DoubleDown Interactive Co., Ltd.

Good afternoon and welcome to Double Down Interactive's earnings conference call for the first quarter ended March 31st, 2023. My name is Sean and I will be your operator this afternoon. Prior to this call, Double Down issued its financial results for the first quarter 2023 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-Kook Kim, and its CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. Before we begin, Richard Land, the company's outside investor relations advisor, will make a brief introductory statement. Mr. Land.

Thank you, Sean. Before management begins their formal remarks, we need to remind everyone that some of the 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 Double Down'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 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 today's 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 6K filed to 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 Double Down's website. Thank you for your patience with that. It's now my pleasure to turn the call over to Double Down's CEO, Inko Kim.

Thank you, Richard. Good afternoon, everyone. Thank you for joining us on our 2023 first quarter earnings call. Current revenue of $77.6 million. What's up? on a quarterly sequential basis marking our first quarterly sequential revenue increase since the peak of the COVID pandemic period. We also continue to generate consistent attractive adjusted EBITDA margins and operating cash flow with adjusted EBITDA in the first quarter also rising on a quarterly sequential basis to $25.4 million and cash flow from operations of $19.2 million. Our solid financial results are based on the ongoing strength of our flagship dovetail casino or DDC gaming app. We continue to benefit from the sickness and loyalty of DDC players who choose to pay, which has established the foundation for our consistent financial results. As many of you know, DDC revenue is primarily driven by those who have been playing our games for several years, as opposed to newly acquired players. For example, 92% of our 2022 annual revenue was generated by players who were acquired in prior years. In January, we announced a definitive agreement for Double Down to acquire SuperNation, which operates three iGaming sites in Western Europe. We are working towards gaining the required regulatory approvals and currently expect to close this transaction later this year. The acquisition of SuperNation will further diversify our sources of revenue by type and geography while marking our entry into the high-growth iGaming sector. This acquisition will also allow Double Down to leverage its core competency of creating games that entertain and engage users. In that regard, along with our M&A activities, we continue to invest in our own app development initiatives, primarily focused outside the social casino category. This includes multiple projects running in parallel that are supported by our game developers in Seoul and Seattle. During last quarter's conference call, we mentioned that a new gaming app, Spinning Space, had reached its soft launch status. While we were optimistic for the potential of this game throughout its development process and approach, the performance metrics seen during the soft launch did not meet our criteria. As a result, we have determined not to move forward with a full global introduction of the game and are refocusing related resources on other game development activities. This includes adding these resources to games that we expect to launch later in 2023. I will highlight that our decision not to move forward with the global launch of Spinning Space sticks to our commitment to invest capital only when we are confident that we can achieve appropriate returns. Now I will turn it over to our CFO, Joe Sigrist, to walk you through our financials before providing my closing remarks. Joe Sigrist Thank you, I.K., and good afternoon, everyone.

Our revenues for the first quarter of 2023 were $77.6 million compared to $85.5 million last year. However, as IK mentioned, Q1 revenue increased sequentially from the fourth quarter of 2022, primarily driven by an increase in Double Down Casino revenue. KPI highlights for the company include average revenue per daily active user, or ARPDAU, increased to $1.03 in Q1 2023 from $0.97 in Q1 2022. Payer conversion ratio, which is the percentage of players who pay Double Down, also increased to 5.8% in Q1 2023 from 5.5% in Q1 2022. And average monthly revenue per payer decreased from $225 in Q1 2022 to $221 in Q1 2023. Total operating expenses decreased from $60.8 million in the first quarter of 2022 to $52.2 million in the first quarter of 2023. The decrease was primarily due to lower cost of revenue, decreased marketing expenses, and lower depreciation expense. Sales and marketing expenses for the first quarter of 2023 were $16.0 million. a 19% reduction compared to Q1 2022, and 5% lower on a quarterly sequential basis. We believe that our advertising efforts to acquire new players, the primary cost component in our sales and marketing expenses, will remain fairly flat over the next couple of quarters, inclusive of our decision not to proceed with the spinning in space global launch. It is also worth noting that depreciation and amortization expense has been less than $100,000 in the last three quarters, a significant decline from prior periods 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 2023 was $23.7 million were $9.55 per diluted share and $0.48 per ADS, an increase from net income of $18.5 million, or $7.46 per diluted share and $0.37 per ADS, in the first quarter of 2022. The increase was primarily driven by lower marketing and depreciation and amortization expenses. Adjusted EBITDA for the first quarter of 2023 was $25.4 million compared to $26.9 million for the prior year quarter. Adjusted EBITDA margin was 32.8% for Q1 2023, representing an improvement from 31.5% in Q1 2022 and 32.4% in Q4 2022. Net cash flows from operations were $19.2 million for the first quarter of 2023 compared to net cash flows from operations of $28.4 million in the prior year period. The decline is primarily due to the timing of accounts receivable payments. And finally, turning to our balance sheet, as of March 31, 2023, we had $304.8 million in cash cash equivalents and short-term investments compared to $285.2 million at the end of last quarter. Our total debt as of March 31st, 2023 was $38.3 million. With regard to our current cash position, we expect to make the final payment for the Benson settlement of $95.25 million by the end of June. Excluding cash for this payment, cash for our pending Supernation acquisition, and our debt position, our balance sheet currently reflects a total uncommitted cash and short-term investment position of approximately $136 million, which amounts to approximately $2.74 per ADS. This completes my financial summary. Now I'll turn it over to I.K. for closing remarks.

Thank you, Joe. The financial power of our social casino platform positions us to continue to make return-focused investments in multiple areas of potential growth through both organic developments and M&A. Within the core of our social casino business, our development teams are working hard to make ongoing enhancements to our flagship app, Double Down Casinos. In addition to our normal new slot launches, we are also developing new monetization features such as enhancements to our high-limit rooms to drive consistent player entertainment and engagement. In the near term, we are excited to close the SuperNational position, which will allow us to quickly enter a new gross market and expand Double Down's gaming reach. We believe this acquisition will create strong synergy opportunities between SuperNation and Double Down, and we look forward to starting this work as soon as the acquisition is complete. At the same time, we are continuing to evaluate other M&A opportunities that would leverage our existing strengths in game development, engineering, marketing, and business intelligence to grow our top and bottom line As you highlighted, we have a very strong uncommitted cash position, which combined with our ability to generate consistent high levels of free cash flow, provides a company with significant optionality to allocate capital to enhance shareholder value. We are now happy to take your questions. Sean?

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for our first question. And our first question comes from David Bain with B Reilly. David, go ahead.

Thank you. Hi, IK and Joe. Nice execution on the first quarter. I was hoping first you could maybe unpack, and I know maybe following up with what you were just talking about, IK, on the supernation strategy, just a little bit more, maybe near-term, long-term. What's on the to-do list for the near-term synergy execution? Is it a heavy lift to incorporate your content? Any strategies immediately for customer acquisition? that you're going to be implementing near-term and then longer-term. Is this something you replicate with other acquisitions similar to SuperNation, or do you really just need one kind of horse or platform to potentially tackle other geographies? Just kind of big-picture roadmap on SuperNation from a strategic standpoint would be helpful.

So, Dave, this is Joe. I'm going to start and let IK... weighed in uh afterward uh so you know we are as we mentioned in in uh our com on our comments we're very excited about getting this closed and um you know we are uh able to do some you know preparation work although not certainly as much as we'd like um because we're chomping at the bit to you know to get going um you know i think And I'll have IK specifically focus on the product side because we do, as you mentioned, believe that there are great opportunities for us to bring content and technology sharing and that kind of thing to their business. But we also believe that from a marketing business intelligence standpoint, There are, you know, best practices that we have relative to, for instance, acquiring new users on the marketing side and measuring through our BI capabilities the ROI of those investments and those kinds of things that we are very interested in leveraging, you know, right away and sharing that with the team at SuperNation almost immediately. And that's where the kind of day one focus will be as far as, you know, trying to make an impact immediately. But, you know, as I think you alluded to, the product side is, I think, where the real upside is. Maybe, Ike, you want to talk a little bit about content technology?

Yeah. Hi, Dave.

This is Ike.

Hi. Yeah. As soon as the acquisition is complete, we will support SuperNation's product side and marketing side, as you mentioned. From short-term perspective, we will have opportunity to support SuperNation in succeeding in Western Europe B2C market in iGaming. As well as long-term perspective, we will explore B2B business and B2C business We understand social casino user demo and slot content, how we can make the slot content, and we understand US user demo. So we look forward to expanding our user demo and geography and slot content broadly in B2C and B2B area.

Okay, perfect. Thank you, Ed. Yeah, no, definitely. And then my follow-up has to be on capital allocation. Thank you for citing the $100 million of uncommitted capital and optionality. I'm hoping to understand just a little bit more deeply from a technical and strategic standpoint. So I know you made the change on the reserve in your financials, which to my understanding allows for dividends or buybacks under Korean law. So one, is there any structural... impediment or, you know, to call like a board or special meeting at any point now during the year? Or do we have to wait, you know, for, you know, a year-end type event? And then the other thing would be, you know, have talks around capital return policy become more substantive? Because by calling this out, it seems like that may be the case, but I just wanted to confirm.

Yeah, sure. No, I understand uh and to answer the first question uh you're right we did um make those moves last year to ensure that we weren't beholden to any specific timing um impediment if the board chose to to do something on the capital return side and um at least at this point we know of no impediment that we would would have in case the board wanted to act you know quickly to to do something like a buyback or a dividend as it relates to discussions I mean the board's discussions are ongoing you know there is definitely you know certainly with you know, what occurred with the, you know, the vote on the dividend and certainly discussions that we've had with investors, you know, a top of mind aspect to the capital return topic from a board standpoint. And, you know, like I said, it's definitely something that's, you know, that's, you know, a topic that we wanted to really highlight here today.

Awesome. Thanks, OK. Thanks, Joe.

Sure. One moment for our next question. And as a reminder, if you do have a question, press star 1 1 on your phone to be put into the queue. Our next question comes from Jeff Henriksen with Thorpe Abbott's Capital.

Jeff, go ahead. Hey, Jeff, are you there? Not hearing Jeff.

Can you hear me now? Hi, Jeff. Okay, great. Yeah, so a couple questions for me. Congratulations on the quarter and the return to sequential growth. First question, year on year, you're still following whatever it was, 8%. Some of your peers are growing at this point. Why is the disconnect there? Why? I mean, I'm thinking a side play had a pretty significant year on year growth in their quarter. Are you guys not just investing aggressively enough on the marketing side or maybe get a little bit of color on why we're still kind of seeing negative year on year comps there? That's I guess maybe start with that question.

Yeah, I can't comment on what's in the revenue from others, especially those that you mentioned. I mean, clearly one of the focuses that we've had is to both grow in social casino, which is, as you probably know, is a fairly mature, flattish industry overall, as well as then layer on top new businesses that we would you know, either enter organically or through acquisition. And so I think the first question, you know, in comparison would be with other, you know, with other companies is, you know, what's their, you know, social casino business versus other businesses that they may have more recently acquired. And, you know, that's the first comment. We Also are very focused on continuing to manage and maintain our profitability, our EBITDA margins. And I think actually not inconsistent with what some of our peers have done, but perhaps not all. We have decided not to be as aggressive in spending on the marketing side to acquire new users. as we have seen CPIs increase, and as a result, our overall ROIs related to acquiring new users fall. And so there's a balance between continuing to acquire new users and bringing those new users along as payers and not overspending as the cost of those users go up.

Okay, no, fair enough. And, I mean, in terms of the stabilization of social casino, I mean, do you think now that we've kind of seen sequential growth that this is, you know, something we should kind of continue to see it normalized in the quarters ahead coming, you know, post-pandemic, the normalization we've seen in terms of, you know, how people spend their time and their money, et cetera? Are we kind of getting to a more normalized environment in your view?

Well, I mean, it's great that we were able to break the string of sequential declines from a quarterly revenue standpoint. And, you know, our focus is to grow from here, not just as a company, but for overall revenue, but also for our social casino business. And, you know, we'll obviously have to see how it goes. But, you know, certainly that's our objective is to continue to grow our social casino business from here.

Okay, fantastic. And, I mean, look, anybody that looks at your business can do some pretty simple calculations and realize how ridiculously cheap this stock appears to be. Is this an internal discussion among board members just about kind of how you're being valued relative to peers, relative to the market in general? Is this something that is on your guys' radar? And I mention it because I think I've said in the past that you kind of get this – you know, the market implied cost of equity is really high when you're trading at three times kind of net of cash. Is this something that is, is on your radar in terms of trying to resolve or any color there would be fantastic. Thanks.

Yeah, sure. Jeff. Well, I, I would definitely reinforce the fact that, you know, we understand how, um, uh, how low our valuation is. Uh, and, uh, you know, we, we believe that, uh, We are executing on, you know, the company's strategy to increase that valuation. And, you know, we look forward to that happening. And certainly, you know, there's a recognition that, you know, that's important for us to do, no doubt.

Okay. Well, fantastic. Congrats on the quarter, guys. And have a wonderful rest of your day. Thank you.

Yeah. Thanks, Jeff.

One moment while we bring up our next question. And our next question comes from Aaron Lee with Macquarie. Aaron, go ahead.

Hi, good afternoon. Thanks for taking my question. I got dropped from the call, so I apologize if I missed this. But understanding the pause in new game launches, how are you thinking about possibly investing to accelerate the internal development of new slot content or maybe striking partnerships for more third-party content? Thank you.

Yeah, so, yeah, thanks, Aaron. You know, we – spend a significant amount of our development resources on a combination of new content to refresh Double Down Casino, as well as, as we said in the remarks today, the parallel projects that we have going on in the new app area. And that includes apps that are, well, especially includes apps that are not in the social casino category. And so, you know, we are working very hard with our resources in Seattle and Seoul in both those areas. Again, new content, metagame features, et cetera, for Double Down Casino and then development of new apps, parallel projects to develop new apps outside of Social Casino. We, to date, haven't announced or haven't – gone down the path of using third parties to assist in that process. We certainly aren't against that. We are able actually to do some potential work in leveraging our controlling shareholder, W, if we need to, to use their resources potentially if we find that makes sense for us. And we would definitely be willing to do that as well. So we're open to other options beyond our own resources. But at this point, we're primarily focused in using the resources that we've built up in our studios in Seattle and in Seoul.

Gotcha. Awesome. Thank you. And yeah, congrats on the nice progress this quarter.

Thanks, Aaron.

One moment for our next question. And our next question comes from Greg Gibbous with Northland Securities.

Hey, good afternoon, Joe and IK. Thanks for taking the questions. Sorry if I missed this. I was jumping between a few calls. But did you discuss maybe more specifics on the timing of SuperNation closing?

Well, we didn't, we weren't very specific because it's not possible to be specific. As you know, we need to get regulatory approval from various jurisdictions in Europe. And we are making good progress down those various paths to get approval. And, you know, we certainly believe that we will get approval here within the next, I'll say, short number of months. But unfortunately, there's no way to handicap an exact date or time. But, you know, we're working very hard with our various advisors to do everything that we can to get it closed as quickly as possible.

Okay, fair enough. Yeah, I was just kind of referring to the expected to close later this year and the release. So I just wanted to see if there was anything else. But that's helpful.

And, you know, one of the... Yeah, and just to be clear, there's no real change there. I mean, it's inherently, you know, an... certain timeline when you get started. And so we just keep, uh, we just keep plugging along.

Right. Understood. Um, great. And then, you know, wondering if you could just maybe discuss a little bit more of the specifics, um, relating to the new features that you're adding to Double Down Casino.

Yeah, sure. So, um, as you know, the, one of the most important things that we, uh, do as, um, as a social casino company, is provide chips to players, both purchase chips as well as free chips that we give out. And it's important for us to have players enjoy those and consume them as quickly as they can. And so we are working on new features. And I think IK mentioned some enhancements that we plan on rolling out here later this quarter on for instance our high limit room and the structure of that and how that would work because very much like jackpot features and other features that incent players to bet up with their virtual chips and as a result consume chips faster, that's something that we're, you know, excited about, you know, providing to Double Down Casino users specifically.

Got it. Great. And then I guess lastly, just wanted to follow up on, you know, anything within your control, right, other than kind of, you know, the general trend of the social casino category. you know, wanted to get a sense of if there's anything you could maybe specifically do on the sales and marketing side, because I know, you know, it's been a little bit tougher on the return that you're seeing there. And also maybe just kind of how that return on sales and marketing has trended over the last several quarters. Is it improving, kind of staying the same, you know, worsening, just trying to get your high-level thoughts on that.

Yeah, you know, as I mentioned earlier, You know, CPI, you know, costs, you know, the general trend in costs are going up. You know, and we have generally seen that, you know, all else being equal, the ROIs are not there. And, you know, if we, you know, just have this rising tide of higher costs associated with acquiring new users. Now, if you look inside of that, I mean, one of the things that is kind of the skill and the focus of our marketing team is to find agencies, to find sources of new user advertising partners, et cetera, that can provide pockets of new players that will, you know, be supportive of our ROI targets. And we do find those, and we are spending a considerable amount of money still to acquire new users. But in general, there is kind of a headwind of rising costs that make us cautious about overspending on the sales and marketing side. And you can see that reflective of our sales and marketing costs, especially over the last couple of quarters.

Got it. Appreciate the color. Congrats on the quarter, and I'll follow up offline. Thanks.

Okay. Thanks, Greg.

And at this time, I would like to turn the call over to Mr. Sigris for some closing comments.

Great. Thank you, Sean. And thanks to everybody for joining our call today and your continued interest in Double Down. We look forward to sharing future updates as we continue to innovate and grow within both the social casino business and certainly the general mobile gaming arena. Thanks again. Have a great afternoon.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.