DoubleUGames Co., Ltd. (A192080) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Thank you all for joining the conference call for the DoubleUGames Earnings Results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on DoubleUGames' first quarter of fiscal year 2025 earnings results.

[Interpreted] Good morning. We'd like to thank all analysts and domestic and international investors for attending the 2025 Q1 Earnings Conference Call of DoubleUGames. Before we begin the presentation, we'd like to provide a few notes. The materials presented today are based on preliminary financial statements for the first quarter of 2025 and are prepared solely for the convenience of investors. While every effort has been made to ensure objectivity, some of the information may include forecasts, forward-looking statements or subjective interpretation. Please note that due to future environmental changes or different data aggregation standards, figures and interpretations presented here may not exactly match the finalized results. Today's earnings presentations will be led by Mr. Jaeyoung Choi, CFO, who will cover the Q1 highlights and Q&A session while the main presentation will be delivered by Mr. Young-Joo Shin from the IR team.

[Interpreted] Good morning. This is Jaeyoung Choi from the DoubleUGames, and I will now walk you through our Q1 2020 earnings. Today's presentations will cover Q1 highlights, consolidated results summary, cost breakdown business updates. We will hold a Q&A session at the end of the presentation. First of all, let me walk you through the Q1 highlights. Consolidated revenue for the first quarter reached KRW 162 billion, which is driven by the continued growth of our iGaming division, marking a return to quarter-over-quarter growth. In particular, the share of DTC revenue is by 2.2 percentage points Y-o-Y to 10.4%, entering the double-digit range and signaling a full-fledged structural shift. Apple's recent decision to allow external payments has also created a favorable environment for DTC expansion. SuprNation delivered strong results achieving net gaming revenue of KRW 19.2 billion, which is a 73% Y-o-Y increase driven by expanded marketing investments, targeting the U.K. market and synergies from product and marketing channel diversification based on our experience in the social casino business. Moving beyond the reliance on its flagship service Duelz, additional contributions from NYspins and VoodooDreams are accelerating overall revenue growth. Paxie Games demonstrated outstanding performance, recording KRW 10.7 billion in payments, which is a 346% Y-o-Y increase, centered on its flagship title Merge Studio, proving its strong momentum in the hybrid casual genre. Monthly revenue continues to hit new record highs and Paxie Games will be fully consolidated starting in Q2, contributing meaningfully to top line growth.

[Interpreted] Hello, this is Young-Joo Shin from the IR team at DoubleUGames. Let me now walk you through our consolidated results for the first quarter. Revenue came in at KRW 162 billion, which is up 4.0% Q-o-Q and 0.9% Y-o-Y demonstrating stable growth. Operating income was KRW 54.8 billion, with a margin of 34% and EBITDA was KRW 57.8 billion, reflecting a margin of 36%. Driven by cost optimization across social casino operations, we have demonstrated operating margins above 30%. Net income was KRW 45.8 billion with a 28% margin. The decline from previous quarter is due to the normalization, following FX valuation gains recorded in Q4. Let me now explain our Q1 cost structure. Platform costs totaled KRW 41 billion, accounting for about 25% of consolidated revenue. The rate continues to decline due to DTC expansion and overall efficiency improvements. We aim for further optimization of platform cost over the mid to long term. Marketing expenses amounted to KRW 23.8 billion, representing a 13% increase Y-o-Y. This increase was primarily due to aggressive marketing expansion in the iGaming segment, which should be viewed not as a short-term cost, but as a strategic upfront investment aimed at acquiring loyal users. Marketing spend as a percentage of revenue was 11% for social casino and 39% for iGaming, reflecting differentiated execution strategies tailored to the characteristics of each business model. Personnel expenses remained stable at KRW 23.7 billion. We plan to continue managing labor cost efficiently by maintaining our existing workforce, excluding changes related to M&A activities. As of the end of the quarter, our consolidated head count stood at 589 employees and there are currently no plans for large-scale hiring. Royalties amounted to KRW 3.6 billion, reflecting increased external IP fees in the iGaming segment due to SuprNation's revenue growth. Depreciation and amortization came in at KRW 3.1 billion consisting of KRW 2.0 billion in lease-related amortization for office space and KRW 1.1 billion in PPA amortization. Let's turn to new business performance. SuprNation is diversifying its brand portfolio and plans to continue expanding its marketing investment with the goal of increasing market share in the U.K. iGaming market which is estimated to be worth approximately KRW 8 trillion. While last year's revenue structure was centered around Duelz, this year, NYspins grew 129% Q-o-Q and VoodooDreams by 123%. By applying our user-friendly UI and UX -- UI expertise gained from the social casino business to the iGaming segment, we are now seeing meaningful cross-segment synergies. This rapid growth is largely attributed to the highly efficient marketing structure characteristics of the iGaming business which allows for a quick return on investment. These advantages have been directly reflected in our performance. It has the user convenience, has also contributed to lower churn rates and more stable user retention. Paxie Games continues to show strong growth with Merge Studio achieving 346% Y-o-Y payment growth. Further enhancements to Merge Studio and the launch of a new title Merge 2 are planned for the second half of the year, reporting additional upside. Like iGaming, hybrid casual games enable quick ROI through in-app purchases and added revenue. Let's now discuss our DTC strategy for the social casino business. The DTC revenue share increased by 2.2 percentage points Y-o-Y, reaching 10.4%. As part of our DTC platform activation strategy, we are enhancing the DUC web platform and integrating it with seasonal events to improve user acquisition and conversion rates. In addition, Apple's full-scale policy shift allowing external payments presents a clear opportunity for our DTC strategy. We plan to actively leverage this change to expand beyond the VIP users and further strengthen our revenue base by reaching a broader general user segment. Now let me discuss our M&A performance and future direction. Since 2017, we have successfully acquired 3 global game companies and completed their PMI processes. In Q1 2025, revenue from DoubleDown Interactive and SuprNation totaled KRW 122.3 billion accounting for 75% of consolidated revenue. Starting in Q2, Paxie Games will also be included in our consolidated results. The company's 346% Y-o-Y growth in Q1 payment volume is a testament to its high growth potential, and we expect it to contribute meaningfully to our future top line performance. We continue to explore M&A opportunities in North America and Europe, focusing on companies that offer strong synergies with our existing portfolio. Lastly, let me walk you through our new game development strategy. We are focusing on the rapid growing hybrid casual market which expanded by 44% Y-o-Y to reach KRW 4.07 trillion in 2024. This market is particularly attractive as it enables monetization through both advertising and in-app purchases. In this high-growth segment, we are leveraging our time-to-market strategy as a core competitive advantage. By identifying global trends early and optimizing our market entry timing, we aim to maximize the success potential of each title. In particular, we plan to strengthen our development capabilities through synergies with Paxie Games. The exclusive growth of Merge Studio has proven Paxie Games' success formula in the hybrid casual genre. We will actively apply these insights through the development of new titles such as Color Slide Jam, Jewelry Jam and Hexa Hive Adventure. Marketing investments will be selectively executed based on step-by-step KPI assessment focusing only on titles with a proven gameplay quality. This approach allows us to allocate our limited marketing budget efficiently and maximize return on investment. This year, we plan to develop more than 15 new games continuing to explore a range of opportunities. Our ground -- while grounded in the puzzle genre, these titles will be incorporate unique content and gameplay mechanics to enhance our competitive edge in the global market. That concludes our Q1 2021 earnings presentation up to Page 9, and we will now move on to the Q&A session, which will be led by our CFO, Mr. Jaeyoung Choi.

[Interpreted] [Operator Instructions] The first question will be provided by Dong Woo Kim from Kyobo Securities.

[Interpreted] It seems like you are focused on expanding your business by acquiring Paxie Games and developing new games. So my question is about the personnel like human resources, how's the current situation? And what is your plan for the human resources management in 2025?

[Interpreted] Thank you for your questions. So let me brief you on the current situation of the -- our staff members and our plan for the human resources management in 2025. By the end of March, the consolidated personnel, the head count was 590 and then as the Paxie Games was added to our consolidated results in Q2, about 40 personnel will be added to this team. And consequently, in total, the consolidated personnel, the head count will be about 630. And the revenue per head count based on the consolidated result is about KRW 1 billion. So we can say that we are currently efficiently managing our personnel. And if I have to divide it by the business -- by the company or the country, we have 480 personnel in Korea and 50 in the U.S., 60 in SuprNation and 40 in Turkey. So we have very efficient arrangement of the personnel and staff members according to our expansion plan for the global market. In 2025, we will utilize AI technology in more active manner so that we can improve our overall efficiency in different business areas such as design, development and CS. And as I explained earlier, we will utilize the use case of the AI, and then we will also apply this to the game asset development. In overall, we will be able to improve productivity. In particular, we will also reassign the personnel within our company, and we will dispatch our human resources to the department which show more growth potential so that in this way we will be able to improve our efficiency furthermore. By doing so, we will be able to expand our business and continue our growth without adding more head count in our company.

[Interpreted] The following question will be presented by Ui Hoon Jeong from Eugene Investment & Securities.

[Interpreted] I have 2 questions. First question is about the marketing expense. It seems like you improved the profitability by improving efficiency in the marketing cost until last year, but your plan is to increase the marketing cost in order to boost up the Paxie Games and SuprNation. So what is the ratio that your -- ratio of the marketing spend that is now being put into social casino and the other genres in Q1 and compared to the last year? And what's your plan for this year? And second question is about the social casino marketing spend. So you have efficiently spent the marketing expenses for the social casino until last year. But what is your marketing channel? Or what is your strategies to better save the marketing spend for this year?

[Interpreted] Thank you so much for your questions. So let me explain about the marketing guidance for year 2025. So in the social casino sector, we will maintain our marketing spend to be 10% out of the revenue -- total revenue and at the same time, we will utilize the DTC in a more active way to maximize our profitability. So this will be our strategy for 2025 and then currently, the sales -- the revenues coming from the DTC already reached a double digit. So this will help us to improve our margin and then secure more user data in this way. And then when it comes to iGaming, the payback period is about 3 to 6 months. So we will focus more on expanding our market share in the U.K. market. Especially just like the social casino market we will continuously expand the rural user pool so that they can be more -- they can be stronger baseline for our revenues. And in addition, the marketing spend that is used for the first quarter will be the strong baseline for the upcoming revenues in Q2 which will also help us expand our top line. So this will be our strategy -- core strategy to set up the long-term baseline for our further profits in the future. And in terms of the Paxie business, currently, we see that the payback period is about 6 to 7 months. So even though we spend our marketing spend, it is easily and very promptly transferred to the revenues, and we can see the results. And then the merged market is growing very -- at a fast pace, and this is a really important time line for us. So we will use this growth pace to create more top line growth, and this will be a really important opportunity for us. And we see that this is an important point to further invest in our marketing. And then it's not like we set up the percentage of the -- percentage that can be spent for the marketing out of the -- our total revenue, but we have our internal guideline for the marketing spend in relation to the ROI as well as the payback period. So we will keep our eyes on this to make our decisions on the marketing spend. However, all the marketing investment will be proceeded within the scope in which our operating profit can make absolute growth. So we will review our ROI thoroughly in order to maximize efficiency, and we will focus on investment so that we can strike a balance between growth and our profitability at the same time.

[Interpreted] The following question will be presented by Seokoh Kang from Shinhan Investment and Securities.

[Interpreted] My first -- I have 2 questions. And my first question is about shareholder return policy. So the overall -- the total amount of the dividend by FY 2024 was KRW 24.0 billion and it's in the middle range of the EBITDA that was shared in advance. And then what is -- what can -- when can we expect the share buyback? So would it be by the end of June? And how about the scale of the share buyback? Would it be about 1 or 3x like we see from the total dividend that was recorded in FY 2024. So that's my first question. And second question is about your future collaboration with Paxie Games. So as far as I know, you are currently internally developing casual games right now. But after the acquisition, do you have any further plans to collaborate with Paxie Games to develop more new games? If so, what would be the genre?

[Interpreted] First, I will answer the first question about the shareholder return policy. As you may well know, the buyback was done in March, and we will be able to disclose officially about the total scale of the buyback by the end of June. So we will share such detailed information with the market by then after having thorough discussion with our Board of Directors. And second, I will answer your question about our future collaboration with Paxie Games. Recently, the Paxie team has made a visit to Korea and we started our discussion for future collaboration in many different ways. And we have analyzed our failure causes when it comes to game development until today. And then we concluded that the development period was too long, and we didn't verify the situation of the market sufficiently until to date. So based on this lesson, we will fundamentally change and improve our development path and measures. In particular, the success cases of Paxie Games has become really important benchmark for our company. And so focus on the U.S. market, the hybrid casual game markets are becoming more successful in which gameplays are being done really a short period of time. So success in that market will be our priority in the future. And then when it comes to genres, so like software puzzle--related genres are our focus, and that we are now seeing some genres whose D30 retention is at least a 15% which means at least 15 people will continue their play after 1 of the people install our games. But however, such numbers are changing dramatically every month. So we are currently closely communicating with Paxie right now so that we can come up with any ideas or the game ideas that can be launched with 1 or 1.5 months. And also in relation to the Turkey market, we are currently expanding our networks in that country as well. So in Korea, some people consider casual game to be easily successful. However, there are still many challenges in these genres as well. Even though many users get access to this kind of game, it's not easy to retain those users for at least 30x of play time. And so the operation is complicated and we have to expose more to many different markets in order to make our profits from the advertisement. However, currently, we see that Turkey is now growing as the hub of the casual game development. So it is a strategically important market for us. And also, we are reviewing the investment opportunities or references of the different game companies in the Turkey as well. So these are now being done in overall. And then based on these strategies, our plan is to launch 15 or more various hybrid games every year. So we are currently collaborating and talking together with Paxie in a very close manner to enter not only the social casino game market, but also the hybrid game market. We are trying to track records together with the Paxie Games.

[Interpreted] The following question will be presented by Dong Hwan Oh from Samsung Securities.

[Interpreted] I have 2 questions. First question is about the social casino revenue. So in overall, we see a decrease or a decline in the sales in the social casino game genre. So is it because of the overall market condition or any certain situations? Or is it because of the decrease in the marketing spend? So that's the first question. And second question is about the SuprNation and Paxie. So what would be the revenue point that we can go beyond the BEP?

[Interpreted] Thank you and let me first answer the first question. So when it comes to the social casino market in overall, we are, of course, on the U.S. market with the DoubleDown Casino and DoubleU Casino. And IDF has changed and CPA has grown in the U.S. market recently. And we also see a decrease in the sales -- the revenue of the -- our competitors in that market as well. However, when it comes to European market, the social casino revenue and the market seem more solid. So until today, the proportion of the revenue of the U.S. market was 90%. So we believe that we have to do more to expand into more various markets. So we have to make up on this. When it comes to ranking, we are #3 or #4 in the U.S. market. but #7 or #10 in European markets. So we will try to find the measures that we can take to catch up on this. And regarding your second question about SuprNation and Paxie, when we look into our EBITDA -- monthly EBITDA, it's about minus 5% and it's near the BEP point. But if we reach 20% to 30% of the revenues more, we believe to -- we expect to have the 5% to 10% margin.

[Interpreted] The following question will be presented by [ Jun-Ho Lee ] from Hana Securities.

[Interpreted] I have 2 questions. The first question is about the high growth of the SuprNation in Q1. So what are the backgrounds behind this high growth of the SuprNation in Q1? And how about the marketing spend as well as the current situation in Q2? Second question is about Paxie. So it will be included in the consolidated results from Q2. So what kind of impact are you specifically expecting? And then how about the marketing? Will you look into the ROI and promote with the marketing? So will it be a little bit delayed? Or will you start marketing in an aggressive way right away?

[Interpreted] So let me first answer the first question about the SuprNation's performance. In Q1, the Korea, the sale -- the revenues based on the Korean won was KRW 19.2 billion, and it was USD 13.1 million. This is 52% up Q-o-Q and 73% up Y-o-Y. So it's a significant growth compared to these 2 periods. And then we believe that there are 3 causes behind this significant growth. First, we see synergy that is synergy with the social casino in full swing. We have verified a lot of different products among the social -- among the users just like we did in the social casino. And then we also have diversified the marketing channels and then the A/B test has been connected to the maximization of ROI, which all led together our revenue for the SuprNation. Secondly, we focus on our marketing investment in the Duelz services before. But we have distributed this to the 2 different services like NYspins and VoodooDreams, so we have distributed different marketing investments and then that effectively work on the U.K. market to recruit more users from this market. And lastly, when it comes to iGaming business, just like the social casino, we can expect the user accumulation effect very much in this business model. So the users who start to play our games will be more likely to use our service for the long time -- long term, and then this will also lead to continuous revenue growth in our company. And then because of our increased marketing investment from Q4, we have more users who are being retained, and they are now converted into the loyal users who are currently contributing to the stable baseline for our revenue growth in the -- currently and also in the future. And then with our know-how in the user retention that was already verified in the social casino market, we apply this to the iGaming market, so that the user pool is currently expanding more and more and such a baseline for the service revenue is now currently making a virtuous cycle. And then we expect that to happen gradually in the future as well. What we have to focus more is that the revenue of the SuprNation in April peaked actually to the highest point since our service launching of the SuprNation. We believe that this is a very important indicator showing that our accumulated user retention and recruitment know-how from the social casino business is now being applied to the iGaming as well, and we expect that this trend will only continue. And now let me answer the second question about the Paxie Games. So when it comes to marketing spend, we are currently reviewing the ROI model for this, and then we will make up -- we will decide our marketing policies after reviewing this ROI policy and model for the Paxie Games. So as of now, we don't have immediate plans to expand our marketing spend for the Paxie Games. However, we see a very good performance from the merge genre. So currently, merge market is growing at a very fast pace, up to USD 300 million per quarter. So it's leading -- it's showing a very important and leading position in the growing market. Especially what we have to focus more is that the users of this genre is the youngest out of the portfolio of DoubleUGames, who are about 25 to 40 years old and then mostly like female users. So these young and new users will be the new driving force, our long-term growth in the future. And then we also see relatively lower CPI and then we believe that this will be a strong point for our strategy to expand our profitability in the future. And also payback period is maintained at about 6 months, so which is relatively shorter compared to that of social casino. And then one more characteristic is that play pattern is about 30 to 40 minutes, which goes align together with the media trend like people prefer Shorts and this will help us to target the niche time out of their daily life. And also high immersion experience is important characteristic as well, and that also led to increasing the daily average payment, and it also peaked in April this year. And we expect that this trend will continue in the second quarter. And then the performance will be consolidated from Q2, which will contribute to the top line growth in full swing from that quarter. And based on the successful know-how of the Paxie Games, we will focus more on -- focus our efforts on the new game development in the future and expand the casual game portfolio as well, and this will help us to develop the core success element in this mobile game market, which can provide a high level of immersion experience to the users within the short period of time.

[Interpreted] The following question will be presented by Dan Kim from Morgan Stanley.

[Interpreted] My question is about the Q2 revenue guidance for the SuprNation and Paxie Games, especially when Paxie Games shows a very compounding revenue these days. So what is the revenue guidance?

[Interpreted] Because of the fair disclosure related to the question that you asked, we cannot give you the exact numbers, but we expect that the numbers will improve in the next quarter compared to the current one. So if there is no more question, I'd like to conclude this conference call. But before that, I want to highlight the points that I want to deliver to you from our company side. We will do our best to maximize our revenues and operating profits in the upcoming quarters like quarter 2, 3, 4 in 2025. And compared to other game companies, I'm sure that we have a bigger potential for increasing revenues, and we can manage our costs. We have the ability to manage our costs. And then we also have the capabilities to sort of promote additional growth through M&A activities as well. So in that sense, I want to explain about our investment principles and M&A strategy before closing this conference call. The big principle of our company is always on the financial performance. We keep our eyes on the consolidated revenues as well as the continuous growth of the operating profit before making every decision from our company. So our principle for investment is a synergic investment. We have 3 standards when it comes to the investment. First, we want to create synergy and improve the efficiency, connecting with our existing business models. We have a focus on casino-related businesses like social casino in the past. But by acquiring Paxie this year -- last year and then expanding our business coverage into the casual games genres, we have laid the foundation to create more synergy effect in many different types of game genres. And secondly, we aim at selecting the companies with a high level of competitiveness in growing game genres. So we look into the game genres in many different ways, which can continue their growth in the future. And then we also review their product competitiveness and marketing know-how and then we prioritize our selection and investment in these companies in order to improve our market competitiveness and ensure our new driving force for the long-term period. Third, we are focusing on the investment opportunities to expand into more different geographical markets as well as the user demographics. We are currently expanding -- trying to expand our revenues with our 3 existing models, at the same time, expand to more markets as well as expand our coverage in different age groups as well as striking a balance between the different gender users of our company. So we will focus our investment in these goals and priorities to expand more user pool and lay a firm foundation for stable revenue for our company. In the case that we invest in the company who owns their own founder, for example, we are currently contracting on a long-term basis also based on the earn-out principle so that we can utilize our own shares and capital at the same time in this investment structure. And in this way, we will be able to have our interest and then the founders interest together and grow this into the long-term partnership. Even though our company is based -- and its headquarters are based in Korea, we have successfully promoted 3 rounds of M&As with the foreign companies that you may well know and that help us to expand our global network continuously. And by doing so, we laid the foundation for further global market entry in different games genres, including social casino, iGaming and casual games. And currently, we are working on due diligence with potential partner companies as of now. And in 2025, we will continuously review such global expansion strategies. And when we specify these deals, we will be able to have some opportunities to share these details with you in the near future. We will focus on reaching our business, our goals as well as financial growth through such M&A principles and strategies, especially we are currently reviewing the potential partners who can create synergy effects together with us in the market and genres with a high level of potential for the further growth in the new market as well. And in this way, we will make our global presence as a global game company firmer in the near future. Thank you so much once again for attending our earnings call despite your busy schedule. I want to assure you once again that we are committed to making every effort we can make in order to make the business dynamics that can provoke curiosity from many different investors in this year. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]