Snail, Inc.

Greetings and welcome to SNAIL Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Sy, Chief Executive Officer. Thank you. You may begin.

Thank you. Good afternoon and welcome to Snail Inc.' 's third quarter 2022 earnings conference call and webcast. On today's call are Jim Tsai, Snail's chief executive officer, Heidi Chow, Snail's chief financial officer, and Peter King, Snail's chief operation officer, will join us during the Q&A session. By now, everyone should have access to the company's third quarter Q&A 2022 earnings press release filed today after market closed. This is also available on the investor relations section of Snail Inc.' 's website at www.snail.com. During the course of this call, management may make forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to the risks and uncertainties as described in the company's press release and other filings with the SEC. On today's call, we will refer to bookings and EBITDA, which are non-GAAP financial measures that provide useful information for our investors. You will find a historical reconciliation of bookings and EBITDA to the corresponding GAAP measures and the earnings press release and the company's SEC filings. And now, I would like to turn the call over to Jim.

Thank you. And hello, everyone. It's a pleasure to speak with you on our first earnings call as a public company. We are a leading global independent developer and publisher of interactive digital entertainment for consumers. We have built a premium portfolio of premium video games designed for use on a variety of platforms, including consoles, PCs, and mobile devices. Only weeks ago, we officially began trading on the NASDAQ. marking a significant milestone for our company, our team, partners, customers, and consumers worldwide. Our mission is to continue to provide high-quality entertainment experiences to audiences around the world. As a leading independent developer and publisher of interactive digital entertainment, we have a strong portfolio of games that are designed to be played on the range of platforms, including consoles, PCs, and mobile devices. In four out of the last six years, our game, Art of Survival Evolved, was a top 25 seller on the Steam platform, and our expertise in technology, in-game ecosystem, and online multiplayer game monetization has allowed us to build a diverse range of intellectual property, against multiple formats and platforms. After survival evolved, our flagship franchise is the leading game with the sandbox survival genre with over 83.2 million consoles and PC install as of September 30th, 2022. As now, we are a team of dreamers with a mission to deliver unmatched gaming experiences and products for the world to enjoy. Our arc series of games are the most popular in the sandbox survival genre because we listen to our customers and partner with top developers to create immersive and entertaining virtual worlds. We have multiple levels for sustained long-term growth. We are working to expand our title to Nintendo Switch and expand genres to develop interactive esports experiences. This includes IP expansion into additional media fronts to boost our portfolio of titles and product offerings. In the medium term, we plan to release game expansion packs for select titles, including launching a new franchise title for our ARK series called ARK 2. Our long-term growth plan is to develop new game titles. We currently have five in the pipeline. R2 will kick off these five additional games, all of which we are targeting to release between 2023 and 2024. I would like to touch a bit more on our series of games. Our dedication to providing audience with high-quality entertainment experience and utilizing the latest gaming technology has produced a strong user engagement, sustained revenues, and meaningful cash flow. Through September 30, 2022, our art franchise, Games, has been played for more than 2.9 billion hours with an average playing time per user of more than 159 hours, and with the top 21% of all players spending over 100 hours in the game, according to data related to the Steam platform. With that being said, we are thrilled to announce that Arc 2 is scheduled and on track for release in 2023. This completely revamped game, developed on Unreal Engine 5, will offer players an immersive gaming experience with improved graphics and a host of new features, including advanced technologies, enhanced animations, and dynamic environments that would evolve based on players' actions. We can't wait for players to experience all the Arc 2 has to offer. Arc 2 will be a console launched exclusively on Xbox. After the first game trailer was released, the game was added to over 1 million user wishlist in 24 hours. We are pleased to see the positive reaction from our fans and are excited to deliver them the next generation of art. We believe that the success of games is dependent on developers' creativity, independence, and their ability to execute their vision consistently. That's why we have been partnering with Studio Walker since 2015, and we are proud of the success of our relationship. This partnership will serve as a model of our future engagement with the new developers. I would like to go ahead and share a few brief accomplishments during the third quarter. We saw 4.4x growth in new installs or 6.4 million installs for Arc Survival Evolved for the third quarter of 2022 versus 1.2 million installed in the prior year period. The continued engagement in our arc title is a testament to our hardworking developers bringing immersive new content and experience to the game. During Q3, we have expanded the Snell team to 85 full-time employees versus 63 full-time employees compared to the end of 2021. We are proud to be a destination for top talent and are excited to continue growing our team as we work towards achieving our mission. We are also pleased to announce that we have entered into agreements with two new development studios, with Hunt and Agasa. These partnerships will continue allow us to focus on the execution and design of our upcoming games up to as well as future gaming products we also remaster art on nintendo switch and also launched the first dlc scotch earth in november 2022 during q4 we successfully completed our initial public offering on the nasdaq raising 15 million in gross per seat. This will allow us to be opportunistic in our approach to M&A, enabling us to strengthen our technology offering, product, IT, media content, and more, so that we can continue to deliver world-class gaming experience to our consumers. In summary, we are excited to build on our existing portfolio of games and titles. This includes acquiring a new IP and providing multi-platform entertainment franchise to create new entertainment mediums for our customers. By listing on NASDAQ, we now have the resource to focus on the execution and design of our next generation games and entertainment experiences. We are currently focused on the development of Arc 2, which will provide our customers with an even better gaming experience and take advantage of recent innovation in game development. With that, let me hand it over to Heidi to review our financial highlights from the quarter.

Thank you. As Jim noted, we are pleased to welcome everyone to our first earnings conference call to review our third quarter results for 2022. Revenues for the three months end of September 30th, 2022 decreased by $8.8 million or 36.1% to $15.6 million compared to the prior period. ARG revenue decreased by $8.5 million attributable to the age of the gains sales normalizing in 2022 after the initial release of Genesis 2 in June 2021. One-up payments and increased revenue recognized from previous contract payments in 2021. Compared to the second quarter of 2022, revenue increased slightly by $100,000. Cost of revenue for the three-month end of September 30, 2022 decreased by $4 million. or 25.8% to $11.5 million compared to the prior year period. The decrease in cost of revenue was due to a decrease in royalties in line with a decrease in revenue and lower amortization costs due to the impairment of the company's Atlas license. We present booking and EBITDA because they are key operating measures used by our management to assess our financial performance. Bookings adjust for the impact of deferral and we believe provides a useful indicator of sales in a given period. For the three months end of September 30th, 2022, bookings decreased by 6.9 million or 37.9% compared to the three-month end of September 30th, 2021, primarily as a result of a decline in ARG-related revenue. For the three-month end of September 30th, 2022, EBITDA was a loss of $1.5 million versus a gain of $4.6 million in the prior year period. This is mainly due to the decrease in revenue. As of September 30, 2022, our cash was $9 million. As a reminder, this cash balance does not reflect the gross proceeds from our IPO, which occurred on November 9. Lastly, I will spend a moment on capital allocation and our share repurchase program. On November 10, we announced a $5 million share repurchase program which has no fixed expiration date. As of December 13, 2022, approximately 1.1 million shares of our Class A common stock were repurchased pursuant to the share repurchase program, and the average price paid per share was $2.98. We may continue to selectively repurchase shares when we view it as attractive use of capital. To review our detailed financial statements, please refer to the earnings press release and PAN-Q filing. Thank you for joining us today, and now let's go to the questions. Operator?

Thank you.

Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Michael Glenn with Gemini Group. Please proceed with your question.

Hi there, and thanks so much for taking my question. I was wondering, could you give us some more information about your product roadmap? Are there any other games sort of on the market in addition to ARK and how those games have been performing? I think we kind of would like to know if you could elaborate on your strategic partnership with Studio Wildcard. Have you entered into new partnerships beyond that recently? Thank you very much.

Thank you for your question.

This is Jim Tai. And actually, there's a couple of small questions in your one question. I'm going to try to answer all of them. First of all, the last question in your question was the how is the relationship with the studio walker. So we've been working with the studio walker since 2015. And that's a lot to say, but I would say it's a very symbiotic relationship I had ever seen in my career, that both Horry working hand-by-hand and until this year. Until today, we just had an annual meeting talking about the roadmap, and we're both very happy and proud of the relationship and also the outcome so far. And we are very optimistic what the IP can expand into a near future. As a roadmap, I think the R2 is still on track on the roadmap, but one good news, is the 2023, we would have a new DOC. Other than what we stated before, we were expanding into different media and useful genre. So that is looking very good for 2022 to come.

And I'm sorry if I didn't answer all your questions. Did I answer all your questions? Mr. Glenn, are you still there? Our next question goes to the line of Sarah Evans with Elite Capital. Please proceed with your question. Hi there.

When is the target date of the launch of Arc 2 in 2023, and why is the launching exclusively on Xbox? Is there a potential missed revenue opportunity by not launching on other platforms like PC and mobile?

Thank you. Again, this is Jim Tai.

So we are on track on the Arc 2 to be released in later 2023. And I think a note, we're using, we've completely revamped the art by using Unreal 5. It's amazing technology, but it has so much in graphics and AI animation, but it's not easy. And also, we are porting into PS5, so the main hardware is the stunning software that requires a lot of hard work and now the developers are working super hard trying to make it in 2023. And I guarantee this will be the best game that you've ever seen in art. And the question is using VCD in art in Xbox. We have a long history relationship with Xbox and Microsoft. So Microsoft is actually very committed to R2, even in the very beginning of the R2 development. So that exclusivity was the acquisition of R2 specifically in 2023. And then if you look at history on R7 release, From the PC and crossing to Xbox, it actually has a very good track record engaging in players, especially in the hardcore game player that we are very talkative. And those are the reasons. Let me know if those questions have been answered.

Yeah, that's great. Thank you so much.

Our next question comes from the line of John Olson with Hill Investments.

Please proceed with your question.

Yeah. Hi, everyone. Thanks for taking my question. I'm just wondering what your investment strategy is and what you plan on allocating funds to improve and innovate upon your products and business. Thanks so much.

Thank you, John. This is Heidi. That was a very good question, John. I think what my investment strategy is moving forward is we definitely have a strategy for M&A in the near future. And we're actively looking for studios for our future investments. And then also, as Jim mentioned earlier, in 2023 and 2024, in our pipeline, we are building some other games as well that will be coming out in 2023 and 2024.

Great. Thank you so much, Heidi.

If I could just ask a follow-up, please. Could you provide some more information on the noise micro-influencer platform, including some key metrics such as audience size, engagement, et cetera? Thanks.

Sure. And then, John, I'll defer this question to LCO, Peter Kemp.

Hey, John. Great question here. So, you know, Lloyd's platform is going to stay evolving with the trends of digital marketing here. We see a lot more opportunities in short format videos nowadays in the marketing ecosystem. Along with that, you know, the advent of Discord and its popularity among, you know, gamers, player bases. We're going to take both of those avenues as sort of new business ventures. So we will be opening up new mediums where You know, maybe instead of a user being a streamer, a user of the Noise platform could be a video editor or an owner of a Discord community. And that way, you know, we're able to provide new offerings to our clientele for Noise. And this is something that Snail itself is also going to continue to investigate and innovate to make sure that our marketing capabilities are in line with, you know, upcoming trends.

Super helpful. Thank you, everyone.

This concludes our question and answer session, and this concludes our call. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.