Q3 2022 DoubleDown Interactive Co Ltd Earnings Call

November 8, 2022

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Good afternoon, and welcome to double Downs earnings Conference call for the financial results for the third quarter ended September 30th 'twenty 'twenty. Two my name is Lauren and I will be your operator this afternoon.

Here to this call double down issued its unaudited financial results for the third quarter 2022 in our press release, a copy of which has been furnished in our report on form 6K filed with the SEC and is available in the Investor Relations section of the company's website at Www dot doubled down interactive dotcom.

You can find the link to the Investor Relations section at the top of the homepage joining us on today's call are double down CEO , Mr. In cooking and its CFO Mr. Jos Sechrist. Following their remarks, we will open the call for questions before I begin Mr. Grant the company's outside Investor Relations adviser.

We will make a brief introductory statement Mr Grant.

Yeah.

Thank you Laurent.

For 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 27 of the Securities Act of 1933.

And section 20, <unk> of the Securities Exchange Act 34 as amended.

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.

Looking statements include but are not limited to those.

These 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 its annual report on form 20-F filed with the SEC on April four 2022, 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 the call management will discuss non-GAAP measures, which I believe.

The management to be useful in evaluating the company's operating performance. These measures should not be considered superior to an 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 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 Downs website, now I would like to turn the call over to double down CEO and cooking.

Good afternoon.

And everyone. Thank you for joining us on the earning call for our third quarter 2022 results. Our third quarter results represent another solid quarter of performance and demonstrate the stickiness of our customer base and long term engagement of our players we ended another part.

Adjusted EBITDA margin being over 30% and generated $2 $2 billion in cash flow from operations or <unk> 45 per <unk>.

Our high margin capital light business model, coupled with low debt allowed us to continue generating projects.

Free cash flow, which resulted in an increase in our cash balance at the end of the third quarter to over $310 billion.

So quarter revenue of $78 $8 million is up 14% from the third quarter of 2019, the most recent comparable quarter prior to the Covid pandemic, but was down from $87 billion for the same quarter of last year, we will.

Our ability to maintain revenue levels above our pre albeit results.

It's a validation of our success in capturing and retaining costs in our customer base and players spending over the past few years.

Our revenue decrease relative to the first quarter of last year is primarily due to the lifting of hobby latest restrictions that were positively impacted our 2021 retail.

Bind with global installation and recessionary consensus that are impacting Playa Vista happier.

Despite these dynamics, we were still able to generate positive business kpis.

<unk> average revenue per daily active user or <unk>.

<unk> of 96.

This is unchanged from the third quarter of last year and average monthly revenue per payer of $225, which is comparable to the third quarter of last year at $224.

Furthermore, during the third quarter, we had Richard an agreement in principle to settle the best in class action complaint and associated preceding.

Which we announced on August 29.

We have agreed to contribute 145.

Point $205 million into a settlement fund with IGT Another party to the banks in case contribute $269.75 million for the satcom on funds.

As a result of this agreement, which remains subject to court approval.

Quoted 72 $5 million charged to our general and administrative expenses in the third quarter, representing the incremental charge related to the banks in case. In addition to amounts accrued in previous quarters of an aggregate of 75 million.

As of today, the $145 million to $5 million required contribution has been fully spent.

Pleased to have the sanction case result in principle and do not expect to record any further charges related to Benson.

Subject to final court approval.

Now I will turn it over to our CFO Jos degree to walk us through how many shares before providing my closing remark.

Joe.

Thank you Kate and good afternoon, everyone.

Revenues for the third quarter of 2022 decreased 9% to $78 8 million from $87 million for the third quarter of 2021 as I can mentioned, we believe revenue was impacted relative to the prior year period due to player concerns about inflation.

<unk> and a slowdown in the global economy combined with the lifting of stay at home or work from home Covid prevention initiatives in 2022 that we're still positively impacting the business during the third quarter of 2021.

Despite these dynamics, we generated overall solid key monetization metrics for the third quarter of 2022 in particular average revenue per daily active user or <unk> was 96 cents in the third quarter of 2022 in line with the third quarter of 2021 average.

Monthly revenue per payer was $225 in the third quarter, our year over year increase from $224 in the third quarter of 2021.

Lastly, payer conversion, which is the percentage of players who pay double down with five 2% in the third quarter compared to five 7% in the third quarter of 2021.

Total operating expenses for the third quarter of 2022 increased 110% to $124 1 million from $59 2 million for the third quarter of 2021.

The increase was primarily due to a charge of $75 million recorded in general and administrative expenses, reflecting the incremental charge associated with the agreement in principle to settle the Benson class action complaint and associated proceedings that we announced back on August 29.

In accordance with the agreement in principle, which remains subject to court approval double down has agreed to contribute a $145 $25 million to the settlement the incremental charge for the third quarter is in addition to amounts accrued in previous quarters of an aggregate of $75 million.

As I can't mentioned, while the settlement remains subject to court approval, we do not expect to record any further charges related to this class action complaint.

When excluding the legal accrual related to Benson or operating costs decreased 9% from the prior year period.

In line with our revenue decrease demonstrating the flexible cost structure intrinsic to our business.

As it relates to certain operating costs sales and marketing expenses in the third quarter of 2022 were $17 2 million representing.

Representing a nearly $1 million sequential decrease compared to the second quarter of 2022 and consistent with the third quarter of 2021.

As we discussed last quarter, we have slightly moderated beginning this year to acquire iOS users related to <unk> changes and reallocated some of that spending to Android and internal markets. We still expect a modest increase in sales and marketing expenses late in Q4 and into 2020.

<unk> with the pending release of spinning in space, our newest title, noting of course, we have the utmost flexibility in investing in sales and marketing depending upon the success of spinning in space and other overall market changes.

It is also worth noting that depreciation and amortization expenses in the third quarter of 2022 or $45000 compared to $2 $4 million in the third quarter of 2021.

The decrease from the quarter a year ago was due to the completion of amortization of certain identifiable intangible assets that we acquired in the 2017 double down interactive acquisition.

Net income for the third quarter of 2022 reflected a loss of $24 million.

Loss of $9 69 per diluted common share and a loss of <unk> 48 for aes compared to net income of $22 8 million or positive $9 91 per diluted common share and <unk> 50 per aes in the third quarter of 2021.

This decrease is almost exclusively due to the charge related to the <unk> case.

Next I wanted 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 third quarter of 2022 with $25 million.

Compared to $32 million in the third quarter of 2021.

Adjusted EBITDA margin for the third quarter of 2022 was 31, 7% down from adjusted EBITDA margin of 34, 7% for the third quarter of 2021 the.

The year over year decline in adjusted EBITDA and adjusted EBITDA margin is primarily attributable to the lower revenue in the third quarter of 2022, which was previously described.

Cash flow from operations for the third quarter of 2022 was $22 $2 million compared to $33 $7 million for the third quarter of 2021.

Note that the non cash accrual related to Benson had no impact on our operating cash flow.

We did not incur any material capital expenditures during the third quarter.

Finally, turning to our balance sheet at the end of the third quarter of 2022, we had $310 $5 million of cash and cash equivalents compared to $284 $4 million of cash cash equivalents and short term investments at the end of the second quarter.

We elected to convert all of our short term investments to cash during the third quarter.

Our total debt at the end of the third quarter of 2022 was $34 8 million. This translates to a net cash position of approximately $130 million after excluding our outstanding debt and the Benson legal accrual our cash position.

To improve as we remain solidly in a cash generative position.

This completes my financial summary, now I'll turn the call over to <unk> for closing remarks. Thank.

Thank you Joe.

Looking ahead, we plan to better align our U S title, sending a space later this month, if you recall attending a pace had both casino and none.

<unk> casino elements. So we think it will be a compelling title for both our existing social casino demographic.

Users, who prefer non casino casual gaming.

We also have multiple gaming apps under development by our internal studios planned for launch during 2023, which news.

We're excited to share with you as we finalize the calendars.

Their leases.

It is important to highlight that the development of our pipeline.

New titles outside of the social Casino segment and continued reinvestment into our flagship Dover Downs casino App to introduce new meta features as slot games.

<unk> accomplished within our existing R&D budget.

In addition, our team is continuing to evaluate strategic M&A opportunities that strengthen our overall business.

<unk>, providing new growth opportunities to diversify our business.

Any M&A opportunity should also have strong synergy potential where we can leverage our existing platform and capabilities, including product development marketing user acquisitions and live ops capabilities.

We're cognizant of the Investor interest in seeing a transaction taking place, but the lift that we should remain patient until we find the right opportunity at the right valuation.

Considering the overall movement in equity markets since our IPO, we believe patience has been the correct move.

We remain optimistic about the availability of alternative opportunities to us.

Of course, we cannot make any assurances about timing of any potential future transaction should an appropriate opportunity arise.

We believe double down has an attractive attractive business model and M&A transactions must be complementary to our chief talent and not compromise the strong business we have created.

We have a capital light and flexible cost structure that is largely correlated to revenue or discretionary we have high margins with low debt and we have a tenured and dedicated customer base that provides healthy.

Visibility into long term recurring type revenue.

In a strong position to remain a leading gaming company that generate.

Stream margins positive cash flow and chip low debt almost positive market conditions.

We are now happy to take your questions operator.

Thank you.

At this time, we will conduct a question and answer session to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.

One moment please.

Our first question comes from the line of Aaron Lee of <unk>. Your line is now open.

Hey, good afternoon, congrats on the quarter and thanks for taking my question.

In the release you called out the macro impact on consumers did the macro impacting <unk> get better or worse relative to <unk>.

And what do you think could happen in <unk> and beyond thanks.

Yes, Thanks Erin.

Thanks for.

Joining us today.

We talked about same factors in in our Q2 call relative especially to year over year comparison at the time.

And.

While we certainly don't think things have necessarily improve sequentially from Q2.

We do do not think things have significantly worsened from what we saw in the Q.

Q2 quarter.

Of course, there is a little bit of seasonality in our business summers is generally a little bit softer.

But if we try to set that aside.

We think the environment is at least from a player engagement standpoint.

Pretty similar or was pretty similar in Q3 versus Q2.

As it relates to Q4.

I mean time will tell obviously.

There are a number of other seasonal factors in play here obviously.

We hope to.

Benefit from.

Holiday play as we have in the past.

But also are still.

Yeah.

Considering the fact that in <unk>.

Relation in general concerns about the economy remain in play.

Great got it thank you.

As we enter 2023, clearly we're stepping into a different environment than a year ago.

As you think about your product roadmap heading into this year versus last year are there any things you are focused on doing differently.

Well, maybe I can start and then if it has any comments about our roadmap and how maybe we're approaching it now versus how we did.

A few months or quarters ago.

I would say that our desire to continue to benefit from.

Our strong presence that we have in social casino with double down casino is our flagship App remains we believe there are opportunities to continue to improve double down casino.

Especially with.

The addition of new meta features that we continue to test and implement.

And at the same time, we're very excited about the roadmap that we have.

For non social casino apps.

Thank you.

I would say from my standpoint, the only thing that's really different is that we're further down the path in fully engaging in some of these new apps.

And we're looking forward to the App of the launch of some of these new non social casino.

Apps in 2023.

So protein Joe's comment internally, we are preparing for project.

GE K C.

Those are our code named actually.

We redesigned.

The synergies between social casino, and social casino elements and demographic so.

Hopefully, we can have lots of restaurants brands from that work.

Hopefully we can launch more apps 2023.

Great. Thank you very much.

Yeah, Thanks, Eric I appreciate it.

One moment for our next question.

Okay.

Our next question comes from the line of Greg give us with Northland Securities. Your line is open.

Great. Thanks for taking the questions.

I guess I first wanted to ask about.

Opex you talked about it expense in case being down 9%. Just wondering do you expect that trend to continue and maybe when do you expect operating costs to level out.

Yes, I think the.

Thanks, Greg I think as we've said and said in the past and during this call I mean, the good news is we have a <unk>.

Flexible cost model.

And we can scale it pretty much to our revenue as we as we wish.

And that's especially true with marquee investment.

Which is very very.

Flexible.

And so.

As we look at the launches we just discussed the launches of new games into 2023.

That will require us to spend more in sales and marketing now we fully expect.

To see the return in revenue.

And gross margin, but by the same token it will require an investment in acquiring new players and we would expect to see greater sales and marketing investment in 2023.

Got it makes sense.

And I apologize if I missed this but if we could just go over the new game development front I think you said spinning in space either later this month or next month.

But can we I don't know if you've discussed any months further out you talked about how youre excited for additional titles in 2023.

Could we maybe go over that and do you expect maybe new game launches to almost offset or.

Yes, I guess offset some of the macro related headwinds that you're seeing year over year.

Sure so relative to spinning in space.

<unk>.

Our planning to enter into open beta by the end of this month.

And then if that goes well to potentially launch by the end of this year.

As it relates to other apps, we haven't been specific about launch dates but as we mentioned there are several that are teed up for launch in 2023, and certainly if you look at our strategy, which is to continue to benefit from the strength that we have with double down casino in social casino.

We will very hopefully be able to layer on top.

Of that continued strength.

Additional new revenue from from the launch of these new apps, which.

We will continue to be released as we as I said go forward into 2023.

Okay makes sense and if I could just follow up on the M&A prospects.

Just sounded like.

The idea right now is be a little more patient is that kind of afford just improving valuations or maybe waiting for targets that are have more synergies to offer.

Well, we've gone through a process.

Which continues Greg which is very thoughtful.

And we think very complete in the sense of evaluating.

Not only.

What what.

<unk> wants and what their desires are but also what we believe we can do with with the business relative to synergy.

And certainly what we can do in the sense of augmenting our current strategy, especially around.

Internal development of nonsense.

Casino apps.

And so I wouldn't say things have changed we're continuing through a pretty rigorous process.

Thoughtful.

And.

That continues forward.

Okay. Thanks again.

Thanks, Greg.

Thank you.

A reminder to ask a question you will need to press star one on your telephone.

One moment please.

Okay.

At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Seacrest.

Great. Thanks, Lauren and thanks, everyone for joining us today and for your interest in double down we look forward to sharing future updates with you as we continue to innovate and grow the company in the global digital gaming business. Thanks, So much have a great rest of your day.

Thank you for joining us today for <unk> earnings call you may now disconnect.

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Q3 2022 DoubleDown Interactive Co Ltd Earnings Call

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