DoubleDown Interactive Co., Ltd.

Good afternoon, ladies and gentlemen, and welcome to Double Down's earnings conference call for the financial results for the first quarter ended March 31st, 2022. My name is Livia and I'll be your conference operator this afternoon. Prior to this call, Double Down issued and audited financial results for the first quarter 2022 in a press release, a copy of which has been furnished in a report on Form 6K 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 Double Down CEO, Mr. Inko Kim, and his CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. Before we begin, Mr. Grant, the company outside investor relations advisors, will make a brief introductory statement. Mr. Grant?

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 use of the words such as may, might, will, expect, assume, believe, intend, estimate, continue, should, anticipate, or other similar items. Forward-looking statements include and are not limited to those regarding the company's future plans, mergers and acquisitions 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 Double Dan's annual report on Form 20F filed with the SEC on April 4, 2022, and other SEC filings for a more detailed discussion of the risks that could impact future operating results and financial conditions. 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 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 Double Down's website. Now, I would like to turn the call over to Double Down's CEO, Mr. Inko Kim.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us on the only call for our first quarter 2022 results. Our first quarter results for 2022 continue to demonstrate the attractiveness of our business model. While revenue was down sequentially on the fourth quarter of 2021, this was primarily due to our decision to scale back sales and marketing costs for our first non-social casino app, and that was Your Survival, as we make certain product changes to improve the app's monetization metrics. This reduction in sales and marketing costs decrease in revenue generated from network during this period. Despite the revenue decrease, our adjusted EBITDA and adjusted EBITDA margin improved sequentially with a reduction in cost, illustrating the adaptability of our business model to varying industry and macroeconomic conditions. We also continue to generate positive operating cash flow ending the quarter with a cash and cash equivalent balance of $268 million. And we hope to continue generating positive operating cash flows in the future. Our decision to scale down sales and marketing costs on that wall in the near term also demonstrates our commitment to being good stewards of capital. While we continue to focus on growing our business, we will not sacrifice or overrule the importance of generating returns on our investment for our shareholders for the sole purpose of achieving goals. By scaling back our investment for Undead World in the near term to revisit our monetization strategy for the app, we have been able to introduce data tests of several improvements for the app. If the monetization KPIs for the game trend positively, we may increase marketing spending for Undead World during the current second quarter and beyond. As a leader in the social casino genre, through our project title Double Down Casino, we believe that we have the team in place to shift on successful monetization strategies of gaming apps adjacent to social casino. Now I will turn it over to our CFO, Joe Siglitz, to walk you through our financials before providing my closing remarks. Joe?

Thank you, I.K., and good afternoon, everyone. Let me start with revenues. Revenues for the first quarter of 2022 decreased 11.6% to $85.5 million from $96.7 million for the first quarter of 2021. It is important to note that the prior year period benefited from the continuation of stay at home or work from home COVID prevention initiatives, which have significantly abated since then. Compared to the fourth quarter of 2021, revenue in the first quarter of 2022 declined by only 0.9%, primarily due to a decrease in undead world revenue based on our intentional reduction in user acquisition spending for the app. Our key monetization metrics for the first quarter of 2022 include average revenue per daily active user, or ARPDAU, was 97 cents in the first quarter, down slightly from 99 cents in the first quarter of 2021 and up sequentially from 96 cents for the fourth quarter of 2021. Average monthly revenue per payer was $225 in the first quarter, a year over year increase from $212 in the first quarter of 2021 and up sequentially from $216 in the fourth quarter of 2021. Lastly, pair conversion, which is the percentage of players who pay double down, was 5.5% in the first quarter, compared to 5.7% in the first quarter of 2021, and remained stable sequentially. Operating expenses in total for the first quarter of 2022 decreased 14.4% to $60.8 million, FROM $71.0 MILLION FOR THE FIRST QUARTER OF 2021. THE DECREASE WAS PRIMARILY DUE TO DECREASES IN COST OF REVENUE, SALES AND MARKETING EXPENSES, AND DEPRECIATION AND AMERICIZATION EXPENSES. OF NOTE, SALES AND MARKETING EXPENSES IN THE FIRST QUARTER OF 2022 WERE $19.8 MILLION, ESSENTIALLY FLAT OVER THE FIRST QUARTER OF 2021 but representing an over $2 million sequential decrease compared to the fourth quarter of 2021. This sequential reduction was primarily due to the aforementioned decrease in sales and marketing spending for Undead World Hero Survival. Going forward, we expect our overall sales and marketing expenses to rise incrementally as we increase investment in acquiring and retaining players in our new apps, as well as for Double Down Casino. It is also worth noting that depreciation and amortization expenses in the first quarter of 2022 were $2.2 million, compared to $7.5 million in the first quarter of 2021, and essentially flat sequentially. The decrease from the year-ago quarter was due to the completed amortization of certain identifiable intangible assets for which we use purchase price allocation at the time of the 2017 Double Down Interactive Acquisition. Net income for the first quarter of 2022 decreased to $18.5 million or $7.46 per diluted common share compared to $19.4 million or $8.77 per diluted common share in the first quarter of 2021. Next, I want to discuss adjusted EBITDA. 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. Adjusted EBITDA for the first quarter of 2022 was $26.9 million, compared to $33.1 million in the first quarter of 2021. adjusted EBITDA margin for the first quarter of 2022 was 31.5%, lower than the adjusted EBITDA margin of 34.2% for the first quarter of 2021. The year-over-year decline in adjusted EBITDA and adjusted EBITDA margin is primarily attributable to the lower revenue in the first quarter of 2021, which I previously discussed. I'll note that as IK mentioned earlier, adjusted EBITDA increased sequentially from $25.8 million in the fourth quarter of 2021 to $26.9 million in the first quarter of 2022. And adjusted EBITDA margin also increased sequentially from 22.9% in the fourth quarter of 2021 to 31.5% in the first quarter of 2022. primarily due to the reduction in sales and marketing costs. The overall reduction in our operating costs compared to the first quarter of 2021 illustrates the variable and discretionary cost structure we have. Our most significant costs are costs of revenue, which is comprised mostly of platform fees and royalties that are directly correlated to our revenue, and sales and marketing costs, which are to a great extent discretionary. This gives us a highly adaptable business model that can generate relatively consistent adjusted EBITDA and cash inflows across many different industry and macroeconomic cycles. Cash flow from operations for the first quarter of 2022 was $28.4 million compared to $22.0 million for the first quarter of 2021. we did not incur any material capital expenditures during the first quarter. Finally, turning to our balance sheet, at the end of the first quarter of 2022, we had $268.2 million of cash and cash equivalents and short-term investments compared to $242.1 million of cash and cash equivalents at the end of 2021. Our total debt at the end of the first quarter of 2022 was $41.3 million compared to $42.2 million at the end of the 2021 full year. Our cash position continued to improve as we continue to generate positive cash flows from operations. This completes my financial summary. Now I'll turn the call back over to I.K. for closing remarks.

Thank you, Joe. As we move forward in 2022, the priority for Double Down is to profitability growth of business. This starts with our continuous effort to improve the performance of Double Down Casino through a combination of product enhancement, marketing, and live-up optimization. The social casino gaming business is still the backbone of our company, and hence whether we are able to implement and realize such improvements remain crucial for our success. We also see opportunities to grow our business outside of traditional social casino genre. And as such, we expect introducing adjacent mobile gaming apps remains a high priority. In addition to the introduction of Undead World Hero Survival in fall 2021, We are planning to launch additional non-social casino games this year. For example, we have been working very hard on a new hyper-casual game, Save My Zombies, which just began Open Beta in April 2022. Also, as previously discussed, we have been working on Spinning Space, which has both casino and non-casino elements that we think can be attractive to both our existing social casino demographics, and new demographics that may be more attracted to non-casino casual gaming. Spinning space remains on track to start its open beta this summer. We'll continue to work on having a robust pipeline of new games to launch, and it is also important to note that these new games are being developed using our existing R&D budget. We, backed by our strong balance sheet position, of course, have also considered pursuing growth through potential M&A opportunities. In this regard, we will continue to look at potential acquisition targets using our key assessment criteria. These criteria include the strengths of a target gaming and creative asset. Our ability to create synergies using our product development, marketing, and live up capabilities, and an attractive performer financial model. We are now happy to take your questions. Operator?

Thank you, ladies and gentlemen. If you'd like to ask a question at this time, you will need to press the Start and the 1 key on your touch-tone telephone. Please stand by while we compile the Q&A roster. Now, first question coming from the lineup, Greg. Give us from Northland Securities. Your line is open.

Hi. Good afternoon, IK and Joe. Thanks for taking the questions. I was just wondering if maybe discuss your expectations for the remainder of the year and when you would expect to see a return to year-over-year growth out of the core portfolio.

Yeah, Greg, thanks for joining us and thanks for the question. As we all know, the impact of the, you know, reduction, let's say, in people staying at home and staying away from work has meant that, you know, the comps associated with the Our quarters have been difficult, and they will continue to be difficult if you look at year-over-year comps for the next at least couple of quarters. As we look forward, I mean, the social casino business is, as we've discussed, fairly flat. or very low-growth business as a whole. And that is why it's so very important for us to not only optimize the presence we have in social casino with Double Down Casino, but also, most importantly, to expand with non-social casino apps. So our expectation is that the... Ability for us to grow is really tied to our ability to have success with the non-social casino apps. And that obviously starts with Undead World, but also the new hyper-casual game Save My Zombies that Ike just mentioned, as well as Spinning in Space. and the other games that we have in our portfolio. And that's where the growth will really come from if we look at the comparisons to previous year-over-year quarters. And that's also finally why the M&A work that we're doing in our evaluation of targets is so very important as well.

Got it. Very helpful, yes. I was just going to ask if you could discuss those upcoming titles, but I think IK, and thanks for going over them again, but it sounds like the Save My Zombies April is when that beta begins, and then I think you said Spinning in Space, the open beta, was this summer. Are you anticipating additional launches, I guess, in the second half of the year? Just trying to kind of get a sense of the slate for the remainder of the year.

Yeah, we have some games in the pipeline beyond Save My Zombies and Spinning in Space. But at this point, I think those are the two that we're tracking most closely as far as being launched this year, or at least transitioning from beta to full release. And certainly, as we have... you know, more progress in getting closer to at least open beta with other games in the pipeline will keep you updated.

Okay, perfect. And just going back to Undead World, what enhancements, I guess, specifically are you going to be making to the game? You said trying to improve the monetization, and maybe when would you expect those to be completed?

I'm sorry, Greg, could you repeat?

Yes, sorry. The enhancements I think you were making to Undead World, I think primarily on the monetization front, was just wondering if you could discuss what those are and maybe when they would be completed.

Yeah, sure. So I can start, and if Ike wants to provide some detail, I'll let him give some specifics. But it's really around payer retention. I mean, we were quite, as we said from the beginning of our discussion about the app last fall, we were quite happy with player retention. And then, of course, as monetization continued to ramp, we were very interested in payer retention and, of course, how much each player each payer pays as well. But we have been more recently, as we've added enhancements to the app, been very focused first and foremost on payer retention. And I don't know if you want to give an example perhaps of the kind of enhancements that we've been adding to the app.

Yes, right. For example, enhancing season pass features and some kinds of new hero abilities. It's still very helpful for payer retention increase.

Yeah, and so if you look at the first one that Ike mentioned, the season pass enhancements, which obviously provide benefits to players and payers, assuming that they opt for the season pass feature. We started those enhancements several weeks ago, and we're very closely watching the impact on payer retention KPIs. And that's one of the most important things that we're observing as we determine when and how much to increase our marketing investment.

Got it. Very helpful. And I guess just the last one from me, I'm not sure how much you can share, but I was just hoping for an update on those potential M&A opportunities that you are seeing, any sense of timing, whether things are getting close, and maybe what multiples you expect to pay.

Yeah, well, I'll start with the last question first. The most interesting one, obviously, is valuations. I mean, we have an active process going on, and we are looking at a range of different opportunities in the gaming industry. various gaming sectors. And, you know, relative to the valuations, obviously, as public market valuations have declined, you know, we believe and we've heard that expectations by private companies have moderated. That being said, I don't think that's consistent across all gaming categories. Certain categories have valuations that at least based on the feedback we've received, you know, still are quite high. So, you know, we'll just have to, you know, continue to wade through those and see what makes sense for us. As far as timing, I mean, I guess all I can say, Greg, is that we have a very active process. We're very engaged. And so we, you know, given the importance of growth outside of the social casino, it's something that's, you know, of the highest priority for the company.

Understood. Thanks, guys.

Thanks, Greg.

Our next question coming from the lineup, David Bain with B. Riley. Great.

Thanks. I mean, my primary question was just asked on the valuations that you're seeing, particularly in the private markets. Maybe building on Greg's question, can you provide kind of the mix that you're looking at, private versus public, and, you know, what You know, what's the dynamic, generally speaking, when you look at synergies, taking out public costs? I'm sure you're balancing a lot of different factors there. I'm just trying to understand, you know, size and really what you're seeing out there generally, if you can give a little bit more detail since that's a big piece of the thesis, it looks like.

Sure, sure. Thanks, Dave, and hopefully you're doing well. Thank you. Well, certainly, I mean, as you would probably believe, I mean, most of the companies that we're looking at are private companies. But as it relates to, you know, size and, you know, what we can bring, I think, as we've said, you know, we're not shy. And certainly if we find something, private, public, whatever, that works, is even, you know, I'll use the word transformational for, you know, for, for double down, you know, we're, we're, if it makes sense for us, you know, it's, it's something that, that we will embrace. And so, you know, again, you know, we're not, we're not shy. Obviously it has to work for us, however. And, and, you know, work for us includes what you mentioned about our belief that we can bring synergies to, to what we acquire. And, and in, in many cases, you know, that's, that's the parts of this company that we now have that were brought to bear to improve Double Down. And that includes our technology platform, the great engineering talent and product development talent that we now have in Korea, our ability to acquire new users, so our sales and marketing discipline and processes relationship with partners, the things that we have learned as we've continued to improve the metrics relative to user acquisition with Double Down Casino, and the things that we kind of wrap around those functions as it relates to business intelligence and data analytics. You know, these are the things that we know we can bring to improve business you know, a target and a business, and that's something that, you know, we continue to use to evaluate potential targets.

Okay, awesome. That was really helpful. I guess the other one I would ask would be, on the last call, you and IK kind of teased us with blockchain and any kind of opportunity there. Are you ready to, you know, give us a little bit more detail on what you could be working on or looking at at this point?

At this point, I can't give you anything more on that, and certainly that's part of the, I can't mention the criteria by which we are, at the end of the formal remarks, by which we are looking at companies. That's certainly another one of those criteria that we're very interested in, and I think that's about all I can say at this point.

Okay, fair enough. Thanks so much.

And as a reminder, to ask a question, please press star one. Now the next question coming from the line of Berkey Bakay with Bakay Capital. Your line is open.

Hey, good afternoon. Congrats on another very strong quarter of free cash flow generation. So my question is on return of capital to shareholders. If my math is correct, more than half of your market cap is in cash and You have a wonderful business that doesn't require much of capital expenditure. So if you're back to cash out, you're probably trading at 60% free cash flow yield, which makes me believe that the market isn't really appreciating what's going on and strong free cash flow characteristics of this business. So while you're considering acquisitions, what is your strategy in terms of maybe accelerated buybacks, tender offers, or dividends that could return some of this capital to shareholders that have been there. Just curious about that. Thank you.

Great, Nick. Thanks so much for the question, and thanks for the, well, I guess, first acknowledgement, which is, you know, the incredible cash-generative nature of our business is and certainly it's something that we continue to promote as we talk to investors. I will, I guess, reiterate what we have said on at least the last couple of earnings calls, which is while we certainly are focused on M&A and what we do with our cash, the ability to – you know, maximize shareholder value is our top priority. And, you know, first and foremost, you know, we believe that doing that means to create growth for the company. And, you know, that's where the focus of our, you know, strong balance sheet is currently. That said, you know, assuming that that that strategy is delayed and or is not something that we're able to pursue in the short to medium term, we definitely will look at other alternatives and other ways to use our balance sheet.

Thank you for your answer. I strongly encourage you to do that and maybe there is a way to do both because every day that passes you generate more cash and maybe there is a way to acquire synergistic companies, but also provide an exit to people that doesn't really understand your business in a very creative way for those that stand with you. Thank you.

Great. Thank you.

And again, as a reminder, to ask a question, please press star one. And at this time, this concludes our question and answer session. I would now like to send a call back over to Mr. Segrist for any closing remarks.

Thanks, Olivia. And thank you all for joining our call today and your interest in Double Down. We look forward to sharing future updates with you as we continue to innovate and grow within the global digital gaming industry. And have a great rest of your evening.

Ladies and gentlemen, thank you for joining us today for Double Down's earnings conference call. You may now disconnect.