DoubleDown Interactive Co., Ltd. Q4 FY2023 Earnings Call

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, 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. 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. Please go ahead, sir.

Thank you, Richard. Good afternoon, everyone. Thank you for joining us on our 2023 fourth quarter earnings call. Total Q4 revenue was $83.1 million, with $78.8 million generated by our social casino, free-to-play games and $4.3 million coming from the operations of SuprNation in the months 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 sequentially and year-over-year to $36.2 million, while cash flow from operations was $29.7 million. Our flagship social casino game, DoubleDown Casino or DDC, continues to be the driver of our solid results. In full year 2023, adjusted EBITDA reached nearly $119 million and cash flow from operations for the 2023 full year exceeded $116 million, excluding the final Benson class action settlement payment earlier in the year. We continue to generate year-over-year increases in some of our most important KPIs, including average monthly revenue per payer and payer conversion rate, which indicates our great ability to offer compelling entertainment value to our core paying players. These results largely reflect the propensity of DDC players to make in-game purchases and the continued increase in the amount spent by payers. In addition, we released new gaming meta features in the first quarter focused on increasing player retention and engagement, including the lucky and swing power features, which we believe aid overall monetization. As we've discussed in the past, DDC revenue largely reflects activity by our long-term base of players who have enjoyed our casino site games 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 acquired in previous years. Last October, we allocated a portion of our strong cash flow from operations to acquire SuprNation, a Western European-focused i-Gaming operator, whose two primary markets are Sweden and the U.K. for a total cash consideration of approximately $36.5 million. This acquisition is the first step in our goal to diversify our sources of revenue into new gaming categories that have highly addressable market opportunities and that are complementary to our core social casino business. SuprNation is a differentiated i-Gaming operator whose primary focus is on engaging the entertainment-focused slot player rather than the more volatile player. Its Duelz brand offers compelling features for these players such as peer-to-peer competition and elimination tournaments as players play slot games alongside one another. SuprNation exited 2023 with an unaudited revenue run rate of approximately $6.5 million per quarter. Going forward, we believe that as a parallel DoubleDown, we can help this business scale its top line. DoubleDown's ability to support and grow SuprNation's business includes leveraging its expertise in game development, marketing and player engagement and monetization to execute on the exciting growth opportunities in i-Gaming. We are pleased to have this acquisition complete and to be working closely with the SuprNation leadership team to help bring the business to the next level. We see the i-Gaming sector as just one of the complementary gaming categories where 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, Cash Me Out Bingo, which was developed by one of our studios in Korea, allows players to compete against each other in skill-based bingo competitions with the opportunity to win a portion of the app-specific currency and real cash that is backed by each of the participating players. We began the launch of Cash Me Out Bingo during the latter part of 2023, and we are now ramping marketing investments in the current quarter to acquire players and scale playing activity. Now I will turn it over to our CFO, Joe 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 2023 were $83.1 million and were comprised of $78.8 million in revenues from our social casino free-to-play games and $4.3 million of revenues from SuprNation for the 61 days when we owned the company following the October 31 acquisition close. This compares to revenues of $76.2 million last year. As IK mentioned, Q4 social casino free-to-play revenue, excluding SuprNation, 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 ARPDAU, which increased to $1.24 in Q4 2023 from $0.98 in Q4 2022. The payer 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 $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 SuprNation. Even with these new operating costs, operating expenses for Q4 2023 declined from $51.5 million in Q4 last year, excluding the non-cash 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 has 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 SuprNation 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 noncash 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 the 2023 full year period was 38.5%, an improvement from the 2022 full year of 31.6%. Net cash flows from operations 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 IK for closing remarks.

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 position, and the launch of our 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 the goal of driving more engagement and even greater monetization. We are also focused on generating more of our social casino purchases through direct-to-consumer methods, thereby improving margins in the largest part of our company's business. With SuprNation, our goal is to grow the business from its current revenue level with a combination of increased marketing investments and by leveraging the skills and expertise that DoubleDown brings to this combination. 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. We are now happy to take your questions. Operator?

Good afternoon. Thank you for addressing my question. Now that you have several months of experience with SuprNation, could you provide us with some guidance on the growth potential for 2024? Also, are there any significant milestones we should watch for as you expand that business?

Yes. Thank you, Aaron. I appreciate it. As we discussed, our primary focus in the near term is on marketing investment, which supports the existing strategies for acquiring new players who provide a high return on investment. We are also enhancing our efforts with additional methods, such as performance marketing, to find new players. Regarding growth, we aim to expand our business significantly in our established strong markets, specifically Sweden and the U.K., before venturing into new markets. At this time, we are not providing specific guidance on our short-term business potential. However, it's worth noting that our market share in both Sweden and the U.K. is quite low, sitting in the single digits, which indicates there is considerable opportunity available in these two countries in the near term.

Got you. Okay. And then a quick follow-up. I wanted to dig into your fourth quarter average multi 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?

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 IK can talk a little bit about some of our newer monetization and retention features, the meta features that we have especially started to implement in Q4. We'll do more this quarter. So IK, do you want to talk a little bit about our focus in adding new meta features and how important that is to get payers to want to pay increasing amounts with us?

Yes. Hi, Aaron. I can explain about our new meta features like Power. Those meta features are getting more diverse as users play more, which could raise slot-playing user retention. For example, about the feature itself, you are awarded on slot wins or more or as we heard from its dedicated, specifically single and daily challenges, those all kind of meta features could increase user engagement and retention. So it helps users to play more.

Okay, great. Got it. Thank you very much. Pre-quarter.

Hey, IK and Joe. Thanks for taking the questions, congrats on the nice results. Wanted to just maybe dive in a little bit more like maybe what you attribute that, I think, 8% sequential growth in the core casino or social casino and then 3% year-over-year. What do 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, Greg? You were a little light on the volume there for me, sorry.

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

Yes. So let me start with that one, and maybe I can both talk about what we've done better and what we see as it relates to the core social casino business to drive revenue growth. Relative to the cost of revenue, as we have done over the course of the year, we in Q4 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 much based on our evaluation of 3,721-day payback for newly acquired cohorts. And that has led us to continue to curtail marketing to acquire new players. I mean that was the primary driver of the reduction in cost of revenue for this quarter. Relative to the top line, I think the product features have really helped to create excitement for players, again, IK said, to return to play, to want to be playing more, and also, it gives us marketing opportunities. So we can use those features in our content in the ads we go out through our various partners in order to acquire new players to try to reactivate lapsed players or even lapsed payers who may still be playing but haven't paid for a while. Those new features are really exciting things for us to use to get players to reengage or to engage more.

Great. Very helpful. While I know you're not providing official guidance, I'd like to get your thoughts on financial expectations for next year. You mentioned the product features that are driving player excitement and the return to growth. When considering the core social casino business, should we view the 3% year-over-year growth as reasonable if no other changes occur? I'm curious about your outlook for the top line in 2024.

I appreciate the question. The reality is that the social casino category is quite mature, and market estimates suggest it will remain relatively flat from 2023 to 2024 and beyond for the next few years. I believe the core market is stable. The question is whether we can gain market share, as we did in Q4, by leveraging the unique and differentiated offerings of DoubleDown Casino. We successfully achieved that in Q4, and we aim for that every quarter. This is our objective and challenge, and we are very focused on it. However, it’s important to understand that this is in the context of a flat yet profitable and cash-generating gaming category.

Got it. That's fair. Lastly, I wanted to follow up on SuprNation. Since closing at the end of October, how has it performed compared to your expectations? I know it has only been a couple of months, and you mentioned the initiatives you've implemented. Considering the focus is initially on Sweden and the U.K., when do you expect to explore new markets for that business?

Thanks, Greg. This is IK. The most important thing for us about SuprNation is to find scalability to get a bigger market share. Although traditional i-Gaming casino business could only provide just playing casino content and its experience so far, we want to see additional differentiated opportunities by offering compelling features for these players such as peer-to-peer competition. So far, November and December showed promising results. We expect our ongoing development and improvement, and if everything goes well, then we will increase our marketing capabilities to scale up.

Thanks, Greg.

Thank you. I am 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.

Great. Thanks, Josh. Appreciate it. 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-bye.

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