DoubleDown Interactive Co., Ltd.

Good afternoon and welcome to Double Down Interactive's earnings conference call for second quarter ending September 30th, 2023. My name is James and I will be your operator this afternoon. Prior to this call, Double Down issued its financial results for the third quarter 2023 in a press release, a copy which has been furnished in a report on a form 6K filed with the SEC and is available in the investor relations section at the website www.doubledown.com. DoubleDownInteractive.com. You can find the link in the investor relations section at the top of the homepage. Joining us on today's call, our Double Down CEO, Mr. Inko Kim, and its CFO, Mr. Joe Segrist. Following their remarks, we will be open for questions. Before we begin, Richard Land, the company's outside investor relations advisor, will make a brief introductory statement. Mr. Land.

Thank you, James. 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 meeting 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 were made only as of the date of this call. The company does not undertake and expressly disclaims any obligations to update or alter the forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During the call, management will discuss non-GAAP measures, which are believed by management to be useful in evaluating the company's operating performance. These measures should not be considered superior to, in isolation, or as a substitute for the financial results prepared in accordance with GAAP. A full reconciliation of these measures to the most directly comparable gap measure is available in the earnings release and on our form 6K 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 Double Down's website. With that, it's my pleasure to turn the call over to Double Down's CEO, Inko Kim.

Thank you, Rach. Good afternoon, everyone. Thank you for joining us on our 2023 Third Quarter Earnings Call. Q3 revenue of $73 million was down slightly on a quarterly sequential basis from $75.2 million in Q2 2023. The decline to a significant extent reflects our continued focus on optimizing our advertising spend to deliver profitable revenue. As such, we continue to generate consistent profit and adjusted EBITDA in the third quarter. Adjusted EBITDA for the third quarter rose both year over year and on a quarterly sequential basis to $29.7 million, while cash flow from operations for the third quarter increased $6.5 million year over year to $28.7 million. Our flagship Double Down Casino, or DDC, continues to be the driver of our solid results. This includes contribution to operating cash flow of approximately $86 million through the first nine months of the year, including the final payment to the Benson Class Action Settlement earlier this year. DDC continues to be very sticky with its existing core paying players as evidenced by the increase we are achieving in average monthly revenue per payer, which have established the foundation for our consistent financial results, including attractive adjusted EBITDA margins and cash flow from operations. As many of you know, DDC revenue is primarily driven by those who have been playing our casino-style games for several years, as opposed to newly acquired players, with a majority of revenue in any quarter generated by players acquired in previous periods. As we have discussed, this is supported by our marketing span refinements and optimization as we focus on generating attractive and appropriate returns. Going forward, Our marketing investment in the social casino business will depend on our ability to intelligently forecast improvement in the ROI of the acquisition of new players and in the retention of existing payers. Simply said, we are managing the business for appropriate ROI on marketing spend to deliver the highest cash flows. We've previously discussed that the consistent cash flow generated by DDC provides us with the flexibility to allocate capital towards establishing a presence in new gaming categories that have highly addressable market opportunities and that are complementary to our core social casino business. In this regard, last week we completed the acquisition of SuperNation, which operates three real-money iGaming sites, primarily focused on online gambling in Western Europe. SuperNation has strong and loyal player base in markets such as Sweden and the UK, and we believe they are poised for growth. In fact, while SuperNation generated unaudited revenue of up-extremely, $24 million in 2022, it is estimated that the European online gambling market will reach $48 billion this year. So we do see a lot of opportunity before us with this transaction. We are working to quickly leverage Double Down's product development expertise to enhance the differentiated online casino player experience SuperNation offers on their Duos, NY Spin, and Voodoo Dream sites. We also expect to take advantage of Double Down's excellence in player acquisition and engagement and monetization. Let me provide a little color on SuperNation's recent progress and the opportunities we see to scale the business. For the first nine months of 2023, their revenue rose approximately 5% compared to the same period a year ago, and they continue to operate at essentially adjusted EBITDA break even. Earlier this year, the company obtained licenses to operate in Estonia, and we expect to launch in this market in the first half of 2024. Following the acquisition, we see opportunities to enhance the marketing efforts to accelerate growth, especially in SuperNation's largest current market of the UK and Sweden. At the same time, we will be fine-tuning SuperNation's operational processes, including with compliance tools, which will help position the business to handle a larger player base as they scale. All of us at Double Down are excited to welcome the SuperNation team to the company. And I'm personally looking forward to working closely with Joachim Stockmann and Henrik Andersen, the co-chief executive officers of SuperNation and their entire team to help bring the business to the next level. The iGaming sector is just one of several complementary gaming categories that are of interest to us. Additional high-growth gaming categories where we can leverage our core competencies include the very large casual mobile games category, which has games in the puzzle, casual casino, and skill, match, and adventure genres. We plan to support these apps in a capital, efficient manner to deliver 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?

Thank you, IK, and good afternoon, everyone. Our revenues for the third quarter of 2023 were $73.0 million compared to $78.8 million last year. As Ike mentioned, Q3 revenue was down 3% sequentially from the second quarter of 2023, primarily reflecting the lower marketing expense, coupled with our belief that consumers remain somewhat cautious about the global economic environment and the prospects for continued inflationary pressures. That said, our current quarter, the fourth quarter of the year, is historically a seasonally positive one, and we have seen encouraging payer behavior trends since early October of this year. In the third quarter, several KPI metrics improved compared to the year-ago period, including average revenue per daily active user, or ARPDAU, increased to $1.06 in Q3 2023 from 96 cents in Q3 2022. Pair conversion ratio, which is the percentage of players who pay Double Down, was up 70 basis points to 5.9% in Q3 2023 compared to 5.2% in Q3 of 2022. Average monthly revenue per payer increased 9% from $225 in Q3 of 2022 to $245 in Q3 of 2023. On a quarterly sequential basis, total operating expenses decreased sequentially from $47.7 million in the second quarter of 2023 to $43.3 million in the third quarter of 2023. The decrease was primarily due to lower cost of revenue and lower sales and marketing expenses sales and marketing expenses for the third quarter of 2023 were 10.6 million dollars a decline of 39 percent compared to q3 of 2022 and 19 percent lower on a quarterly sequential basis our efforts to acquire new players through advertising which represents the primary cost in the sales and marketing category continue to reflect our focus on spending to ensure we deliver the best return on this investment. At this point, we believe that near-term sales and marketing expenses for the core social casino business will remain consistent with the trend over the last few quarters. Net income for the third quarter of 2023 was $26.9 million, or $10.87 per diluted share and $0.54 per ADS compared to a net loss of $24.0 million or a loss of $9.69 per diluted share and 48 cents per ADS in the third quarter of 2022. Note that Q3 2022 results were impacted by a non-cash accrual of $70.1 million related to legal proceedings for the bench and class action. As a reminder, settlement of the Benson matter was finalized, including all settlement payments in June of this year. Adjusted EBITDA for the third quarter of 2023 was $29.7 million compared to $25.0 million for the prior year quarter. Adjusted EBITDA margin was 40.7% for Q3 2023, representing an improvement from 31.7% in Q3 2022 and 36.7% in Q2 2023. Through the first nine months of the year, we have generated adjusted EBITDA of $82.8 million, up 8% compared to the same period in 2022. And the adjusted EBITDA margin for the first nine months of this year is 36.7% up 530 basis points compared to the same period last year. Net cash flows from operations were $28.7 million for the third quarter of 2023, compared to $22.2 million in the prior year period, primarily reflecting higher operating income. And finally, turning to our balance sheet, as of September 30, 2023, we had $271.2 million in cash, cash equivalents, and short-term investments. Our total debt as of September 30 was $37.2 million. After the payment of $36.5 million in cash to acquire SuperNation at the end of the month of October and excluding the debt, our net cash position is approximately $200 million or $4 per ADS. This completes my financial summary. Now I'll turn the call over to IK for closing remarks.

Thank you, Joe. Our core social casino platforms continues to generate attractive adjusted EBITDA margins and strong cash flow. And with the recent acquisition of SuperNation, we are investing in a new high-growth gaming category that we believe will be a long-term growth driver for the business. For our core social casino business, we will remain disciplined in our focus to drive ongoing improvements in player entertainment value driving higher engagement and greater monetization. As I highlighted earlier, with the acquisition of SuperNation now complete, We are moving quickly to integrate the business to bring our combined expertise in game creation, marketing, player engagement, and monetization to bear to execute on the executing growth opportunity we see. As Joe highlighted, we have a very strong uncommitted cash positions and continue to generate consistent high levels of free cash flow. This provides us with the foundation and flexibility to evaluate other M&A opportunities that would leverage our existing strengths in game development, engineering, marketing, and business intelligence, allowing Double Down to further grow our top and bottom lines and create new value for our shareholders. We are now happy to take your questions, operator.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

And our first question comes from Aaron Lee from McCallery.

Hey, guys. Thanks for taking my question. I wanted to start with SuperNation. You know, first, congratulations on closing the deal. And second, I think you said SuperNation has been running at EBITDA break-even. Can you help us think about the EBITDA contribution you expect for 2024 and any color on the Synergy opportunity?

Sure. Thanks, Aaron. Appreciate that. Relative to 2024, the main focus is for the business is to help them scale. We think they have really strong product and certainly with especially their duals brand, strong brand and feature capability. And we really want to help them light the fire to gain more players. To that end, we will be assisting them in investing more in marketing, both on the dollar side and also with the assistance of our marketing acumen and capability that we have created over the last 10 plus years with our social casino business. To that end, we do see them in 2024 becoming EBITDA positive, but I think that would be more towards the back half of the year. And, you know, that is, you know, kind of the focus of how we're looking at the business, at least over the next 15 months or so.

Understood. That's great. And then, you know, now that SuperNation is in the fold, I guess, how are you thinking about the allocation of your development and marketing resources and time and effort in Is it roughly split between SuperNation and the legacy social casino portfolio, or does it kind of lean one way over the other?

Well, I mean, if you look at even after the acquisition closes, I mean, SuperNation's business is still less than 10% the size of our social casino business. So, you know, from an allocation standpoint, you know, the main, quote, business is our core business. Simply from a volume standpoint, That being said, we do see, as I mentioned previously, growth opportunities that are significant with A, the small market share they have now, and B, the ramp that we see analysts suggest as far as how large the opportunity is in iGaming in general. So we definitely will be leaning into them relative to especially marketing, as I said before. But there's no doubt that, you know, from just a sheer volume standpoint, the social casino business is still the, you know, the largest by far part of our company.

Okay, got it. Thank you very much. I'll hand it off.

Thank you. Please stand by for our next question. Our next question comes from Greg Gibbous from Northland Securities.

Thanks for taking the questions. If I could follow up on SuperNation, I thought you mentioned positive performance. I don't know if it was from the most recent period, but just curious how they performed maybe year-to-date relative to their 2022 revenue of $24 million.

Yeah, I made a comment, Greg, that from a nine-month perspective in 2023 versus 2022, their revenue was up about 5%. are still, at least for the first nine months and throughout the 2023 year, will be operating in the same markets that they were operating in and have been operating in in 2022, with the largest being by far in the UK and in Sweden. They've been making good progress in those markets. And as I mentioned to the answer to Aaron's question, as we go into 2024, you know, the scale we believe is going to come from assistance that they need, and we will be giving them relative to acquiring new players in their current markets, with, of course, Estonia being a little bit of a frosting on the cake as they now have an additional market they could add to the business.

Perfect. Yeah, thanks for clarifying. And if I could follow up there, too, as well, could you maybe speak to some of the levers or the strategies that you're aiming to use to improve their operations? I mean, I guess if you could just maybe readdress the synergies, that'd be helpful.

Yeah, no, it's good. I mean, IK summarized at the end of his comments, I think, well, which is game creation, which is development and assistance relative to performance. Slot games, I mean, we have slot games that we are working on now to convert to the iGaming model that they'll be using. But also, really, technology that is the under, as well, that is the underpinning of their games. And I think we've used in the past the example of, you know, they don't have native mobile apps yet. So when you log on to any either Well, any of the three sites that they have on your phone, you're going through Safari, if it's an iPhone, and playing essentially a website. And we think that it will be very helpful to help them develop a native app, for instance, for iPhone and for Android as well. So that's one area. The second is around marketing, which includes primarily the acquisition of new players, but also retention, which is an extremely important part of the Double Down business, and how we believe we can assist them in, you know, marketing creative and different strategies as far as, you know, the various partners that we use that we can bring to bear for them relative to digital ads to, again, acquire but as well retain players. And then, you know, the entire, let's call it live ops category so everything that starts with business intelligence and analyzing the player base and then taking the appropriate action relative to you know sales and offers and um you know even how that feeds into product development relative to new meta features etc um you know those are all things that we're working uh you know you know very closely with them from the very start of the close of this acquisition

Great, extremely helpful. I guess last one, you know, regarding the pullback in sales and marketing spend, seems to have really driven the improvement in AdjustDVD. You know, just wondering if I could get your thoughts on that decision, maybe retroactively or like after the fact. Did it confirm kind of your ROI expectations that you had regarding the decision to pull it back?

Well, did it confirm? I mean, the reality is that the, if I can use the word tuning, of our marketing spend is it's almost like a real-time process. So, you know, we don't go in necessarily saying, you know, it's going to be at this level or that level. We go in saying we need to achieve a certain ROAS, you know, return on ad spend or ROI. And then we tune, you know, essentially in real time based on what we see from the results, from, you know, three-day and seven-day returns on various campaigns we run, various partners that are engaged in those campaigns, et cetera. So, you know, as IK highlighted in his comments, you know, the focus is, and I think we've been very consistent when we talked about that, is on getting the return, not on spending X or Y or Z amount of money, because if you get the return, then we're happy to spend the money, but if we're not, I don't know how to say this, but we're happy not to spend the money because the return is the most important thing.

I would like to support Joe's comment. So basically, marketing environment and platform are changing rapidly, you know, like efforts can and so on. And we have been maintaining our efficiency very well. We use our own analysis and forecast tool based on our internal AI models. This is an ongoing process that we are going to keep leveraging AI for internal tools. Within our internal platforms, based on a lot of DSP data and partners data, based on MMAPs, accumulated attributions, We do see some improvements so far, and we will keep refining efficient processes to avoid repetition between marketing channels. So hope this helps.

Got it. Yeah, it does. That makes sense. Thanks, guys.

Thanks, Greg.

As a reminder, to ask a question, you 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.

Please stand by while we compile the Q&A roster. Please stand by.

And our next question comes from Aaron Lee from Macquarie.

Hey, just a couple quick follow-ups. Yeah, just on SuperNation's seasonality, does it roughly match the seasonality of your social casino business?

At this point, the size of their revenue and how they've been ramping their revenue makes it hard for us to predict or to look back even over the last couple of years and say this is their seasonality. I mean, we know that iGaming in general, like most mobile gaming and gaming products in general, do have a bit of a summer drop-off, especially in August in Western Europe. But at this point, it's hard to know what the exact seasonal pattern will be for SuperNation. And, you know, we'll be learning as we go forward.

Okay. Yeah, fair enough. Yeah, with ramping assets, yeah. You kind of have to throw seasonality at the window sometimes. And just one more for me. You know, in the past, we've talked about your development pipeline. Is there anything on the horizon that we should be mindful of, or should we consider this more on the back burner as you focus on the SuperNation integration? Thanks.

Yeah, no, I mean, I wouldn't say it's on the back burner. We definitely have new gaming apps under development, and we're actively testing concepts and are hard at work on our organic app activities and projects. And we'll give you more information about those, especially as those products launch.

Okay, perfect. Thank you very much.

Thank you. I show no further questions at this time, and this does conclude the question and answer session. Double Down Interactive thanks you for participating in today's conference. This does conclude the program, and you now may disconnect.