DoubleDown Interactive Co., Ltd. Q2 FY2024 Earnings Call

Good afternoon, and welcome to DoubleDown Interactive Earnings Conference Call for the Second Quarter ending in June 30th, 2024. My name is Lisa, and I will be your operator for this afternoon. Prior to this call, DoubleDown issued its financial results for the second quarter of 2024 in a press release, a copy of which has been furnished in 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 are DoubleDown CEO Mr. In Keuk Kim and its CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. 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 the company hereby claims 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 and 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 can cause actual results to differ materially and adversely from what the company expects. Therefore, you should exercise caution in interpreting and relying on them. The company refers you to DoubleDown's annual report on Form 20-F filed with SEC March 28th, 2024, and other SEC filings for 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 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 in the 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. It's now my pleasure to turn the call over to DoubleDown CEO, In Keuk Kim, you may begin.

Thank you, Lisa. Good afternoon, everyone. Thank you for joining us on our 2024 second quarter earnings call. This afternoon we reported total Q2 revenue of $88.2 million comprised of $80.3 million generated by our social casino free-to-play games and $7.9 million generated by SuprNation, our iGaming business. Q2 was the third consecutive quarter of year-over-year revenue growth for our free-to-play social casino business as it was up 7% compared to Q2 2023. Our social casino revenue growth reflects our ability to gain market share and outperform the industry as Eilers & Krejcik Gaming recently reported an estimated year-over-year overall top line decline for the social casino segment at large. Importantly, our top-line growth is being achieved within our criteria of consistently converting revenue to profit and cash flow. Adjusted EBITDA for the second quarter rose 34% year-over-year to $37 million, and cash flow from operations was $34.4 million. DoubleDown Casino continues to be the driver of our strong results as we again generated year-over-year increase in some of our most important KPIs including ARPDAU, average monthly revenue per payer and payer conversion rate. As we've previously discussed, we believe the recent growth of our social casino business is in part due to last year's release of new meta features for DoubleDown Casino. These features are consistent with our focus on player and payer retention as we continue to deliver even more excitement to DoubleDown Casino players. In this second quarter, the social casino business also benefited from our initiative to provide players with greater options to buy chips from direct channels. Revenues from these efforts, which benefit our profitability are beginning to ramp noticeably. In summary, our strategy for social casino is to continue enhancing the entertainment value of DoubleDown Casino, while remaining disciplined in our user acquisition and R&D spend to drive strong profitability and free cash flow. Turning to SuprNation, Q2 was the second full quarter of our ownership of this iGaming business. Revenues of $7.9 million for SuprNation in Q2 continued to be above our estimates of what the business quarterly run rate was prior to our acquisition in late 2023. In Q2, we pulled back somewhat on player acquisition spending compared to Q1. As we've gained more experience with the business, we are beginning to fine-tune our plans and efforts to scale SuprNation. In this business, we believe we have many opportunities to leverage our core strengths, including our game developer's expertise in game creation and our marketing platform to scale SuprNation profitably. And over the next several quarters, we expect to continue to find the investment sweet spot in the business to optimize both top-line growth and cash flow generation. The only progress we are having with SuprNation confirms our thesis that we can leverage our core strengths and balance sheet to further diversify our business into new gaming categories that have a highly addressable market opportunity. We are continuing to invest in new internally developed mobile games, including those we expect to launch in the second half of this year, with the commitment to undertake these efforts in a manner that creates additional value for shareholders. Given our excellent financial foundation, we will continue to evaluate opportunities to expand into new markets, both organically and through M&A. Now, I will turn it over to our CFO, Joe Sigrist, to walk us through our financials before providing my closing remarks, Joe?

Thank you, IK, and good afternoon, everyone. Our revenues for the second quarter of 2024 were $88.2 million and were comprised of $80.3 million in revenues from our social casino free-to-play games and $7.9 million of revenues from SuprNation. This compares to total revenues from our social casino free-to-play games of $75.2 million last year. As IK mentioned, Q2 social casino free-to-play revenue was up 7% year-over-year, which is in contrast to Eilers recently published estimate of a Q2 year-over-year social casino industry top line decline. Going forward, our goal is to continue to outperform the overall social casino market as we monitor and react to changes in the macroeconomic environment and overall consumer sentiment. In the second quarter, several KPI metrics for our social casino business improved, again, compared to the year-ago period, including average revenue per daily active user or ARPDUA increased to $1.33 in Q2 2024 from $1.05 in Q2 2023, marking a 27% increase. Payer conversion ratio, which is the percentage of players who pay within the social casino app environment increased to 6.7% in Q2 2024 compared to 6.0% in Q2 2023, and average monthly revenue per payer increased 23% to $288 in Q2 2024 from $235 in Q2 2023. Operating expenses rose on a year-over-year basis to $52.0 million compared to $47.7 million in the second quarter of 2023. Operating expenses for the 2024 second quarter include the operating expenses associated with our operation of SuprNation, which we did not own in Q2 of last year, and which were partially offset by lower sales and marketing and research and development expenses for our social casino operations. Sales and marketing expenses for the second quarter of 2024 were $11.1 million, a decline of 15% compared to Q2 2023 and down 25% on a quarterly sequential basis. In Q2, we began to fine-tune our approach to ramping the top line of SuprNation while at the same time managing this business to establish the foundation to generate consistent profitability and cash flow. Our sales and marketing costs focused on acquiring new social casino players continue to reflect our focus on spending to ensure we deliver the best return on this investment. For Q3, we anticipate that overall sales and marketing expenses will be in line with Q2 levels. Net income for the second quarter of 2024 was $33.3 million, or $13.39 per diluted share and $0.61 per ADS compared to net income of $24.4 million, or $9.83 per diluted share and $0.49 per ADS in the second quarter of 2023. Adjusted EBITDA for the second quarter of 2024 increased 34% to $37.0 million compared to $27.6 million for the prior year quarter. Adjusted EBITDA margin was 41.9% for Q2 2024, representing a 520 basis point improvement from 36.7% in Q2 of 2023. Net cash flows provided by operating activities for the second quarter of 2024 were $34.4 million compared to net cash flows used in operating activities of $37.6 million in the second quarter of 2023. The increase is primarily due to higher net income and a lower deferred tax asset impact, as well as the final payment of $95.25 million towards the Benson litigation settlement that occurred in the second quarter of last year. And finally, turning to our balance sheet, as of June 30th, 2024, we had $339 million in cash, cash equivalents and short term investments with a net cash position at quarter end, including the outstanding loan with our controlling shareholder WGAMES of approximately $303 million, or approximately $6.12 per ADS. While we had previously indicated that we intended to pay off loan amounts of approximately $35 million from our controlling shareholder in May, we made the decision to instead extend this loan for an additional two years at the same 4.6% interest rate of the original loans. That completes my financial summary. Now, I will turn the call over to IK for closing remarks.

Thank you, Joe. The strong Q2 results in our core social casino business and the continued solid performance of our SuprNation iGaming business extended our operating performance momentum. Over the balance of this year, we will remain focused on driving further improvement in DoubleDown Casino through the continued introduction of new slot content, our ROI-based marketing spend, and our ability to deliver real-time value to players through our LiveOps expertise. Our strategies to continue to drive higher player engagement and monetization will be undertaken in a manner that is consistent with our capital efficiency discipline. In addition, we expect our efforts to increase direct consumer payment volumes, whereby DoubleDown Casino players have an expanded number of options to purchase chips. Beyond the app stores, we will continue to benefit our already strong margins going forward. As we have discussed today, as we gain more operational experience with our SuprNation business, we expect to make additional progress on fine-tuning our new player acquisition strategies so that we can both grow the player base in the UK and Sweden, while also focusing on setting the foundation for this business to deliver consistent, positive cash flow contributions in the near and long term. Finally, I will highlight that the consistency with which we generate attractive free cash flow and our strong balance sheet provides us with financial flexibility to continue to pursue growth by exploring opportunities in adjacent gaming categories through our in-house development efforts and through potential M&A opportunities. We are now happy to take your questions. Lisa?

Thank you. Our first question for today will be coming from David Bain of B. Riley. Your line is open.

Hello?

Hi, Dave.

Oh, sorry, I didn't know what happened there. Anyway, thanks Joe. First, I really do want to acknowledge an excellent Q2 execution, that was really well done. My first question would be on EBITDA margins. I know you went through a lot of this, but obviously, several hundred basis points better than we had anticipated. I'm trying to think about the near and long term on go forward. You mentioned the downtick in sales and marketing are likely maintained in the 3Q. So one, I mean percentage of revenue in 2Q, that's a likely level sustained beyond 3Q, and then IK mentioned D2C having a positive impact in 2Q, maybe if there's anything more as a percentage of revenue what D2C transactions were, if you can compare it to quarter-over-quarter or frame it in any way that you can, that would be really helpful.

Sure. I appreciate the comments and questions. In terms of EBITDA margins, we've had a couple of recent quarters above 40%. This has been partially driven by our efficient spending practices. Recently, we've been particularly focused on sales and marketing, paying close attention to the ROI, especially in the social casino segment. I believe our Q3 marketing spend will be similar to what we had in Q2. Looking ahead, we plan to launch a new organically developed game later this year, which may increase our marketing spending towards year-end. However, we expect Q2 and Q3 to remain consistent in this regard. Regarding direct-to-consumer efforts, we’ve consistently stated that it’s early for us, as we've only recently prioritized it. It’s a significant focus for us this year and into 2024. We have made good progress in the last few quarters, although I can't provide specific numbers yet since it’s still early. Nevertheless, it has already made some positive impact, and we expect it to become even more significant throughout the rest of the year and into 2025.

Okay, awesome. And then my follow-up would be, I know you guys are gaining share relative to the industry. And you mentioned an industry publication that's calling the social casino industry slightly down. And one reason they cited was the concept of Sweepstakes, maybe taking from social casino. Can you offer any big picture as it relates to the industry or any specifics around that in particular that you're seeing?

It's challenging for us to comment on what's happening with our competitors, as we focus primarily on our own business. We are very pleased with the current performance of DoubleDown Casino. As mentioned, we have made significant investments in enhancing features and continually providing excellent new content for our players. We believe this has created an entertaining environment in which DoubleDown Casino is more engaging than ever, encouraging both play and spending among our users. Therefore, I cannot speak to outside occurrences, as our attention remains on effectively managing our business and achieving success within the social casino market.

Awesome. All right, thanks again, guys.

Thanks, Dave.

Thank you. One moment for the next question. And our next question today will be coming from Greg Gibas of Northland Securities. Your line is open.

Great, thanks. Good afternoon, IK and Joe. Thanks for taking the questions. Congrats on the nice results. I appreciate the color on the cost dynamics and everything there. If I could, what do you maybe believe is driving the upside with SuprNation? You noted the last couple of quarters have been ahead of your expectations. Maybe what you attribute that to and what is maybe fair in terms of estimated run rate expectations going forward?

Thanks, Greg. Yes, I mean, we certainly have seen their business ramp since we bought them. And this quarter, we just announced being the second full quarter that we've been operating the business. We believe that our investment in additional marketing has really helped. And when we started operating the business, we realized that there was definitely opportunity to invest more in marketing and still get a very positive ROI with that incremental spend. And from that standpoint, again, in Sweden and the UK, which are their two main markets, we're excited to be spending money to acquire new players. Obviously, the dynamics are much different and KPIs are much different than our social casino business. But as we learn more about the iGaming business and work with our partners at SuprNation, I think you can expect us to continue to lean into that marketing spend, acquire new players and then layer on top the things that we've talked about as far as synergies in the past, which is game development, technology platform and live ops, and the things that we do well from our social casino legacy.

Great, that's helpful. And if I could follow-up just within social casino, nice to see the growth there and especially considering the aforementioned Sweepstakes games kind of maybe pressuring some peers. You note the meta features that you think are kind of driving growth there and I wanted to just follow-up and see kind of what's working well in terms of what you've implemented and what's kind of showing the strong consumer response.

Hi Greg, this is IK, how are you? Let me start first. DDC has been one of the pioneers in the social casino space for over 14 years. We actually focused on providing our players with lots of fun elements through slot content and meta contents. However, as we introduced more features and benefits for those users in recent years, the content flow and economy became very complicated. So last year we started to refactor it and we formed many flows and features from the user experience perspective. At the same time, it enable us to provide attractive retention meta features. Those meta-features are reward features like Lucky Orbs & Flame Power, Wonder Cards, et cetera, as we described last quarter. So as users play more, simply those could help slot-playing user's retention. We will continue to experiment with fun retention features like Mission Pass and Welcome Back and so on. So hope this helps.

Great. Yes, that does. And good to hear that you're seeing success with them. Thanks.

Thanks, Greg.

Thank you. One moment for the next question. And our next question for the day will be coming from Aaron Lee of Macquarie. Your line is open.

Hi, good afternoon. Thanks for taking my question and congratulations on the quarter. You mentioned your balance sheet is in great shape with a net cash position of $303 million. You also said you are focused on evaluating mergers and acquisitions. Where do you see the greatest opportunities for M&A? Is it in social casino, iGaming, or are you considering diversifying into another area? Thanks.

We are continuously exploring opportunities across various categories, including those that are not primarily focused on casino-oriented mobile gaming. There are still large categories, such as Puzzle and Match 3 games, where we have previously participated and which continue to attract significant payer engagement. We have not ruled anything out. When we announced our acquisition of SuprNation, we expressed our enthusiasm for iGaming; however, we do not intend to limit ourselves exclusively to this area. We are open to exploring opportunities that align with our criteria, which take into account factors beyond just the type of game, including considerations related to efficiency.

Got it. That's great to hear. As a quick follow-up, a competitor recently announced a licensing agreement with IGT to use some of their real-world content, which they expect to go live by the end of the year. I know you have an exclusive license for a large portion of IGT's content, which should insulate you, but can you comment on that at all and whether you see that having any impact on your business? Thanks.

Yes, I'm aware of the announcement and we know what our partner IGT has been doing. They've been seeking additional partners to license in the social casino category for several years. The short answer is, it doesn't impact our business at all. As you mentioned, Greg, we have perpetual licenses and exclusive licenses for most of the games we use. Specifically, any game from IGT that we started using before 2020 comes with a perpetual exclusive license. These include the popular IGT titles that our players enjoy, like Cleopatras, Golden Goddesses, and Da Vinci Diamonds. For the new games we began using after 2022, we don’t have exclusive licenses, but we still hold our perpetual licenses to offer them to our players. Furthermore, over the past few years, we’ve shifted more towards content we've developed in-house and licensed from our controlling shareholder. Consequently, the amount of new content we've sourced from IGT has decreased significantly, which contributes to our lack of concern about what IGT has been doing recently.

Thank you. And this does conclude today's Q&A session. It also concludes today's conference call. You may all disconnect. And thank you so much for joining.

Thank you, Lisa. Thanks, everyone.