DDI - DoubleDown Interactive Awaits SuprNation Deal Approval As Board Weighs Capital Plans

2023-07-27 17:21:23 ET

Summary

• DoubleDown Interactive Co., Ltd. publishes casual gaming titles.
• The firm is seeking to close on its acquisition of SuprNation, a Western European operator of three iGaming sites.
• While some user metrics are improving, consensus revenue estimates indicate revenue decline in 2023.
• The Board is considering capital allocation to maximize shareholder value, which may include a share buyback or dividend.
• I'm Neutral [Hold] on DoubleDown Interactive Co., Ltd. for the near term and until management can reignite revenue growth.

A Quick Take On DoubleDown Interactive

DoubleDown Interactive Co., Ltd. ( DDI ) develops and publishes casual game titles globally.

I previously wrote about DoubleDown with a Buy outlook.

The company expects to receive regulatory approval for its SuprNation acquisition and the Board is considering capital allocation options to maximize shareholder value, which may include a share buyback or dividend.

Investors with a risk-on approach may consider DoubleDown Interactive Co., Ltd. stock a buy given the potential for announcement-driven upside, but for now, I’m Neutral [Hold] on the stock until management can reignite revenue growth organically.

DoubleDown Overview And Market

Seoul, Republic of Korea-based DoubleDown Interactive Co., Ltd. was founded to develop a family of gaming titles for casual gaming enthusiasts.

Management is headed by director and CEO In Keuk Kim, who has been with the firm since leading the acquisition of DoubleDown by DoubleU Games and has extensive executive experience in the cloud computing, trading and corporate M&A industries.

The company’s primary offerings include social casino games including DoubleDown Casino, DoubleDown Fort Knox, DoubleDown Classic and Ellen's Road to Riches.

According to a 2020 market research report by Mobile Marketer, in 2019, mobile games accounted for 60% of revenue for global video game activity, generating $49 billion in revenue, and profit of $16.9 billion.

The mobile gaming market was forecast to grow at a 2.9% annual rate through 2024.

The main drivers for this expected growth are more capable smartphones able to generate more compelling and sophisticated game experiences and continued investment by mobile game developers in innovative display presentation and game dynamics.

DDI’s Recent Financial Trends

• Total revenue by quarter has been trending lower recently; Operating income by quarter has dropped slightly sequentially.

• Gross profit margin by quarter has varied seasonally; Selling, G&A expenses as a percentage of total revenue by quarter have followed the same pattern, dropping in Q4 2022 YoY.

• Earnings per share (Diluted) have proceeded as follows.

(All data in the above charts is GAAP.)

In the past 12 months, DDI’s stock price has fallen 15.71% vs. that of PLAYSTUDIOS, Inc.’s ( MYPS ) rise of 19.29%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $304.8 million in cash, equivalents, short-term investments and trading asset securities and $38.3 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $41.4 million, during which capital expenditures were $0.2 million. The company paid no stock-based compensation in the last four quarters.

Valuation And Other Metrics For DoubleDown

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

DDI’s most recent unadjusted Rule of 40 calculation was 20.9% as of Q1 2023’s results, so the firm is in need of improvement, especially with respect to revenue growth, per the table below.

(Source - Seeking Alpha.)

Commentary On DoubleDown

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results , management highlighted the continued "strength" of its flagship DoubleDown Casino game.

Notably, the company generates the bulk of its revenue from players who have played the games for multiple years, with 92% of its revenue coming from players acquired in previous years.

Leadership is seeking to diversify the company's revenue streams and previously announced the acquisition of Western Europe-focused SuprNation, which operates three successful iGaming sites. It expects regulatory approval for the acquisition "later this year."

Management didn’t disclose any user or dollar retention rate metrics, but said that average revenue per daily user increased 6.2% year-over-year, from $0.97 to $1.03.

The payer conversion ratio also rose year-over-year, from 5.5% in Q1 2022 to 5.8% in Q1 2023.

Total revenue for Q1 2023 fell 9.2% year-over-year and gross profit margin rose by 0.7%.

Selling, G&A expenses as a percentage of revenue dropped 1.8% year-over-year, while operating income was 2.8% higher.

The company's financial position is quite solid, with ample liquidity, very little debt and material free cash flow.

DDI’s Rule of 40 performance has been only moderate, with revenue contraction dragging down its results.

Looking ahead, consensus analyst topline revenue projections for 2023 are $318.5 million at the midpoint.

If achieved, this would represent an annual revenue decline of 3.4% versus 2022’s decline rate of 5.53% over 2021, indicating a drop in revenue decline, an improvement of sorts.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once and "Drop" once.

Analysts questioned company leadership about changes to its capital allocation strategy, and management said the Board of Directors is in ongoing discussions about creating shareholder value, which could include a dividend or buyback, or both.

Leadership looks to be pushing forward on its plans for the successful approval of the SuprNation acquisition, preparing to enhance the properties of the SuprNation business with its knowledge and experience in content and related competencies.

A potential upside catalyst to the stock could include announcements on regulatory approvals and stock buyback or dividend.

The primary business risk to the company’s outlook is the potential for softer demand for purchasing game items as these are discretionary purchases.

Investors with a risk-on approach may consider DoubleDown Interactive Co., Ltd. a buy, but for now, I’m Neutral [Hold] on the stock until management can reignite revenue growth organically.

For further details see: