DoubleDown Interactive Co., Ltd. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2021; filed April 4, 2022. The filing is an annual report under U.S. GAAP, not a standalone quarterly filing. Fourth-quarter financial statement values are not separately presented, although selected quarterly operating indicators are disclosed.
Business Context
DoubleDown develops and publishes free-to-play social casino and casual games on mobile and web platforms. DoubleDown Casino generated 96.6% of 2021 revenue. Revenue is primarily generated from purchases of virtual chips, with a small contribution from subscriptions. The company’s principal revenue-generating subsidiary is DoubleDown Interactive, LLC in the United States, while development operations are primarily based in Korea.
- Average monthly players declined to 2.4 million in 2021 from 2.9 million in 2020.
- Mobile represented 72.9% of revenue, compared with 71.8% in 2020.
- DoubleU Games controlled 67.1% of the common shares at year-end and provides significant licensed content, related-party financing and other services.
- ADSs began trading on Nasdaq under the symbol DDI on August 31, 2021; each ADS represents 0.05 common share.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $363.2 million | $358.3 million | +1.4% |
| Operating income | $98.7 million | $88.8 million | +11.3% |
| Operating margin | 27.2% | 24.8% | +2.4 percentage points |
| Net income | $78.1 million | $53.6 million | +45.7% |
| Net margin | 21.5% | 15.0% | +6.5 percentage points |
| Adjusted EBITDA | $120.1 million | $120.3 million | -0.2% |
| Adjusted EBITDA margin | 33.1% | 33.6% | -0.5 percentage points |
| Operating cash flow | $96.1 million | $99.9 million | -3.8% |
| Cash and cash equivalents | $242.1 million | $63.2 million | +$178.9 million |
Cost of revenue was $126.6 million, or 34.9% of revenue, versus 35.2% in 2020. Sales and marketing expense increased 10.7% to $78.8 million, including $74.2 million of user-acquisition advertising. Research and development expense was $18.5 million, and general and administrative expense was $22.6 million. Depreciation and amortization declined 43.4% to $17.9 million as certain acquired intangible assets became fully amortized.
- Average payer conversion increased to 5.7% from 5.4%.
- Average monthly paying users declined 10.9% to 139,000.
- Average monthly revenue per payer increased 14.1% to $218.
- Annual ARPDAU increased to $0.97 from $0.83.
- U.S. revenue increased 2.7% to $317.6 million, while international revenue declined 7.1% to $45.6 million.
Liquidity, Debt and Capital Resources
Operating cash flow funded the business. Cash increased primarily because the September 2021 IPO generated approximately $86.0 million of net proceeds. Investing cash outflow was $1.8 million, and financing cash inflow was $86.0 million. Management stated that operating cash flows and available borrowing capacity should cover anticipated ordinary-course cash needs for the next 12 months, subject to litigation and growth-related funding requirements.
- Long-term related-party borrowings totaled $42.2 million at December 31, 2021, consisting of 4.60% notes due May 27, 2024.
- No short-term debt was outstanding at year-end.
- Operating lease obligations totaled approximately $8.2 million, including $3.3 million due within one year.
- The company had no off-balance-sheet arrangements.
- No dividends are planned for the foreseeable future.
Material Changes Versus Prior Period
- Revenue growth slowed substantially from 31.0% growth in 2020 to 1.4% in 2021.
- Player volume declined materially, but monetization improved through higher payer conversion, ARPDAU and revenue per payer.
- Sales and marketing investment increased, pressuring Adjusted EBITDA and its margin despite higher operating income.
- Net income benefited from lower interest expense, lower amortization and the absence of certain 2020 miscellaneous expenses.
- The company completed its IPO and ended the year with substantially higher cash and shareholders’ equity.
- In September 2021, the company launched its first action RPG, Undead World: Hero Survival, beginning diversification beyond social casino.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects research and development expenditures to increase approximately 10% to 15% annually over the next three to five years and may increase sales and marketing spending to expand the player base. Management expects the revenue benefit from COVID-19-related stay-at-home activity to diminish as restrictions ease and discretionary spending shifts to other uses.
- Benson litigation: A putative class action alleges that DoubleDown Casino violated Washington gambling and consumer-protection laws. The company recorded a $3.5 million loss-contingency charge, representing the low end of a reasonably possible loss range of $3.5 million to $201.5 million. The insurer will not cover the defense costs or any settlement or damages award, and the ultimate exposure remains uncertain.
- NEXRF patent litigation: The case was stayed pending appeal of a Nevada ruling invalidating the asserted patents; loss could not be reasonably estimated.
- Platform concentration: Apple, Facebook and Google accounted for 51.8%, 25.9% and 19.1% of revenue, respectively. Platform providers generally charge approximately 30% of gross receipts and can unilaterally change terms, fees and distribution policies.
- Content concentration: DoubleDown Casino accounted for substantially all revenue, while significant content is licensed from IGT and DoubleU Games.
- Regulatory exposure: Social casino games face potential gambling, consumer-protection, privacy and data-security regulation, including possible restrictions or required game modifications.
- COVID-19: Operations continued without reported interruption, but management cannot quantify the pandemic’s specific contribution to revenue and expects any benefit to decline.
- Goodwill: Goodwill was $634.0 million, with no impairment recorded. Management reported approximately 30% excess fair value over carrying value at the impairment-testing date, or approximately 15% under a hypothetical 10% fair-value decline.
Important Facts for Investors to Verify
- Whether the Benson litigation results in a settlement, judgment or required game modifications, and whether the recorded contingency is sufficient.
- Whether declining MAU, DAU and paying-user counts continue despite improved monetization.
- The sustainability of revenue and player spending after COVID-19-related benefits recede.
- Dependence on DoubleDown Casino, Apple, Facebook and Google, and the effect of platform fee or policy changes.
- Terms, renewal rights and royalty economics of the IGT and DoubleU Games licenses.
- Ability to repay or refinance the $42.2 million related-party notes due in 2024.
- Progress and financial contribution from newer games and planned expansion into adjacent gaming categories.
- Future impairment risk for the $634.0 million goodwill balance and other acquired intangible assets.
- Potential regulatory developments concerning social casino gaming, consumer protection and data privacy.