Earnings Call Transcript - DDI Q3 2021

Operator, Operator

Good afternoon, and welcome to DoubleDown's Interactive Conference Call for the Third Quarter ended September 30, 2021. My name is Bo In Hye, and I will be your operator this afternoon. Before this call, DoubleDown issued its financial results for the third quarter 2021 in a press release, a copy of which has been furnished in a report on Form 6-K filed with 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 today's call are DoubleDown's CEO, Mr. In Keuk Kim; CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. Before we begin, Jeff Grampp, the company's outside Investor Relations adviser, will make a brief introductory statement. Mr. Grampp?

Jeff Grampp, Investor Relations Advisor

Thank you, Bo In Hye. 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 or statements about future events and include expectations and projections, not present of historical facts, and they 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 these 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 Form 6-K filed with the SEC. I would like to remind everyone that this call is being recorded and will be made available for replay following the instructions in the company's earnings release. Now I would like to turn the call over to DoubleDown's CEO, Mr. In Keuk Kim.

In Keuk Kim, CEO

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us on our inaugural earnings call following our successful IPO in the third quarter. I'd also like to welcome our new shareholders. We appreciate your support. Before we discuss the results of our third quarter, I would like to first provide some background on DoubleDown for those of you who are newer to our company. We are a leading developer and publisher of digital games on mobile and web-based platforms. We were pioneers in the social casino gaming segment as one of the initial publishers to launch a social casino game on Facebook in 2010. Our goal is to become one of the world's leading global gaming companies by delivering differentiated content and playing experiences to our users. Our flagship game, DoubleDown Casino, has been among the top 20 grossing mobile games annually on the Apple App Store since 2016 according to FME. We believe we have a deep understanding of our users, which allows us to refine our game development, content strategy, and game operations. We also have unique access to content through our relationship with IGT and our parent, DoubleU Games. We are able to leverage their slot games, many of which are exclusive to DoubleDown, while also developing our own content to provide a wide array of new and exciting casino-style games for players. We have what we call an all-in-one approach with our DoubleDown Casino app. We believe that users prefer fewer apps on their smartphones, not more, so having an all-in-one solution creates better retention, lower user acquisition costs, and higher lifetime value. DoubleDown Casino provides a diverse set of offerings to our players, ranging from authentic land-based slots to more casual slot games as well as other casino-style games, such as single-player and table games. A key part of our strategy is to augment our revenue streams by launching gaming apps outside of traditional social casino. Our first effort in this regard is Undead World: Hero Survival, which is an RPG that was launched globally at the end of September. While it is very early, we are pleased with initial player retention results and excellent rating scores in the App Store and Play Store. For the remainder of this quarter, we will focus on further improving player engagement as we continue to acquire new users. We are also continuing to tune the game economics and the operations of its heroes. We expect to release additional non-social casino gaming apps like Undead World in 2022. Our next such game is in the later stages of development and is currently planned to be released in open beta in Q1 of next year. We will also continue to make updates to our core DoubleDown Casino platform to enhance customer engagement and strengthen customer lifetime value. Regarding our financial results, we are pleased with our third-quarter performance, our first as a public company. While revenue decreased 6% from Q3 2020 due to the easing of stay-at-home initiatives during the height of COVID-related restrictions last year, adjusted EBITDA increased 4%. We were able to grow adjusted EBITDA despite lower revenue as we focused on optimizing returns from our sales and marketing spending, which our CFO, Joe Sigrist, will discuss in more detail momentarily. Also, during this quarter, we generated $33.7 million in net operating cash flows and ended the quarter with a cash balance of $223.1 million, providing us with a strong financial position. Importantly, our business model should continue to be one that produces significant positive free cash flow each quarter. Now I will turn it over to our CFO, Joe Sigrist, to walk you through our financials before providing my closing remarks.

Joseph Sigrist, CFO

Thank you, I.K., and good afternoon, everyone. As a reminder, DoubleDown Interactive completed its Initial Public Offering on September 2, 2021, issuing approximately 6.31 million American Depository Shares, which we will refer to as ADSs on this call, each representing 0.05 of a common share at a price of $18 per ADS. Of this, the company sold 5.26 million ADSs, and STIC, Special Situation Diamond Limited, sold 1.05 million ADSs. DoubleDown received net proceeds from the offering of $86.5 million after deducting underwriting fees and commissions and certain offering expenses, which we plan to use to fund our growth initiatives. Our revenues for the third quarter of 2021 decreased 6% to $87.0 million from the prior year period. As I.K. mentioned, Q3 2020 benefited from the widespread stay-at-home COVID prevention initiatives in place at that time, which have significantly abated since then. Despite the revenue decrease, we are encouraged by several key monetization metrics that improved from the comparable period last year. Average revenue per daily active user, or ARPDAU, increased from $0.86 to $0.96. Payer conversion, which is the percentage of players who pay DoubleDown, increased from 5.4% to 5.7%. And average monthly revenue per payer increased from $196 to $224. At a high level, we would characterize these trends in our KPIs as indicative of our disciplined focus on growing wallet share of paying players while allowing the attrition of non-paying players. Accordingly, we believe KPIs that are aligned with paying players are more useful in evaluating our progress rather than aggregate user metrics. Total operating expenses for the third quarter of 2021 decreased 17% to $59.2 million from the prior year period. The decrease was primarily due to a combination of lower sales and marketing costs and lower depreciation and amortization expenses. Specifically, sales and marketing expenses declined 18% from the comparable period a year ago to $17.2 million as we continued to optimize our investments to acquire new players in light of Apple's new app tracking transparency framework and changes to IDFA, Apple's identifier for advertisers. In addition, cost per install or CPI for mobile users trended higher during the summer, which caused us to be more cautious in advertising spend during this period. Overall, we feel confident about our ability to continue to measure and track the efficiency of our new player acquisitions. Optimizing the ROI of our sales and marketing expenses is at the core of our financial framework to diligently manage our P&L. Depreciation and amortization expenses declined to $2.4 million in the quarter compared to $8.0 million in Q3 2020 as the useful life schedules from assets acquired as part of DoubleU Games 2017 purchase of DoubleDown Interactive LLC continued to end. Net income for the third quarter of 2021 totaled $22.8 million or $9.91 per diluted share, which was higher than the prior period of $8.3 million or $3.75 per diluted share. Note that our common share count at the end of the third quarter was approximately 2.5 million shares. As a reminder, each of our American Depositary Shares that trade on NASDAQ represent 0.05 of a common share. Adjusted EBITDA for the third quarter of 2021 increased 4% to $30.2 million from the prior year period. Adjusted EBITDA margin of 34.7% represents an approximate 330 basis point improvement from the prior year period. The improvement in adjusted EBITDA and adjusted EBITDA margin is primarily attributable to the lower sales and marketing costs I previously mentioned. 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 third quarter of 2021 increased 49% to $33.7 million compared to the prior year period, primarily due to the timing of payments from our platform partners. We did not incur any material capital expenditures during the quarter. Finally, turning to our balance sheet. At quarter end, we had $223.1 million of cash and cash equivalents. The improvement in our net cash position was due to the aforementioned net cash flows from operations and the proceeds from our Initial Public Offering. That completes my financial summary. Now I will turn it back over to I.K. for closing remarks.

In Keuk Kim, CEO

Thank you, Joe. We are excited about our entry into the public market and our pipeline of new games, both within our core DoubleDown Casino franchise and outside of the traditional social casino segment. Regarding our core DoubleDown Casino franchise, we are continuing to make it an exciting gaming destination for our users by launching new slot content approximately every 1 to 2 weeks. We will also be introducing new DoubleDown Casino meta features over the next few months, such as new collection features. And finally, we are excited about the launch of Undead World: Hero Survival. We look to increase its player base in Q4 and beyond while continuing to monitor monetization metrics as we plan to acquire new users. We are now happy to take your questions.

Operator, Operator

Your first question comes from David Bain of B. Riley.

David Bain, Analyst

Great. I.K., Joe, very nice execution on the quarter. I guess my first question, could you offer any broad commentary surrounding the potential reduction of platform fees from Apple or others? I mean, is that something that you think could positively impact margins next year? Are there certain strategies you're testing internally or planning for at this point?

Joseph Sigrist, CFO

Yes, Dave, thanks so much for the question and your comment. I can start, and then I.K. can comment perhaps. Obviously, the entire gaming and mobile gaming industry is excited about the potential, and I'll stress potential, for the lowering of platform fees based on the court rulings. And we are interested to see not only how Apple reacts to it, but also, and I think more importantly, in the shorter term, how other gaming companies might be changing their games to execute on how they would implement non-Apple ways of collecting payments. And I think that's going to be the key for us, which is to kind of decide how we implement, which I think is on one level pretty straightforward, these alternative payment processors. But in a way that we believe based on what others in the industry, frankly who are larger than us do, as far as what they think will be acceptable, frankly, to Apple.

In Keuk Kim, CEO

Yes. To support Joe's comment, from a development standpoint, we're already ready to take those advantages. But it will depend on other gaming companies' implementation. From December, if we take a look at our other competitors or other mobile gaming companies in comparison, we will be ready right now. So I hope this helps.

David Bain, Analyst

Sure. My next question, which comes up frequently, is about your views on mergers and acquisitions. Specifically, I'd like to know your thoughts on several social casino competitors that have been acquired in your sector, such as GSN, Bowl Game, and Side Play. These acquisitions seem to indicate a reflection on your own valuation. Do you see any signs of a competitive shift in the market under new ownership? Additionally, could you share your strategies regarding M&A? With over $220 million in cash flow, are current acquisition valuations reasonable, and is there a strong supply of opportunities? Lastly, if no significant acquisitions arise, would the Board consider options for returning capital to shareholders in the long run?

Joseph Sigrist, CFO

Thank you for the summary on that lengthy question. Let’s begin with mergers and acquisitions. Regarding recent activity, there isn't much we can disclose about what others are doing, but it’s noteworthy that there seems to be renewed interest in social casino. For example, the recent GSN deal highlights that some social casino companies have been acquired at attractive valuations. Over the last couple of years, there have been fewer such transactions in the social casino space. Despite this, there remains significant interest among these companies to acquire businesses outside of social casino to diversify. What you mentioned about the recent purchases of social casino companies is quite interesting and has happened since the summer. In terms of our acquisition strategy, as we discussed during our road show, we are looking for potential acquisitions that can significantly impact our growth. We are particularly interested in companies that already have revenue and games in the market with an existing player base. These types of companies are less common than studios that are simply developing or launching new games. There are certainly many companies in the beta stage seeking funding for marketing, but our focus is on those that can genuinely help us achieve substantial growth. This may mean that our search takes longer because we are selective. As for what we would do if we can't find suitable acquisitions, maximizing shareholder value is our top priority. With our healthy cash balance, we will explore all potential avenues to maximize shareholder value, and we are open to various options.

David Bain, Analyst

Congratulations again.

In Keuk Kim, CEO

Yes, sorry. Just first, you had commented lately on M&A opportunity. We are also looking at additional opportunities related to NF, non-fungible tokens, and it actually would fit a lot to our gaming content. So we look forward to taking those advantages for M&A. I hope this helped.

Operator, Operator

Your next question is from Greg Gibas of Northland Securities.

Gregory Gibas, Analyst

Congrats on the nice EBITDA improvement. I wanted to ask, I guess, on kind of new developments, how the rollout of Undead World is maybe going so far relative to your expectations initially? Kind of how you're marketing it differently relative to DoubleDown Casino? And then just wanted to kind of gauge you on timing and kind of general cadence of new launches and kind of how development is going for the space-related game, Spinning In Space, I believe it's called.

Joseph Sigrist, CFO

Yes. I'll just quickly describe how we believe the game is going in the market. And then I'm going to ask I.K. to talk about the marketing of the game, which I think is interesting. Relative to results, I mean it is early days. We just launched about 5 weeks ago, global launch. And consistent with what we saw during the open beta period, we're really pleased with player retention which means repeat play once we acquire a user. Ultimately, that's the first step in getting players to convert and then ultimately to continue to monetize over time and maximize LTV. So right now, we're continuing, as I believe I.K. said in his comments, to not only acquire players but also to enhance the game, tweak the game from a monetization standpoint, so we can continue to drive up monetization which is important. But I think for us, it's very encouraging to see player retention at this early stage in the release of the game.

In Keuk Kim, CEO

Yes, related to marketing difference of Undead World. Fundamentally, performance marketing uses similar targeting strategies. However, each channel's inventory is totally different, and it will take time to get meaningful volume based on different genres. To that end, to test larger volume, we are testing influencer marketing for Undead World. It is one of the different inventory compared to social casino app. And related to user player retention, actually, we now see above 20 to 25 for user retention, which is a huge number compared to other competitors. So we will focus on how to utilize that retention to net highs going forward. Hope this helped.

Joseph Sigrist, CFO

Yes. I think, Greg, you also asked about the final part of that. The next game, the next game in the expand beyond social casino category that we have is the space game that I think you referenced, which we had said in our comments here that we're planning open beta to be in the first quarter of 2022.

Gregory Gibas, Analyst

Okay. Great. Yes. Nice to hear that it's on track. And yes, I think you previously said first half of next year. So good to hear, and I appreciate the additional color there. I'm just wondering, too, as we kind of think about the fourth quarter, how kind of seasonality impacts the business? And how you're thinking about kind of the holiday season and maybe year-over-year impacts because I know you said kind of Q3 was impacted by more stay-at-home a year ago. So how you're thinking about that?

Joseph Sigrist, CFO

Yes, there are several key seasonal factors in the fourth quarter. One is that more people are at home during the holidays, which is beneficial for mobile gaming. This is particularly noticeable when compared to the third quarter, which includes the summer months when people are less at home and playing less. Additionally, in the fourth quarter, cost per installs typically rises. I noticed an increase in CPIs during the latter part of the third quarter, but in October, we saw a slight decrease in CPIs for both Android and iOS users, which was a positive sign. However, we expect that as we approach the holidays, CPIs will increase again, so we need to be cautious about our spending as we acquire new players, as the return on investment for these users is one of our most crucial metrics.

Gregory Gibas, Analyst

Okay. Great. I was going to ask on M&A, but I think you covered that pretty well. I guess the last one for me, just relating to kind of OpEx trends going forward. I know you said you pulled back your spend a little bit, just seeing the trends on player acquisition costs. Any thoughts on that, I guess, going forward?

Joseph Sigrist, CFO

Yes, I believe we need to consider the seasonal increases in the second half of the quarter, particularly in CPIs, which might lead us to pull back slightly. However, this quarter, we will also see the full impact of the launch of Undead World. We are making investments in that area to ensure a strong launch for the game, which means I expect our overall spending to increase this quarter.

Operator, Operator

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

Joseph Sigrist, CFO

Great, Bo In Hye. Thanks again. Thank you, guys, all for joining us on our call today and for your interest in DoubleDown. We look forward to sharing future updates with you as we continue to innovate and grow the business and take advantage of a truly exciting global digital gaming industry. Thanks again. Have a great rest of your day.

Operator, Operator

Thank you for joining us today for DoubleDown's earnings call. You may now disconnect.