Good afternoon, and welcome to DoubleDown's Earnings Conference Call for the Financial Results for the Third Quarter Ended September 30, 2022. My name is Lauren, and I will be your operator this afternoon.

Prior to this call, DoubleDown issued its unaudited financial results for the third quarter 2022 in a press release, a copy of which has been furnished in a report on Form 6-K filed with the SEC and is available in the Investor Relations section of the company's website at www.doubledowninteractive.com.

You can find a link to the Investor Relations section at the top of the home page. Joining us on today's call are DoubleDown's CEO, Mr. In Keuk Kim; and its CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. Before we begin, Mr.

Grampp, the company's outside Investor Relations Advisers will make a brief introductory statement. Mr.

Grampp?.

Thank you, Lauren.

Before 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 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and we 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 it 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.

Forward-looking statements include and are not limited to those regarding our company's 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 DoubleDown's Annual Report on Form 20-F filed with the SEC on April 4, 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 are believed by the management to be useful in evaluating the company's operating performance. These measures should not be considered superior to, in 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 measures is available in the earnings release and on our Form 6-K 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 DoubleDown's website. Now, I would like to turn the call over to DoubleDown's CEO, In Keuk Kim..

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us on the earnings call for our third quarter 2022 results. Our third quarter results represents another solid quarter of performance and demonstrates the stickiness of our customer base and long-term engagement of our players.

We ended another quarter with adjusted EBITDA margin being over 30% and generated $22.2 million in cash flow from operations or $0.45 per ADS.

Our high-margin capital-light business model coupled with low debt allowed us to continue generating positive free cash flow, which resulted in an increase in our cash and equivalents at the end of the third quarter to over $310 million.

Third 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 million for the same quarter of last year.

We believe our ability to maintain revenue levels above our pre-COVID results is a validation of our success in capturing and retaining growth in our customer base and player spending over the past few years.

Our revenue decrease relative to the third quarter of last year is primarily due to the lifting of COVID-related restrictions that more positively impacted our 2021 results, combined with global inflation and recessionary concerns that are impacting player behavior.

Despite these dynamics, we were still able to generate positive business KPIs, including average revenue per daily active user or ARPDAU of $0.96, which 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 reached an agreement in principle to set the Benson class action complaint and associated proceedings, which we announced on August 29. We agreed to contribute $145.25 million into a settlement fund with IGT, another party to the Benson case, contribute $269.75 million to the settlement bond.

As a result of this agreement, which remains subject to court approval, we recorded a $70.25 million charge to our general and administrative expenses in the third quarter, representing the incremental charge related to the Benson case in addition to amounts accrued in previous quarters of an aggregate of $75 million.

As of today, the $145.25 million required contribution has been fully expensed. We are pleased to have the Benson case results in principle and do not expect to record any further charges related to Benson, of course, subject to final court approval.

Now I will turn it over to our CFO, Joe Sigrist, to walk you through our financials before providing my closing remarks.

Joe?.

Thank you, IK, 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 IK mentioned, we believe revenue was impacted relative to the prior year period due to player concerns about inflation 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 were 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 ARPDAU was $0.96 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, a year-over-year increase from $224 in the third quarter of 2021. Lastly, payer conversion, which is the percentage of players who pay DoubleDown was 5.2% in the third quarter compared to 5.7% 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 $70.25 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, DoubleDown has agreed to contribute $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 IK 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, our 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 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 moderate spending this year to acquire iOS users related to IDFA 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 2023 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 were $45,000, 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 DoubleDown Interactive acquisition.

Net income for the third quarter of 2022 reflected a loss of $24 million or a loss of $9.69 per diluted common share and a loss of $0.48 per ADS compared to net income of $22.8 million or a positive $9.91 per diluted common share and $0.50 per ADS in the third quarter of 2021.

This decrease is almost exclusively due to the charge related to the Benson case. Next I want 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 was $25 million compared to $30.2 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 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 continued to improve as we remain solidly in a cash-generative position. This completes my financial summary.

Now I'll turn the call over to IK for closing remarks..

Thank you, Joe. Looking ahead, we plan to better launch our U.S. title, Spinning in Space later this month. If you recall, Spinning in Space has both casino and non-casino elements. So we think it will be a compelling title for both our existing social casino demographic and new 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 are excited to share with you as we finalize the calendars for their releases.

It is important to highlight that the development of our pipeline of new titles outside of the social casino segment and continued reinvestment into our flagship DoubleDown Casino app to introduce new meta features and slot games are accomplished within our existing R&D budget.

In addition, our team is continuing to evaluate strategic M&A opportunities that can strengthen our overall business, while 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 life of capabilities.

We are cognizant of the investor interest in seeing a transaction taking place, but believe that we should remain patient until we find the right opportunity at the right valuation.

Considering the overall movement in equity market since our IPO, we believe patience have been the correct move, remain optimistic about the availability of alternative opportunities to us, but of course, we cannot make any assurances about timing of any potential future transaction should an appropriate opportunity arise.

We believe DoubleDown has an attractive business model and M&A transactions must be complementary to our key tenants 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. We are in a strong position to remain a leading gaming company that generates stream margins, positive cash flow and keep low debt almost irrespective of market conditions. We are now happy to take your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Aaron Lee of Macquarie. 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 impact in 3Q get better or worse relative to 2Q? And what do you think could happen in 4Q and beyond? Thanks..

Yeah, thanks, Aaron. Thanks for joining us today. We talked about same factors in our Q2 call relative especially to year-over-year comparison at the time. And while we certainly don't think things have necessarily improved sequentially from Q2, we do not think things have significantly worsened from what we saw in the Q2 quarter.

Of course, there is a little bit of seasonality in our business. Summer 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 considering the fact that the inflation and general concerns about the economy remain in play..

Great. Got it. Thank you. And 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're focused on doing differently?.

Well, maybe I can start, and then if IK 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 where DoubleDown Casino as our flagship app remains.

We believe there are opportunities to continue to improve DoubleDown 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.

I think the – 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 – or the launch of some of these new non-social casino apps in 2023..

So pertaining to Joe's comment, internally, we are preparing for Project M, G, K, G. Those are our code names and actually, we designed the synergy between social casino and non-social casino elements and demographics. So, hopefully, we can have lots of reference from Undead World, and hopefully, if we can launch more apps 2023..

Great. Thank you very much..

Yes. Thanks, Aaron, appreciated..

One moment for our next question. Our next question comes from the line of Greg Gibas with Northland Securities. Your line is open. .

Great. Thanks for taking the question. I guess, I first wanted to ask about OpEx. You talked about 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?.

Yeah, I think the, thanks, Greg. I think as we've said in the past and during this call, I mean, the good news is we have a very flexible cost model and we can scale it pretty much to our revenue 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 in 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 could we – I don't know if you've discussed any ones further out. You talked about how you are excited for additional titles in 2023.

Could we maybe go over that? And do you expect maybe new game launches to almost offset or – yeah, I guess, offset some of the macro-related headwinds that you are seeing year-over-year?.

Sure. So relative to Spinning in Space, we are 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 DoubleDown Casino and social casino, we will very hopefully be able to layer on top of that continued strength, additional new revenue from the launch of these new apps, which 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. It just sounded like the idea right now is to be a little more patient.

Is that kind for just improving valuations or is it may be 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 sellers want and what their desires are, but also what we believe we can do 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 non-social casino app.

And so I wouldn't say things have changed. We're continuing through a pretty rigorous process that's thoughtful and that continues forward..

Okay. Thanks again. .

Thanks, Greg..

Thank you. [Operator Instructions] At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Sigrist..

Great. Thanks, Lauren, and thanks everyone for joining us today and for your interest in DoubleDown. 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 DoubleDown's earnings call. You may now disconnect..