cash positive orders with $20.4 million in operating cash flow for Q4 and $96.1 million for the full year. As a result, we ended the first quarter with a cash balance of $242.1 million, giving us a strong financial position. Importantly, we believe our business model will continue to generate positive free cash flow each quarter. Now I will hand it over to our CFO, Joseph Sigrist to walk you through our financials before providing my closing remarks. Joe?

Thank you, IK, and good afternoon, everyone. Our revenues for the fourth quarter of 2021 decreased 5% to $86.3 million from the prior year period. Q4 2020 benefited from the widespread stay-at-home COVID prevention initiatives in place at that time, which have significantly abated since then. For the all year of 2021, revenue increased 1.4% to a record $363.2 million. We continue to be encouraged with key monetization metrics that improved from the comparable quarter last year and for the full-year 2021 versus the full-year 2020. Specifically, average revenue per daily active user or ARPDAU increased from $0.83 in Q4 2020 to $0.96 in Q4 2021, and ARPDAU for the full-year 2021 increased to $0.97 compared to $0.83 for the full-year 2020. Secondly, average monthly revenue per payer increased from $205 in Q4 2020 to $216 in Q4 2021, and average monthly revenue per payer for the full-year 2021 increased to $218, compared to $191 for the full-year 2020. Lastly, payer conversion, which is the percentage of players who pay DoubleDown, was unchanged at 5.5% in 2021, compared to the prior year period. For the full-year 2021, payer conversion increased to 5.7% from 5.3% in 2020. In addition, the initial engagement of players from Undead World: Hero Survival, our first non-social casino gaming app launched at the end of September 2021, positively impacted our sequential quarterly player engagement metrics as Q4 total company monthly active users, or MAU, increased compared to Q3 2021. Total operating expenses for the fourth quarter of 2021 decreased 8.8% to $62.7 million from the prior year period. The decrease was primarily due to a combination of lower cost of revenues, lower G&A and lower depreciation and amortization expense. For the full-year 2021, total operating expenses decreased 1.9% to $264.5 million from the prior year period. The decrease was primarily due to lower depreciation and amortization expenses from the prior year. Of note, sales and marketing expenses in Q4 2021 were $21.9 million, representing a 25% increase compared to the fourth quarter of 2020. This increase was primarily due to the activity to acquire initial new players for Undead World: Hero Survival. Going forward, we expect to continue to incur advertising expenses both to acquire and retain players for DoubleDown Casino and for the ramp-up of our new app initiative. It is also worth noting that depreciation and amortization expenses in Q4 2021 were $2.2 million compared to $7.6 million in Q4 2020 and were $17.9 million for the full year 2021, compared to $31.6 million for the full-year 2020. The decreases were due to the completed amortization of certain identifiable intangible assets for which we used purchase price allocation at the time of the 2017 DoubleDown Interactive acquisition. Net income for the fourth quarter of 2021 increased to $17.5 million or $7.08 per diluted share, compared to $15.5 million or $6.99 per diluted share in the fourth quarter of 2020. For the full-year of 2021, net income increased to $78.2 million or $33.96 per diluted share, compared to net income of $53.6 million or $26.20 per diluted share in the full-year of 2020. Adjusted EBITDA for the fourth quarter of 2021 was $25.8 million, compared to $29.9 million in the prior year quarter. Adjusted EBITDA margin of 29.9% represents a reduction of approximately 296 basis points compared to Q4 2020. The quarterly year-over-year decline in adjusted EBITDA and adjusted EBITDA margin is primarily attributable to lower revenue and higher sales and marketing costs as I previously discussed. For the full-year of 2021, adjusted EBITDA remained relatively stable compared to 2020 at approximately $120 million. 2021 full-year adjusted EBITDA margin was 33.1%, slightly below last year's result of 33.6%. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures, which we believe are useful in evaluating our operating performance. A full reconciliation of these measures to the most directly comparable GAAP measure is available in the earnings release. Cash flow from operations for the fourth quarter of 2021 was $20.4 million, compared to $36.1 million in the prior year period. We did not incur any material capital expenditures during the quarter. For the full-year, cash flow from operations was $96.1 million, compared to cash flow from operations of $99.9 million during the 12 months of 2020. And finally, turning to our balance sheet, at the end of the fourth quarter, we had $242.1 million of cash and cash equivalents, compared to $223.1 million at the end of Q3 2021. The improvement in our net cash position was due to the aforementioned net cash flow from operations as we continue to remain in a state of positive cash flow generation. That completes my financial summary. Now, I will turn the call back over to IK for closing remarks.

Thank you, Joe. As some of you know, DoubleDown has designed a growth strategy. Let me briefly comment on each element. Firstly, we will continue to maximize our leadership position in the social casino gaming industry. This is primarily through our flagship gaming app, DoubleDown Casino, leveraging our passionate current base of players while acquiring new players for the frequent and consistent launch of new slot games and the introduction of exciting new meta features. Secondly, we plan to continue to expand into the adjacent mobile gaming segment, starting with last quarter's launch of Undead World: Hero Survival. We were encouraged by the player engagement metrics immediately after that worldwide launch in late September. We expect to continue to optimize our monetization strategy and the future set of the game as we work toward more material monetization while building a critical mass of players for long-term value creation. In parallel, we are preparing for the release of our next non-social casino app, which we currently expect will be available to players in the summer of 2022. We believe that we are in an excellent position to capitalize on the last element of our growth strategy, which is M&A, due to our strong balance sheet following our late September IPO and our track record of successful post-merger acquisitions. We continue to evaluate opportunities to accelerate our organic growth potential and have been encouraged by the recent broader M&A activities within the gaming industry. We are now happy to take your questions.

Thank you, sir. Now, our first question will come from David Bain with B. Riley. Your line is open.

Great. Thanks. IK and Joe, once again nice cash flow conversion. I guess my first question would be if you could bifurcate the core DoubleDown Casino MAUs and DAUs from Undead World for the quarter. Do you have any metrics we can discuss?

Yeah, Dave, thanks. As I said in my comments, the total company MAUs did increase, and obviously, as you've been following us and the industry, that's for the first time in a while. I think while I can't break it out separately, certainly MAUs and DAUs are still falling somewhat in the social casino business and are being augmented or offset, if you will, by what we've seen with Undead World, which if you think back to what we described earlier and during the IPO process, is exactly part of the strategy or at least the hopeful outcome of our strategy to expand through adjacent areas, which is to grow our overall player base by moving into social casino.

Right. Okay. Okay. And we've been hearing a lot about the Metaverse or Blockchain in mobile games, are these opportunities that DDI is working on? And what could that look like from just a timing or just overall perspective?

Yes. Thanks, Dave. Yes, there's no doubt that the Metaverse, Blockchain, and NFT, all those terms have been used a lot in gaming more recently. And certainly, we think it's a very exciting potential for the future of gaming, and we're very interested in leveraging, especially in Korea, where the gaming industry is definitely at the forefront of some of the Metaverse NFT activity in gaming. Frankly, there that we leverage the expertise available in Korea. So, with that, maybe I'll ask IK to talk a little bit about what our strategy is at this point.

Yes. Thank you, Joe, and thanks, David. We believe it will be one of our future opportunities. Technically, I believe our internal processes are ready to adopt this, and now we are thinking about how to leverage it with our own strategies, utilizing outside opportunities like M&A and development.

Yeah. I guess an additional comment I'll make, and Dave, as you know, one of the things that we are very cautious about is creating a thing of value in the social casino context relative to gambling strategies, etcetera. So, we also are looking to investigate and look at the whole area through that lens as well.

Understood. Okay. And then if I can go one over, we noticed that DoubleU, the parent company, offered its first-ever dividend since being public and understanding growth is still the priority for DDI. Is the company open to dividends down the road? If you don't find a suitable or large enough target for diversification at the right price, and then just on that end, just any sort of commentary on the M&A market, kind of what you're looking at, what your discussions are sort of bringing in terms of topics or ideas or anything around that would be helpful.

Sure. Well, at least regarding the dividend side, you're right, DoubleU has actually paid a dividend annually ever since it went public several years ago, which is my understanding fairly normal for companies that are listed in Korea. Relative to DoubleDown, certainly, that’s ultimately one option for us given our cash balance. But as we've said, especially as we continue to look at M&A opportunities, we know that having a strong balance sheet, if you will, at least for a while as we pursue some of these more interesting M&A opportunities is important for us. And so at least for now, that's really been our focus of our balance sheet activities. We'll look at other options down the road. Relative to M&A progress, obviously, I can't speak to anything very specific, but I will say that we are fully engaged in looking at opportunities, and there's been quite a bit of M&A activity in the broader mobile gaming market. On the other hand, I think to be honest, the valuation expectations have started to become a little more realistic. And so we are interested to see how these will play out.

Okay. Great. Thanks IK. Thanks Joe.

Thanks, Dave.

Our next question comes from the line of Greg Gibas with Northland Securities. Please proceed.

Hi, good afternoon. IK and Joe. Thanks for taking the questions. I was wondering, you've had a couple of quarters now with year-over-year headwinds related to the stay-at-home orders. Any thoughts on when you expect to get back to year-over-year revenue growth? And if we think about the resurgence of COVID cases in January here, you know, would that positively impact playtime in Q1?

Yes, there's no question that the comparables we mentioned earlier on the call to 2020 have been somewhat difficult. That being said, the comparison to 2019 still shows a significant bump in revenue, and we are continuing to look to grow from what is a much higher base, kind of steady-state base of the business than we were two years or less than two years ago. If I compare us to what I'm hearing and what we're reading about the social casino industry and how it performed at the end of 2021, as a whole, I think we're all as an industry continuing to do things to create that growth given the bump that we all had over the last 18 months to 24 months. Certainly, the things that IK mentioned around game improvements within DoubleDown Casino, meta features, marketing activities, and a continued focus on improving our advertising partnerships positively to acquire good paying new users, all that is toward growth within social casino. Moreover, the expansion into social casino adjacencies is extremely important for us. We're in very early days, obviously, with just the first few months of the Undead World launch, and we have other games in development, but that will augment whatever growth that we will ultimately see in Social Casino.

Great, very helpful, Joe. And I know you already spoke on kind of your M&A and dividend thoughts, so no need to repeat yourself. But wanted to follow-up in terms of the balance sheet being strengthened, cash generation, and conversion strong this quarter, just wondering if you can maybe from a high level discuss upcoming capital deployment or uses in terms of your priorities?

Yes. Well, again, I think M&A for us is the top priority. Actually, let me step back and say, the top priority is maximizing shareholder value. And that is first and foremost what we're about. We see our strong balance sheet as a tool to be used to maximize shareholder value. For us, the main focus or the main priority to utilize that tool is towards growth. That growth, obviously, is continuing to do the things that we've been talking about from an organic standpoint, but also the potential through M&A for inorganic growth, as we optimize the use of our cash balance. And so that's, I think, the best way to answer your question there, Greg.

Yes, appreciate that. That's helpful. Last one for me just related to Undead World. Now that we have a handful of months since its launch, do you – just wondering if you could talk, I guess a little bit more about its performance, whether it's kind of lived up to your early expectations? And then do you have a sense of maybe what that game can contribute in 2022? Or any sense of run rate, or really any metrics you'd be willing to share?

Yes. So Undead World, we've had three, four months now in worldwide launch. And I'd say we're very encouraged by player engagement, which means the reaction to how players are engaging with the game. And certainly, from a metric standpoint, how players are retaining, especially new players, and the numbers are especially strong. Where we continue to be focused is monetization. So, taking that excitement, interest, if you will, in the game, and converting that into not only the first-time payment activity but ongoing payment. Thus, where we really need to focus based on what we've seen so far is payer retention. One of the important things that we're doing now is continued development in the game from an economy standpoint, from a feature standpoint, so that we can improve the monetization metrics, and importantly, the payer retention metrics. Over the next few months, you're going to see more features released of that sort and improvements that we expect to aid us in the monetization of the game.

Got it. Yeah. Thanks for the color, and thanks for taking the questions.

Thanks, Greg.

Our next question comes from the line of Aaron Lee with Macquarie. Your line is now open. Please proceed.

Hey, good afternoon. Thanks for taking my question. I appreciate all your comments on marketing and M&A. So, just a quick one for me. Just more broadly speaking, when you think about your growth in 2022 and the building blocks for growth, where do you see the biggest opportunities? Do you expect most of your growth to come from converting more users or growing ARPDAU, or how do you think about that?

Yes. Well, if you look at – I’ll answer in two pieces, right? Obviously, on the social casino side, we are continuing to see improvements in revenue per payer. So the payers that we have continue to be very passionately engaged with DoubleDown Casino specifically. Based on the activities that we are giving them like new games, new slot games, etcetera, we're seeing their propensity to pay continue to increase, and we certainly see that being a big contributor to 2022 growth. We also are adding new players every day, right? So, new user acquisition is extremely important. It's the biggest single area of discretionary spend in the company. We continue to, we think, do a very good job managing our advertising partners, optimizing the investment associated with that to get new players into the game, and to continue to retain them as payers. So for us, that's really the focus for the social casino side of the business. Obviously, on the new app side, it's the ability for us to grow our player base first and foremost as we add new players to like Undead World and ultimately Spinning In Space, and then to get those players to monetize, clearly that's all incremental revenue to us, since we don't have a base of any non-social casino revenue prior to the fourth quarter of 2021. So, that's obviously another important element of our growth strategy in 2022.

Great, that's helpful. Just a follow-up – quick follow-up for me. Any updates on how your user acquisition costs have trended post the IDFA change? I think last quarter, you talked about CPI is trending higher in the summer before pulling back in the fall around September, October. So, I'm curious, how would they trend since then and into early 2022? Thanks.

Yeah. So, as I think we mentioned – as you said last time, when IDFA initially was deployed, we certainly saw a couple of phenomena. First of all, there was a big shift towards Android and in the demand, if you will. As a result, the Android CPIs increased significantly. That really occurred through the summer into the early fall. Starting in Q4, we saw Android CPIs actually begin to fall. Fast forward to today, or to the start of Q1, we see Android CPIs essentially back to where they were a year ago. Relative to iOS, it's really been a volatile environment post-IDFA. But if you again, fast forward to today, we generally just see the normal volatility that we've experienced in the past around seasonality. So, December spikes, January fall-off, just essentially back to the kind of normal fluctuation.

Okay, got it. Awesome. That's really helpful. Thank you very much.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Sigrist.

Okay, operator, thank you so much for monitoring this call today. And thanks – a big thank you to everyone who has joined us today for this call and your interest in DoubleDown. We will continue to keep you updated with further status as we continue to innovate and grow the business, and we hope you have a great rest of your day. Thank you.

Ladies and gentlemen, thank you for joining us today for DoubleDown’s earnings call. You may now disconnect.