Good afternoon and welcome to DoubleDown Interactive’s Earnings Conference Call for the Second Quarter ended June 20, 2023. My name is Sean, and I will be your operator this afternoon.

Prior to this call, DoubleDown issued its financial results for the second quarter of 2023 and a press release, a copy of which has been furnished in a report on Form 6-K filed with the SEC and is available on the Investor Relations section of the company’s website at www.doubledowninteractive.com.

You can find the link to the Investor Relations section at the top of the homepage. 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, Richard Land, the company’s outside Investor Relations Advisor, will make a brief introductory statement. Mr.

Land?.

Thank you, Sean.

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 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 the 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 March 31, 2023, 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 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 measure 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. With that, it’s now my pleasure to turn the call over to DoubleDown’s CEO, In Keuk Kim. Please go ahead, sir..

Thanks, Richard. Good afternoon, everyone. Thank you for joining us on our 2023 second quarter earnings call. Q2 revenue of $75.2 million was down slightly on a quarterly sequential basis from $77.6 million in Q1 2023. This decline is not a typical given the historical seasonality in our business.

We continued to generate consistent profit and cash flow with adjusted EBITDA in the second quarter, rising on a quarterly sequential basis to $27.6 million and cash flow from operations almost doubling year-over-year to $38.4 million when the final payment for the Benson litigation is excluded.

Our flagship DoubleDown Casino or DDC gaming app continues to be a driver of our solid financial results. DDC is very sticky with its core paying players, which has established the foundation for our consistent financial results, including attractive adjusted EBITDA margins and cash flow from operations.

As many of you know, DDC revenue is primarily driven by those who have been players for several years. As we have described in the past, 92% of our 2022 revenue was generated by players hired in the years prior to 2022.

It’s clear from our results that we have scaled back on our marketing spend, as we are focused on generating attractive and appropriate returns. Going forward, our marketing investment may increase in their social casino business when we see improvement in the ROI or the execution of new players and in the retention of existing players.

Given the consistency of the cash flow [indiscernible] deliveries, we believe we have significant flexibility to allocate capital towards establishing a presence in new gaming categories with highly addressable market opportunities.

The new gaming categories that are of interest to us are ones that would be complementary to our core social casino operations where we can leverage our game developers’ expertise in game creation and our marketing platform to scale those businesses profitably.

Our – one example of our focus on expanding our addressable market is our pending acquisition of Super Nation, which operates 3 real-money iGaming sites in Western Europe. We continue to make progress towards gaining the required regulatory approvals to complete this transaction, and now expect to close the position by the end of the year.

We believe the acquisition of Super Nation will diversify our revenue sources as it will mark our entry into the high-growth iGaming sector. We are excited to be moving closer to completing this transaction. And once we do, we will provide additional information for you on our plan to drive cost in this business and build from there.

iGaming is just one game category adjacent to our core social casino business that we are evaluating for opportunity to leverage our expertise and player engagement and monetization with our game development expertise to drive growth.

We continue to invest in our own app development initiatives outside of the social casino category to address the very large casual mobile game category, including full games in the action, casual casino, match & adventure genre.

Over the balance of the year, we expect to introduce new gaming apps outside of the social casino category and we’ll support them in a capital-efficient manner to deliver appropriate returns. 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, In Keuk, and good afternoon, everyone. Our revenues for the second quarter of 2023 were $75.2 million compared to $80.6 million for Q2 2022. As In Keuk mentioned, Q2 revenue was down 3% sequentially from the first quarter of 2023, primarily reflecting the seasonality in the business.

Several KPI metrics improved compared to the year-ago period, including average revenue per daily active user, or ARPDAU, increased to $1.05 in Q2 2023 from $0.95 in Q2 2022. Payer conversion ratio, which is the percentage of players who pay DoubleDown, was up 80 basis points to 6.0% in Q2 2023 compared to 5.2% in Q2 2022.

Average monthly revenue per payer increased 4% from $226 in Q2 2022 to $235 in Q2 2023. On a quarterly sequential basis, total operating expenses decreased from $52.2 million in the first quarter of 2023 to $47.7 million in the second quarter of 2023.

The decrease was primarily due to lower cost of revenue and lower sales and marketing and depreciation expenses. Sales and marketing expenses for the second quarter of 2023 were $13.1 million, a decline of 27% compared to Q2 2022 and 18% lower on a quarterly sequential basis.

We believe that our advertising efforts to acquire new and retain existing players, the primary cost in the sales and marketing category will continue to be in this Q2 range over the next several quarters.

But as In Keuk indicated, we will continue to evaluate such spend with a focus on delivering the best return of these investments, including with the launch of new gaming apps.

It is also worth noting that depreciation and amortization expense has been consistently staying below $100,000 for the last 4 quarters, a significant decline from prior periods due to the completed amortization of certain identifiable intangible assets for which we use purchase price allocation at the time of the 2017 DoubleDown Interactive acquisition.

Net income for the second quarter of 2023 was $24.4 million or $9.83 per diluted share and $0.49 per ADS compared to a net loss of $34.1 million or $13.75 per diluted share and $0.69 per ADS in the second quarter of 2022, which at the time included the impact of a non-cash accrual of $71.5 million related to legal proceedings for the Benson class action complaint.

Adjusted EBITDA for the second quarter of 2023 was $27.6 million compared to $25.0 million for the prior year quarter. Accordingly, adjusted EBITDA margin rose to 36.7% for Q2 2023, representing an improvement from 31.0% in Q2 2022 and 32.8% in Q1 2023.

Net cash flows used for operations were $56.8 million for the second quarter of 2023, which primarily reflects the payment of $95.3 million towards the litigation settlement.

This was our final payment for this matter, and excluding this payment, net cash flows from operations was $38.4 million, almost double the net cash flows from operations in the prior year period. Finally, turning to our balance sheet. As of June 30, 2023, we had a total of $245.1 million in cash and cash equivalents and short-term investments.

Our total debt as of the 30th of June was $38.1 million.

With regard to our current cash position, with the final payment for the Benson settlement now behind us and excluding cash for closing of our pending Super Nation acquisition and payment for our debt, our balance sheet currently reflects a total uncommitted cash and cash equivalents and short-term investment position of well over $150 million or over $3 per ADS.

This completes my financial summary. Now I’ll turn it over to In Keuk for closing remarks..

Thank you, Joe. We believe the financial power of our social casino platform, including attractive adjusted EBITDA margins and strong cash flow positions us to continue investing in multiple areas of potential growth through both organic development and M&A.

For our core social casino business, we are focused on driving further and consistent player entertainment value and engagement, which drives higher monetization. Our development team continues to make enhancements to our flagship app, DoubleDown casino.

This development focus includes additional slot game launches as well as the introduction of new monetizing features such as jackpot in game activities. As I highlighted earlier, we are making progress towards completing our acquisition of Super Nation, following which we plan to work to ramp-up the business in the high-growth iGaming market.

At the same time, we are continuing to evaluate other M&A opportunities that would leverage our existing strengths in game development, engineering, marketing and business intelligence to enter new gaming categories in order to further grow our top and bottom line.

As Joe highlighted, we have a very strong and committed cash position and have continued to generate consistent high levels of free cash flow. We are confident to believe that this position DoubleDown to act on opportunity that will create new value for our shareholders. We are now happy to take your questions.

Operator?.

Thank you. We will now conduct the question-and-answer session. [Operator Instructions] Our first question comes from Aaron Lee with Macquarie..

Hi. Good afternoon. Thanks for taking my question and congrats on the nice result. I wanted to touch on the SuprNation deal. Even though it hasn’t closed yet, it has been almost eight months since the announcement.

So, just curious whether there has been any updates or changes with regard to how you are thinking about your strategy around real-money iGaming or your confidence in the size of the opportunity?.

Yes. Thanks Aaron. Thanks for the question. I guess the short answer is no. We are still extremely excited about iGaming. The premise around the acquisition, the basis for the acquisition continue to hold. And we just look forward to getting through the regulatory approval process.

And as IK mentioned, hope to have that done certainly by the end of this year..

Understood. Thank you. And then just on capital returns. So, you guys have been patient and disciplined with your growth investments, and I know you guys have said that you are still looking at other M&A opportunities.

But as you guys continue to generate free cash flow, build up cash and just given the strength of your balance sheet, can you just update us on how you are thinking about any potential capital returns?.

Sure, Aaron. As we have discussed, our primary objective and we believe the thing that will provide the greatest return to shareholders over time is growth.

And that’s why the focus is on growing the business through various investments that we are looking at relative to, as IK mentioned, new gaming areas and certainly also investing in our current business, in the social casino business.

And so again, that’s our prime objective and that’s where we have continued to focus and we will be continuing to focus for the foreseeable future..

Got it. Appreciate the color. Thanks Joe..

One moment for our next question. And our next question comes from David Bain with B. Riley..

Great. Thank you and congrats on the EBITDA and free cash flow result, as always. The first question I had related to the core social casino growth. Do you think we could see MAU growth quarter-over-quarter in this current quarter? And I mean player conversion and ARPDAU looks great. I mean you guys clearly know how to monetize.

I look at SciPlay, out tonight. Margins were 30% and yours were 37%, but their growth was higher. It seemed like IK indicated we may see more offense on sales and marketing.

Is that a sign you are seeing some stability and opportunity in the core social casino market from a growth perspective or did I misread that?.

Well, I can start and IK, you can chime in if you want. I mean certainly, from a player engagement standpoint and if you look at this industry over the last many quarters, as it’s matured, the MAU/DAU numbers for the industry as a whole and for most of the major players has contracted.

And the focus of DoubleDown as well as and I think of our major peers has been less on growing the number of players per se, MAU/DAU, and making sure that we are being efficient in how we acquire new and retain existing payers as it relates to the payer and monetization metrics.

So, we are continuing to do what we can certainly do relative to player acquisition. But both in the way we are using our marketing dollars and especially in our new features and the things that we are doing for DoubleDown Casino, we are very focused on monetization. I will give you an example.

We rolled out very recently something called the super high limit room, where the – we have the ability now for players to wager large, large numbers of chips per spin, even more than they could in the past. And those kinds of features are very much focused not on your, let’s call it, casual player, but certainly on your engaged player/payer.

And those are the kinds of objectives that we have relative to both, again, in how we are spending our marketing dollars, but especially as we invest in new enhancements to the product itself..

Okay. Great.

So – and just to be clear though, then we should continue to see just kind of stability and a continuation, so a real focus on monetization relative to any kind of uptick in sales and marketing to promote growth as…?.

Yes. And just to be clear also, I mean I did say that relative to our marketing spend over the next few quarters, I think I mentioned that we see the level of spend for at least the next couple of quarters to be consistent, all else being equal, to be consistent with where we were in Q2..

Got it. Okay. Great. And then have you begun to look at your – look to your content portfolio and build a strategy with regard to game conversion for SuprNation? I don’t know if that’s a relatively seamless technical transition to put it to RMG games from social casino.

And then if you could touch on your ability to kind of port what you have done in social casino in terms of sales and marketing promos? How is that going to look different than most B2C real-money gaming companies out there?.

Yes. Well, starting with the content, I – it has taken quite a while to get through the regulatory process. And we have folks chomping at the bit to help SuprNation take our existing content. So, yes, we are as ready as we can be, recognizing the deal hasn’t closed yet. And we are very excited.

And there is a number of folks in our slot development team who are very excited about bringing the content to SuprNation as soon as possible. Relative to the marketing, I think that’s going to take a little bit more time to figure out. I mean certainly, the way players are acquired in iGaming is somewhat different than in social casino.

And I think as we mentioned in the past, for instance, SuprNation like a lot of iGaming companies heavily use affiliates for player acquisition. And so there is, I think a lot of leverage. And certainly, from a marketing content and from just a general social media promotion perspective, there is a lot of overlap.

But we are going to have to – it’s probably going to take a little bit more time, frankly, on the marketing side than I would say on the content side..

Awesome. Thanks Joe. Thanks IK..

One moment for our next question. And our next question comes from Greg Gibas with Northland Securities..

Hey. Good afternoon IK and Joe. Thanks for taking the questions. If I could just follow-up, I think you said sales and marketing was kind of going to trend near Q2. It’s like a baseline for the coming quarters. I am wondering, just because you don’t guide, if you could touch on other OpEx trends, G&A and then R&D.

And then maybe roughly kind of seasonality for the top line that you would expect to see in Q3 and Q4?.

Yes. Sure. So, relative to the other OpEx lines, I mean we don’t see much change going forward in Q2 – from Q2, excuse me. If you look at our EBITDA result, it really was the highest EBITDA margin that we have had in actually several years.

And that’s thanks to the fact that, obviously, we spent less in sales and marketing, but for instance, we also spent less than we have done in the last few quarters on G&A. Now, part of that is because thank goodness, we are not spending a lot of money on legal fees for the Benson case any longer.

And so I think that G&A will continue to be at the Q2 level for the next few quarters. And then R&D at around $5 million a quarter has been pretty constant, and I see that being the same going forward. I am sorry, Greg. There was a second part of your question. I think I missed it..

Yes. Sorry. I guess just kind of seasonality expectations..

Yes..

Obviously, it kind of depends on how the whole peer group trends, right, social casino.

But just general, maybe if you expect anything different in the second half relative to typical?.

Well, I mean, Q2 is generally a bit of a – again, if you just look historically, it’s a bit lower than Q1, primarily because Q1 there is, a, a lot of general engagement with players in January after the Christmas season. People get new devices. People get excited about using them and playing.

There are some great holidays where people love to play social casino, like on St. Patrick’s Day, for instance, and Valentine’s Day even that you don’t have in Q2. And then of course, Q4 is generally like Q1, quite strong, again, holiday-driven and people having less time outside and more time inside.

So, those are kind of the main trends that we see generally, and we think those will hold..

Okay. It makes sense.

Apologies if I missed this, but do you have an updated timing on the SuprNation acquisition and closing? Like is that going to be a late Q3 event, or do you think it kind of pushes into Q4? And then just how has that business trended maybe since you first announced that acquisition?.

Yes. So listen, I would love to think we could close it in Q3. I mean the regulators who are going through, hopefully, the final phases of their approvals are in Europe. And August is a tough time to get much done in Europe with the holiday season, etcetera. So, generally believe that it’s more likely a Q4 event to close the deal.

And generally, I would say we are, as I mentioned earlier, excited about the business. We are excited about what SuprNation has developed. And they are continuing to leverage what they have done and are doing now to continue that forward. So, I just – we all just can’t wait to get it closed..

Great. Thank you..

One moment for our next question. And our next question comes from Bryant Riley with B. Riley..

Hey guys. I am representing the investment side, just supply. So, can you – so DoubleU went public in ‘15, I think, and it’s down 30%. You are cut in half. STIC put a proposal in front of your company. That was voted down. I have told you that I think this is probably the worst experience I have had in investment in my 27 years of owning B. Riley.

Like what’s your response to that? Like why do you think your stock trades – I mean, obviously, you are going to make acquisitions and nobody knows what you are making and it’s very much run like a fiefdom.

But I just think like what’s the reaction to that?.

Well, Bryant, thanks for being on the call. As it relates to the shareholder vote, obviously, DoubleU owns majority of the shares of the company. And I can’t – we can’t speak for them or how or why they vote the way they vote. So, I mean I just – it’s not possible to comment on what DoubleU does.

Obviously, we – from a share price perspective, we think the share price is undervalued. I mean as I mentioned in my comments earlier, we have well over $3 per share per ADS in the bank essentially and the stock is trading around $9. So, a third of our value is in cash.

And we believe that and absolutely are committed to growing the business and showing that with growth that, in fact the stock is considerably undervalued..

Well, I guess I would say this. As I run a public company, my shareholders are really important to me. I talk to them all the time. I consider them partners.

This is not a partnership, it’s – you have made a decision – not you, your owners made a decision to act independently, I think from what shareholders would like, namely at least a $1 dividend or something, that while you go out and make your acquisitions or while you do things, at least we get paid part of the cash flow that you generate for our business.

And that decision hasn’t been made. It’s been met with resistance. And I actually – I honestly think it’s like the worst I have seen. So, I know you guys are managing the business. I commend how you run it.

You run it tight, you want it for cash flows and – but it’s just – I don’t think you are ever going to get incremental shareholders based on the relationship you have with current shareholders. Being the underwriter who actually tendered because I was so kind of embarrassed by the communication that the company had with their shareholders.

So, I just think – I really think that – and maybe I am speaking to you or maybe I am speaking to Joe, I think it’s a shame. And I think it could be fixed really quickly by treating your shareholders like partners. I don’t have anything else, operator..

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Sigrist for closing remarks..

Great. Thanks John and thanks everyone for joining the call. And we look forward to continuing to update you with progress towards the growth of the company and look forward to talking to you all again soon. Thanks..

And this concludes today’s conference call. Thank you for participating. You may now disconnect..