DoubleDown Interactive Co., Ltd. (DDI) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. Thank you for joining us at the Needham TMT Conference. My name is Bernie McTernan, the Internet analyst here. My pleasure to introduce Joe Sigrist, CFO of DoubleDown Interactive. He's going to walk through a presentation. If there's any -- I'll hop in at the end to go through some questions. But from the audience, if you have any questions, please type them into the portal, and we'll be sure to get to that. With that, I'll turn it over to Joe, and I'll hop back for Q&A.

Great. Bernie, thank you so much, and good afternoon, everyone. I'm on the West Coast. So for those of you more West, good morning. We look forward to taking about 20 minutes running through a few slides to describe the DoubleDown Interactive story and look forward to taking your questions after that as well. So DoubleDown is a gaming company -- a mobile gaming company that has been around for about a dozen years. And our mission is pretty aggressive, but certainly one we think is very appropriate given our leadership position is to become one of the world's leading global gaming companies by delivering differentiated content and playing experiences to our players. And I think one of the key words here that I'll highlight and we'll talk a little bit more in a minute is this idea of content or differentiated content, which for us means casino-style games, at least in our core social casino business, and that specifically means slot games that our players enjoy playing. And that's the starting point or the core of our business at least today. So just a tail on the tape here on the numbers. We have one of the top 5 social casino games, DoubleDown Casino, which has been in the top 5 for a number of years. We offer within the DoubleDown Casino app and a couple of other smaller casino apps, over 300 separate casino game titles, specifically slot games, although we also have Bingo and Roulette and Blackjack and a few other card and table games as well. We have a very high-value user base. High value, you'll see in a few minutes, recognizing how much are payers, people who play who do pay, pay us on a regular basis. And that base has over 2 million DAU. I also will highlight something in a slide in a minute about the stickiness of our players, given how much players that were acquired in previous periods contribute to current revenue, which is a significant stat that I'd love for you to remember going forward. We have great -- we're a free-to-play model, as you probably know, so casino is free to play. And we have really great monetization metrics within the free-to-play category, average revenue per daily active user in our last reported quarter was over $1. I mentioned the value of our -- the high value of our payers. So in our last reported quarter, if you were a payer -- active payer in that quarter, you paid us over $220 per month, and that's just off the charts relative to a free-to-play model and the contribution of each payer to a company's revenue. And then our payer conversion is an important number, almost 6%. We were at 5.8% in Q1 of 2023, which, as you know, in the free-to-play model is a very important stat to track. We have a great financial profile, our LTM and the last 12 months' revenue over $310 million, about $100 million in adjusted EBITDA. We're always proud of our EBITDA margin, which is 30 plus, an LTM at 32% most recently. So what is Social Casino If you're not familiar with Social Casino, again, it's a free-to-play game, meaning I don't have to pay to play, I download the app but the app -- and the app in our case, is a casino. It's a virtual casino that allows people to play all kinds of different casino-style games. It's like walking into a casino. Most of those games are slot games and most in the category of Social Casino, games that people play are slot games, and they play with virtual currency, monopoly money that we provide to the players on a very regular basis, free. You log in every day, you get free tranches of this virtual currency, this monopoly money. If you like us on Facebook, we'll give you more. If you do a number of things that you would do in a social environment, we'll give you free chips. But of course, given the conversion rate, as I said last quarter, 5.8% of those players also purchased chips, and that's how we generate revenue in this business. Why do people play and why do people pay, it's because they love these games. They love casino-style content, specifically slot games. And this is a form of entertainment for them. They might go to a casino. They might play slot games at the win or at some casino in their local Native American casino, but they also love to just kick back on their phone or on their computer at home and play these games as well. And these games are always available because they're available on their phone or again on their computer. And although you don't have to pay, if you do pay, it's very reasonable if you want more chips. You get many, many, many chips for a very low cost. And so even if you are a payer, the entertainment value or the entertainment cost per minute or whatever that you're playing is very reasonable. So how do we make money? Well, the way we make money ultimately is at the bottom of this inverted triangle, which is people purchase chips. But we start with engaging our players. So we spend a significant amount of money in marketing. In fact, that's our largest discretionary category of spend. We advertise and people will see these ads, and they'll do a click-through, they'll download the app. And again, as I said before, we'll give them free chips, if you sign up for our app and I very much -- if you haven't already put DoubleDown Casino on your phone, I very much would like you to. But when you do that the first time, we'll give you 1 million free virtual chips. You play, you play, over time you likely will have that balance get smaller as the way these games work. And then you can either wait till the next period of time, we'll give you free chips. So maybe wait till tomorrow to get more free chips or you can purchase chips and you go to our pay wall and you purchase chips. And again, 5.8% most recently of the people who play do, in fact, make purchases. And if you make purchase, as I said, made a purchase during the last quarter, on average, you were paying us over $220 per month. And again, it's really a virtuous circle of monetization. We give chips. We offer great slot games and casino-style games to these players. They play those games, they desire as a player more chips. And again, they either wait or they purchase additional chips. Okay. A few quick investment highlights, and I'll go through each of these very quickly. It's a large market. And when I say it, I mean both the Social Casino market, $7 billion annual global market as well as the larger set of markets and market opportunity that we have, specifically the casual mobile game market. So we are very much a sort of casino company, but we are very focused on expanding the business, both through organic development of our own -- through our own development resources and through M&A activities to expand into the larger casual mobile gaming market, which is a significant factor, larger even than Social Casino and growing quite quickly as well. And so we're looking to, again, maximize our benefit in the great category as well as expand greater into the light blue, which, of course, fits into the larger mobile gaming market. We were a pioneer in Social Casino, they're right at the very beginning, founded in 2010, and we launched DoubleDown Casino on Facebook, which was kind of pre-mobile, if I can use that term back then in the same year. In 2012, we were acquired by the company, at a time was a larger slot machine manufacturer in the world, IGT, and we were able to take great IGT slot games, games like Cleopatra and DaVinci Diamonds and launched those within the Social Casino environment of DoubleDown Casino. And that really helped fuel our growth between 2012. And then in 2017, when IGT sold us to another Social Casino company based in New York -- Korea called the DoubleU Games, so we were acquired by DoubleU in 2017. And if you fast forward to today, we have 3 Social Casino apps, the largest, by far, which is or what we call all in one app, which is DoubleDown Casino. And then we are launching and testing new apps, primarily outside of Social Casino, as I mentioned, with our organic development activities as well. Content, I mentioned earlier, is very important to our business. This is great slot games because not only do we have lots of slot games today in DoubleDown Casino, but every 1.5 to 2 weeks, we launch a new slot game. We have that as part of the marketing activities that we have to acquire new players and our players -- existing players also expect that from us. They expect -- just like when you walk into a real casino that you'll see a new slot game, every so often. And we have 3 sources of this ongoing newly launched slot game content. The first is with our previous owner, IGT. IGT, as I said before, has had given us lots of great slot games that they've developed, and they continue to give us great slot games. We have a licensing agreement with them, where we're able to take advantage of bringing the new games they develop if we so choose into our Social Casino business. Secondly, our controlling shareholder and partner, DoubleU Games. They also provide slot games to us through a licensing agreement that we have with them because they are in the same business that we are. And they've given us so far the 300-plus slot titles they have in their library, but we've taken probably somewhere in the range of 35 to 40 of those games over the last few years. And then finally, we develop our own content. So we have our own slot development studios in Seoul, in Korea, and we've developed over 50 titles for our own business. As the CFO, I like these games the best because we don't pay a royalty on games, obviously, we develop ourselves, and we do pay royalties to both IGT and DoubleU Games for the games that we use of theirs. I mentioned the stickiness of our players. And I just want to show this chart which shows the contribution in revenue that we generated over the last 5 years, from players who we've acquired over the history of the company. And you can see based on the thickness of the strata in the slide, how much revenue, we even go back to 2010 or certainly a great year 2011, where in the last few years, players that we acquired over 10 years ago still contribute significantly to the revenue of the company today. And in fact, the stat that I've highlighted here on the right is that 92% of the revenue we generated last year in 2022 were generated by players that we acquired back in previous years. So from a growth standpoint, we have a 3-part strategy here that starts with maximizing the leadership position we have in Social Casino, and that includes not only revenue but also great profit and cash flow generation. I'll talk about that in a minute. And while Social Casino is a fairly mature category in mobile free-to-play gaming, it definitely is a powerful one in the sense of monetization and cash flow generation for our business. It's literally the flywheel of our company and how we continue to have great financial results. The second part prong of our strategy is our own development of category games that are nonsocial casino. So in casual gaming or RPG-style gaming, and we have continued to develop and test and launch new games in this -- in the nonsocial casino category that we developed ourselves. We haven't yet had a hit. We're early in the process of developing these games. We've only launched 2 or 3 or tested 2 or 3 of these games. But we have a great pipeline, a road map of games that we're continuing to test and launch and we will continue to do that with resources that we have, both in Seoul as well as in Seattle, which is where our U.S. operations is based. And then M&A, inorganic growth. We have a significantly strong balance sheet. And so we continue to look at M&A opportunities. We pulled the trigger on our first acquisition we announced in January of this year, the acquisition of a B2C iGaming company called SuprNation, that's based in Western Europe and have their operations in a few countries in Western Europe where online gambling with slot content is legal. And we will be closing this acquisition as soon as the regulators in the appropriate countries approve the acquisition, and we look forward to that. But we continue to look at other acquisitions as well. Again, both in casual and even hypercasual-style mobile gaming as well as in the iGaming space. Just quick on SuprNation. As I said, we announced it in January of this year, acquisition price around $35 million in cash. They have some significantly exciting and powerful brands in slot-based gambling, online gambling, including Duelz, which is a product and a brand that is significantly exciting in the marketplace. Just a few highlights here. About 50 employees. Their run rate -- annual run rate revenue is around $24 million, $25 million, and most of their business comes from either Sweden or Great Britain. At least today as they look to expand in other markets that will obviously evolve. The iGaming market, just in Europe is significant. And certainly, we are excited about their expansion and ability to grow just within Western Europe, first and foremost. I mentioned the power of some of their product, especially the Duelz product and brand. And we believe, given our experience with our business that we can bring significant synergies to SuprNation, both on the product side through games, slot games that we have already developed through engineering and engineering talent that we have in technology. And on the marketing side, their efforts to acquire new players like ours in our Social Casino business is significant, and we believe that across these categories, we can bring significant synergies. Okay. Very quickly on the financing side. Let me just highlight first the most recently reported quarter. So Q1 of 2023, revenue just under $78 million, net income just under $24 million. We continue to generate significant adjusted EBITDA, $25 million and 33% adjusted EBITDA margin, very consistent with what we have done, as you may know, if you know our story over the many years of our existence. Average revenue per DAU just over $1, one of the key metrics in the free-to-play mobile model. And then, as I said, highlight this most interesting stat, which is the average monthly revenue per active payer, which in Q1 was about $221 per month, which we believe to be industry-leading across all free-to-play categories. This is our annual revenue, and you can see we continue to benefit from ongoing contribution of the Social Casino market. We had a significant bump in our revenues. Look at our quarterly flow of revenue in 2021. I mean, COVID was definitely a tailwind for us. Since COVID has kind of dissipated as a tailwind, we've seen revenue decline somewhat, but we were very excited in our last reported quarter that sequentially for the first time since our COVID bump, if you will, sequentially, we actually grew revenue and we look to now continue that trend going forward, both through growth of our Social Casino business and as well as we add new categories of mobile gaming. Just quickly on the monetization side. These are the ARPDAU figures. We continue to improve monetization over the last 4 years. And as I said, in Q1 of 2023, we actually had ARPDAU at over $1. Monthly average revenue per payer, there's that stat again, which has continued to grow and was at $221 in Q1 of 2023. And then our conversion rate has always been over 5%, which is a great conversion rate for any free-to-play company. And certainly in Q1 of 2023, we were excited to be at 5.8%. But we are a very efficient, profitable company and expense-efficient or expense efficiency is shown here where you can see the various breakdown of our operating expenses. And I'll certainly highlight the fact that we continue to be mindful of our marketing spend over the last 2, 3 years, we've been in the low 20s percent of revenue and marketing. One of the things that is very important for everyone to understand about DoubleDown is that we continue as we spend money in marketing, advertising primarily to get new players. We're always looking to be justifying that spend and measuring the return on investment in advertising, and we continue to have models that we apply to measure the efficacy of that advertising spend as a whole, but also more importantly, on a per advertising agency and advertising outlet standpoint. And then just finally here, a quick view of our profitability. As I said, significant both profit and cash generation. We generated about $100 million in cash last year with our $102 million in adjusted EBITDA, which was 30 -- not quite 32% adjusted EBITDA margin. And in Q1 of 2023, we were over 32% in adjusted EBITDA margin. Okay. I'm done.

Great. Well, thanks, Joe. That was great. And just a reminder, if anyone has any questions, please type them in the portal. But maybe just wanted to start with the SuprNation acquisition. Maybe just going further into the thought process behind the deal. Because I think in the past, we've spoken, I think you guys were unclear about if your players really convert into iGaming. So how much is that conversion from Social Casino to real money gaming part of the logic for this acquisition.

Yes. No, it's a good question. I mean, when we went public, we had talked about our M&A strategy, and we talked about casual mobile gaming and hyper-casual games as well, didn't really talk a lot about iGaming. But over the period of time since we looked at iGaming and honestly, the synergies that we thought we could bring to a company in that category, plus the growth opportunities that we observe and what the market can bring, made us more and more interested in the category. And so as a result, given, of course, also the valuation -- I mean, we're paying less than 1.5x revenue for this company. And so from a valuation standpoint, it also makes sense. I mean the investment thesis is less about taking our existing Social Casino players and bringing them over into iGaming. It's really more about this business, first and foremost, this business being a good business in a category or in a market that's growing strongly and the fact that we can bring the synergies to bear like our slot game content, like our engineering and technology back-end, like our marketing and data science skill. And for us, those things were really kind of the leverage points.

Understood. And so the play -- this is a European acquisition, right? Is your player base skewed towards Europe or is it North America?

No. Social Casino as a whole, I mean so if you look at the whole $7 billion annual category that I mentioned, is about 75% North America. And that's because it's mostly slots and slots are very much a North America thing, at least from a preponderance of gambling. So we have a small market of players in Western Europe. Certainly, this helps us, you could argue, diversify our revenue from a geographic standpoint, although that's more of a product or a result. It really wasn't a key driver of this. Again, I think that as a business, this is a really good business. People ask me, by the way, well, can you come to North America, can you take this and...

That was the follow-up question.

Sorry, I preempted. At some point down the road, sure. But first and foremost, we're focused on them growing their revenue, their business in the countries they already have licenses in, in Western Europe. So in Sweden and the U.K., in both cases, they have small markets -- I'm sorry, small market share, so they can grow there. To expand, secondly, in other countries, getting licenses in other countries in Western Europe, like Italy, for instance. So that's a second order opportunity. Third order is sure come to North America. The costs there are significant. I mean it's interesting to cite the reality, which is in the United States, there's still only 6 states where you can gamble online for -- on slot games. Everyone is very excited about sports book, online sports books more. So yes, down the road, that could be an opportunity, but certainly, that's not the primary near or medium-term objective.

Got it. And you mentioned a few times that it's a good business. So you guys already have 30% EBITDA margins. How is adding SuprNation to the mix going to impact that?

Yes. So currently, they're about a breakeven -- EBITDA breakeven. And so our goal with these synergy opportunities is to quite quickly add to the top line, but also efficiency in some of the expense areas to be able to drive profit out of the company. I mean, it's still a fairly small revenue run rate, at least today compared to ours, less than 10%. So we definitely think there's opportunity to grow that to ultimately be additive and to get them to the same or even greater EBITDA margin percentage as our company is currently at.

Got it. Okay. Maybe going back to the core DoubleDown business or Social Casino business. You mentioned it a little bit with where ARPU is and how much you're spending on with -- or sales and marketing is a key cost line. But would love to just get your thoughts on LTV to CAC and what's the right amount to be spending to acquire these customers?

Yes. I mean there's no question that CAC or CPI is going up. I mean, I think that one of the things that's interesting about advertisers is they realize how well Social Casino players monetize. And so as a result, they're trying to get as much as they can from us as we acquire new players. And so that's why we're very mindful with our models and how we look at day 1 monetization, day 7 monetization, et cetera, how well we are getting the return. And so we're very mindful of that, and we moderate our spend in total as well as our spend through any one source based on what our models tell us. And you can tell that if you look at our sales and marketing over the last several quarters, things have moderated as far as how much money we are willing to spend. I mean we spent around $16 million in marketing in Q1 of this year. That compares to almost $20 million of marketing spend back in Q1 of 2022. So we're always just using the science and using the numbers to inform how much we are willing to spend in acquiring new players.