Snail, Inc.

Thank you for standing by, and welcome to Nail, Inc.' 's second quarter 2024 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the call over to Brett Milot, Senior Vice President at ICR. Please go ahead.

Thank you. Good afternoon, and welcome to SNAIL's second quarter 2024 earnings conference call and webcast. On today's call are Tony Tan, SNAIL's Co-Chief Executive Officer, Peter Tang, Chief Operating Officer, and Haoyi Chao, Chief Financial Officer. The company's second quarter 2024 earnings press release was filed today with the SEC after the U.S. stock market's closed, and it's available on the investor relations section of Snail's website. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially from our expectations, and forward-looking statements are subject to certain risks and uncertainties. Please refer to the company's most recent Form 10-Q that was filed today with the SEC. the most recent Form 10-K that was filed with the SEC on April 1, 2024, and other SEC filings. The company makes these forward-looking statements as of today and disclaims any duty or obligation to update them or to release publicly any updates or revisions to any forward-looking statements to reflect any change in its expectations or any change in events, conditions, or circumstances on which any statement is based. Additionally, on today's call, we will refer to bookings and EBITDA, which are non-GAAP financial measures that provide useful information for the company's investors. You will find a historical reconciliation of bookings and EBITDA to the corresponding gap measures in the earnings press release and the company's SEC filings. And now, I will send the call over to Heidi. Heidi?

Good afternoon, everyone, and thank you for joining us today. I'm very excited to share with you our strong results this quarter. As we mentioned on our last quarter's conference call, we now have both an incredibly passionate and skilled team. equipped with state-of-the-art technology and premier franchises such as Art, which have nurtured, engaged, and committed gaming communities. We plan to continue to expand the horizon of what is achievable in the realm of interactive entertainment, delighting our players across the globe. As we look to the future, I'm particularly excited about our plans to further leverage artificial intelligence across our development pipeline. The advanced AI technology in which we have been investing holds immersed potential to enhance our creativity and productivity, all while maintaining the premium quality that our players have come to expect. Our objective is to empower our talented human teams by providing them with these powerful AI tools rather than attempting to replace them. Additionally, we're eager to capitalize on the widespread attention that our ARC animated series is receiving due to the upcoming second half of the series' first season. With the gaming world's eye focus on the Be Love franchise, we have a prime opportunity to engage new players and further energize our existing community of dedicated art fans. We have developed ambitious plans to expand the art universe in ways that will delight both our longstanding players and newcomers alike. With that, let's quickly review the quarters in numbers. Our R franchise continues to be an incredible success story. Through June 30th, 2024, R has been played for 3.7 billion hours with an average playing time per user of 161 hours. Additionally, as we highlighted last quarter, The top 21% of all players have spent over 100 hours immersed in the game, according to data from SEEN. For the second quarter of 2024, NAIL generated net revenue of $21.6 million, up significantly from $9.9 million in the second quarter of 2023. Net income in the second quarter of 2024 was $2.3 million versus at a net loss of $4.1 million in the second quarter of 2023. Primarily driven by the successful launch of new survival game, Bellwright, new DLC for ARK Survival Ascended. The Power Ranger Premium Mod and revenue recognition for the release of the Scorched Earth DLC on ARK Survival Ascended. I will now hand the call over to Peter Kim, our Chief Operating Officer, to review our product roadmap and share some key developments.

Hello, everyone. In the second quarter of 2024, Donkey Crew released the survival simulation title Bellwrights into early access on Steam to rate reviews. With over 77% of the reviews giving a positive score and the overall review score on Steam being mostly positive, We have sold over 300,000 units and the wishlist count for the game hovers around 900,000. We plan to continue to add content to the game and fulfill our vision for the product to set new heights of expectations for a game in this genre. We look forward to a large content update in Q4 of 2024, which will be very exciting for fans and wishlist holders of the title. Additionally, Our indie publishing label, Wandering Wizard, is pushing ahead full steam with our plans to expand our publishing catalog. We have signed two additional games in Q2 of 2024 to be released at the end of 2024 and beginning of 2025. The first project is titled The Cecil, The Journey Begins, a horror game set in the legendary Cecil Hotel in Los Angeles and developed by Genie Interactive Games. The second title is named Chasmo Fear, another horror FPS game developed by Two Brothers and Macedonia under the Misty Dev banner. With plans to add eight more titles to our upcoming slate by the end of 2024, Wandering Wizard continues to seek out new projects with a focus on quality gameplay and a defined market. Internally at Snail Games USA, we have five projects in development. On August 15th, Project Hermes will unveil a first peek at pre-rendered footage, and we will be unveiling the project's commercial title in a first-look developer interview with game director Primus Majda. Next, we have Project Aether and Project Ares. Both will be projects set in Eastern fantasy. These two projects will be familiar to fans of snail games, as they will tap into one of our well-known original IPs. Project Aether will be a multiplayer experience, while Project Ares will gravitate with those seeking an AAA Eastern Fantasy RPG experience. We also have Project Poseidon, which will be very exciting for fans of snail games, as it will be set in a franchise that is very familiar to our audience. Last but not least is Project Dionysus, which is a new IP we are very excited about. Project Dionysus will explore a unique genre of games, that is emerging in popularity. More information will be released about these projects and development as they become ready for our fans. Keep an eye out on our newsfeed for updates. Turning to Ark Survival Ascended, the development timeline has settled down into a cadence of a new DLC every three months. This is up from the previously stated two months as we define in more detail the amount of content we want to present in each DLC. We're looking forward to Asa's content catching up to that of Ark Survival Evolved and hope to be presenting new content in the future. Regarding Ark 2, the development is still ongoing and we will be releasing news about the project as soon as more information becomes available. Lastly, Ark, the animated series, is looking forward to the release of the second part of Season 1. With Episodes 7 through 13 on the slate, fans of the Ark franchise can look forward to more dino battles as the storyline continues development. I will now pass the call off to Heidi to discuss our financial results in more detail. Heidi?

Thank you, Peter. As mentioned, net revenue for the three months ended June 30th, 2024 was 21.6 million as compared to 9.9 million in the three months ended June 30th, 2023. Similar to Q1, the strong increase in net revenues was primarily due to the release of ARC Survival Ascendant on October 25, 2023. As a reminder, to properly account for revenues from sales, SNAIL must recognize revenue over time rather than all at once. This involves estimating when we will deliver the full game experience to customers through the transfer of the game licenses downloadable content, technical support obligations, and how long we estimate that player will be engaged with our game. The timing of future game updates and content releases is based on projection of when our developer will hit certain milestones. However, those estimates can change if developers meet unexpected delays or if the game platform requirements shift unexpectedly. Essentially, public accounting for our gain revenue over time involve making projections that are subject to change based on development milestones. The estimated services period of our virtual goods and market conditions. This can affect the timing of our revenue recognition each period and can cause the deferral of significant revenues into future quarters. With that in mind, Let's get into some of our other results. Net income for the three months ended June 30th, 2024 was 2.3 million compared to a net loss of 4.1 million for the three months ended June 30th, 2023. This improvement in net income was driven by increased revenues and continued cost cutting effort in our general and administrative operating expenses. So things for the three months ended June 30th, 2024 were 22.9 million as compared to 9.3 million for the three months ended June 30th, 2023. The 13.6 million or 146.7% increase in revenue is due mainly to the release of ARC Survival Ascender in the fourth quarter of 2023, as well as the release of Bob's Tall Tales and Bellwright, along with the Ark Survival Ascended DLC, Forge Earth, in April 2024. In addition to the increased sales of the aforementioned titles, the company deferred approximately $7.1 million in revenue during the three-month end of June 30, 2024, for the Ark Survival Ascended DLCs and part of the Bob's Power Tales, which have not yet been released. partially offset by the recognition of 5.6 million for the release of scorched earth. Earnings before interest, taxes, depreciation, and amortization was 3.1 million versus a loss of 4.8 million in the prior year period. A significant increase in EBITDA was due to an increase in net income of 6.4 million and an increase in the company's tax provision for the income taxes of $1.7 million. As of June 30, 2024, unrestricted cash and cash equivalents was $15.5 million. To review our detailed financial statements, please refer to the earnings press release and our most recently filed Form 10-Q, which was filed today with the SEC. Thank you for joining us today, everyone. We will now open the call to questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Pat McCann with Noble Capital Markets. Please go ahead.

Good afternoon and thanks for taking my questions. My first question has to do with the Ark Survival Ascended adoption. As I think you've mentioned before, there were some technological disconnects between the potential user base of ASA and the game, you know, based on the processing power that's necessary to run such a complex game on Unreal Engine 5. I was wondering, could you provide an update to how the adoption of that game is trending and have have there been any changes to your expectations for the adoption period for that game as far as, you know, the quarters, you know, going out, you know, several quarters and the adoption period maybe taking a little longer than originally expected because some users don't have the high-end PC. You know, how is that going? Is that going as expected or any changes there?

Hi, this is Peter Kang. I'll be answering this question. Great question. You know, I believe last time when I spoke on this topic, it was regarding the technological adoption rate. There's another factor that also contributes to the adoption rate, and that is the catch-up of content from ARC Survival Evolved to ARC Ascended. So as we release more DLCs in ARC Ascended, The adoption rate, we certainly do see an increase. We know this by the average concurrent users on both games. We slowly see the amount of ARK Survival Ascended increasing, while ARK Survival Evolved is decreasing at a similar rate. As far as technologically, the case with the graphic cards Well, that factor is contributed and compounded also by the adoption of AI and the usage of these same graphics cards, keeping the price high. So we do have hurdles, but in order for us to overcome this, we have also started some development projects that will alleviate this concern by adding more content over time to Arc Survival Evolved.

Great. Thanks for that. And then my other question, or my next question, I guess I should say, was just if we could piggyback on that question with the technological gap, would it be fair to look at the launch of ARC-II, which, of course, you haven't stated exactly when that will happen, but out in the future, would it be fair to sort of look at the ASA adoption rate and crossing that technological barrier as as kind of a leading indicator for the timing of Arc 2, since you sort of have to cross that. You might want to cross that barrier first before you launch the next big launch.

Absolutely, and that's a very astute point of view to notice. We are using Arc Ascended as an indicator on mass adoption for Unreal 5 game engine on a multiplayer gameplay. So, yes, you're absolutely right. Once we see that the mass market is ready to accept that Unreal Engine 5 in a multiplayer environment, able to process with the right computing power, that will give us the right market window to launch ARC 2.

Great. And if I could squeeze in one more, I was just wondering if you could give any update on how the modding program is going now. Is word of that spreading? And on the other hand, has there been any pushback from users who don't want to pay for mods and that sort of thing? How is the community accepting the program?

The program is being very well received. Our partners at Overwolf, who are handling the curation of the mods, have reported nothing but great things about the success of our program. Recently, we've launched a Power Rangers mod through the program, which was 100% contributed by a third-party studio, and this mod performed exceptionally. As we're launching our programs, we have seen other games also launch similar pay-for-modding programs, and the other titles have not received the amount of support that we have from our community. We have received no lashback, no negative reviews about our ecosystem and allowing content creators to generate revenue from the modding program, whereas the approaches from other competitors have received backlash due to their approach being significantly different from ours.

Great.

Much appreciated. Thanks so much for answering the questions.

This concludes our question and answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect your lines.