Snail Inc

NASDAQ:SNAL

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by, and welcome to Snail, Inc.'s Second Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Brett Milotte, Senior Vice President at ICR. Please go ahead.

[Brett Milotte]

Thank you. Good afternoon, and welcome to Snail's Second Quarter 2024 Earnings Conference Call and Webcast. On today's call are Tony Tian, Snail's Co-Chief Executive Officer; Peter Kang, Chief Operating Officer; and Heidy Chow, Chief Financial Officer.

The company's second quarter 2024 earnings press release was filed today with the SEC after the U.S. stock markets closed and is available on the Investor Relations section of Snail's website. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially from our expectations, and forward-looking statements are subject to certain risks and uncertainties.

Please refer to the company's most recent Form 10-Q that was filed today with the SEC, the most recent Form 10-K that was filed with the SEC on April 1, 2024, and other SEC filings. The company makes these forward-looking statements as of today and disclaims any duty or obligation to update them or to release publicly any updates or revisions to any forward-looking statements to reflect any change in its expectations or any change in events, conditions or circumstances on which any statement is based.

Additionally, on today's call, we will refer to bookings and EBITDA, which are non-GAAP financial measures that provide useful information for the company's investors. You will find a historical reconciliation of bookings and EBITDA to the corresponding GAAP measures in the earnings press release and the company's SEC filings.

And now I will turn the call over to Heidy. Heidy?

[Heidy Kingwan Chow, executive]

Good afternoon, everyone, and thank you for joining us today. I'm very excited to share with you our strong results this quarter. As we mentioned on our last quarter's conference call, Snail boasts an incredibly passionate and skilled team, equipped with state-of-the-art technology and premier franchises such as ARK, which have nurtured engaged and committed gaming communities. We plan to continue to expand the horizon of what is achievable in the realm of interactive entertainment, delighting our players across the globe.

As we look to the future, I'm particularly excited about our plans to further leverage artificial intelligence across our development pipeline. The advanced AI technology in which we have been investing hold [ immense ] potential to enhance our creativity and productivity, all while maintaining the premium quality that our players have come to expect. Our objective is to empower our talented human teams by providing them with this powerful AI tools rather than attempting to replace them.

Additionally, we're eager to capitalize on the widespread attention that our ARK animated series is receiving due to the upcoming second half of the series' first season. With the gaming world's eye focused on the [indiscernible], we have a prime opportunity to engage new players and further energize our existing community of dedicated ARK fans. We have developed ambitious plans to expand the ARK's universe in ways that will delight both our long-standing players and newcomers alike. With that, let's quickly review the quarter in numbers.

Our ARK franchise continue to be an incredible success story. Through June 30, 2024, ARK has been played for 3.7 billion hours, with an average playing time per user of 161 hours. Additionally, as we highlighted last quarter, the top 21% of all players have spent over 100 hours immersed in the game according to data from Steam.

For the second quarter of 2024, Snail generated net revenue of $21.6 million, up significantly from $9.9 million in the second quarter of 2023. Net income in the second quarter of 2024 was $2.3 million versus a net loss of $4.1 million in the second quarter of 2023, primarily driven by the successful launch of new survival game, Bellwright; new DLC for ARK: Survival Ascended; the Power Rangers premium mod; and revenue recognition for the release of the Scorched Earth DLC on ARK: Survival Ascended.

I will now hand the call over to Peter Kang, our Chief Operating Officer, to review our product road map and share some key developments.

[Peter Kang, executive]

Hello, everyone. In the second quarter of 2024, Donkey Crew released the survival simulation title, Bellwright, into early access on Steam to rave reviews. With over 77% of the reviews giving a positive score and the overall review score on Steam being mostly positive, we have sold over 300,000 units, and the wish list count for the game hovers around 900,000.

We plan to continue to add content to the game and fulfill our vision for the product to set new heights of expectations for a game in this genre. We look forward to a large content update in Q4 of 2024, which will be very exciting for fans and wish list holders of the title.

Additionally, our indie publishing label, Wandering Wizard, is pushing ahead full steam with our plans to expand our publishing catalog. We have signed 2 additional games in Q2 of 2024 to be released at the end of 2024 and beginning of 2025. The first project is titled The Cecil: The Journey Begins, a horror game set in the legendary Cecil Hotel in Los Angeles and developed by Genie Interactive Games.

The second title is named Chasmal Fear, another horror FPS game developed by 2 brothers in Macedonia under the MystiveDev banner. With plans to add 8 more titles to our upcoming slate by the end of 2024, Wandering Wizard continues to seek out new projects with a focus on quality game play and a defined market.

Internally, at Snail Games USA, we have 5 projects in development. On August 15, Project Hermes will unveil a first peek at pre-rendered footage, and we will be unveiling the project's commercial title in a first-look developer interview with game director Primus Majda.

Next, we have Project Aether and Project Ares. Both will be projects set in Eastern fantasy. These 2 projects will be familiar to fans of Snail Games as they will tap into one of our well-known original IPs. Project Aether will be a multiplayer experience, while Project Ares will gravitate with those seeking an AAA Eastern fantasy RPG experience.

We also have Project Poseidon, which will be very exciting for fans of Snail Games as they will be set in a franchise that is very familiar to our audience. Last but not least is Project Dionysus, which is a new IP we are very excited about. Project Dionysus will explore a unique genre of games that is emerging in popularity. More information will be released about these projects in development as they become ready for our fans. Keep an eye out on our news feed for updates.

Turning to ARK: Survival Ascended. The development time line has settled down into a cadence of a new DLC every 3 months. This is up from the previously stated 2 months as we define in more detail the amount of content we want to present in each DLC. We're looking forward to ASA's content catching up to that of ARK: Survival Evolved and hope to be presenting new content in the future.

Regarding ARK 2, the development is still ongoing, and we will be releasing news about the project as soon as more information becomes available. Lastly, ARK: The Animated Series is looking forward to the release of the second part of season 1. With episode 7 through 13 on the slate, fans of the ARK franchise can look forward to more dino battles as the storyline continues development.

I will now pass the call off to Heidy to discuss our financial results in more detail. Heidy?

[Heidy Kingwan Chow, executive]

Thank you, Peter. As mentioned, net revenue for the 3 months ended June 30, 2024, was $21.6 million as compared to $9.9 million in the 3 months ended June 30, 2023. Similar to Q1, the strong increase in net revenues was primarily due to the release of ARK: Survival Ascended on October 25, 2023.

As a reminder, to properly account for revenues from sales, Snail must recognize revenue over time rather than all at once. This involves estimating when we will deliver the full game experience to customers through the transfer of the game license, downloadable content, technical support obligations and how long we estimate that player will be engaged with our game.

The timing of future game updates and content releases is based on projection of when our developer will hit certain milestones. However, those estimates can change if developers meet unexpected delays or if the game platform requirements shift unexpectedly.

Essentially, properly accounting for our game revenue over time involve making projections that are subject to change based on development milestones, the estimated services period of our virtual goods and market conditions. This can affect the timing of our revenue recognition each period and can cause the deferral of significant revenues into future quarters. With that in mind, let's get into some of our other results.

Net income for the 3 months ended June 30, 2024, was $2.3 million compared to a net loss of $4.1 million for the 3 months ended June 30, 2023. This improvement in net income was driven by increased revenues and continued cost-cutting effort in our general and administrative operating expenses.

Bookings for the 3 months ended June 30, 2024, were $22.9 million as compared to $9.3 million for the 3 months ended June 30, 2023. The $13.6 million or 146.7% increase in revenue is due mainly to the release of ARK: Survival Ascended in the fourth quarter of 2023 as well as the release of Bobs Tall Tales and Bellwright along with the ARK: Survival Ascended DLC, Scorched Earth, in April 2024.

In addition to the increased sales of the aforementioned titles, the company deferred approximately $7.1 million in revenue during the 3 months ended June 30, 2024, for the ARK: Survival Ascended DLC and part of the Bobs Tall Tales, which have not yet been released, partially offset by the recognition of $5.6 million for the release of Scorched Earth.

Earnings before interest, taxes, depreciation and amortization was $3.1 million versus a loss of $4.8 million in the prior year period. The significant increase in EBITDA was due to an increase in net income of $6.4 million and an increase in the company's tax provision for the income taxes of $1.7 million. As of June 30, 2024, unrestricted cash and cash equivalents was $15.5 million.

To review our detailed financial statements, please refer to the earnings press release and our most recently filed Form 10-Q, which was filed today with the SEC. Thank you for joining us today, everyone. We will now open the call to questions. Operator?

[Operator]

[Operator Instructions] The first question comes from Pat McCann with NOBLE Capital Markets.

[Patrick McCann, analyst]

My first question has to do with the ARK: Survival Ascended adoption. As I think you've mentioned before, there were some technological disconnects between the potential user base of ASA and the game based on the processing power that's necessary to run such a complex game on Unreal Engine 5.

I was wondering, could you provide an update to how the adoption of that game is trending? And have there been any changes to your expectations for the adoption period for that game as far as the quarters -- going out several quarters, and the adoption period maybe taking a little longer than originally expected because some users don't have the high-end PC? How is that going? Is that going as expected? Or any changes there?

[Peter Kang, executive]

This is Peter Kang, I'll be answering this question. Great question. I believe last time when I spoke on this topic, it was regarding the technological adoption rate. There's another factor of that, that also contributes to the adoption rate, and that is the catch-up of content from ARK: Survival Evolved to ARK: Ascended.

So as we release more DLCs in ARK: Ascended, the adoption rate, we certainly do see an increase. We know this by the average concurrent users on both games. We slowly see the amount of ARK: Survival Ascended increasing, while ARK: Survival Evolved is decreasing at a similar rate.

As far as technologically, the case with the graphic cards, well, that factor is contributed and compounded also by the adoption of AI and the usage of these same graphics cards, keeping the price high. So we do have hurdles. But in order for us to overcome this, we have also started some development projects that will alleviate this concern by adding more content over time to ARK: Survival Evolved.

[Patrick McCann, analyst]

Great. And then my other question -- or my next question, I guess I should say, was just if we could piggyback on that question with the technological gap, would it be fair to look at the launch of ARK 2? Which, of course, you haven't stated exactly when that will happen, but out in the future, would it be fair to sort of look at the ASA adoption rate and crossing that technological barrier as kind of a leading indicator for the timing of ARK 2 since you sort of have to cross that? You might want to cross that barrier first before you launch the next big launch.

[Peter Kang, executive]

Absolutely, and that's [ a various 2 ] point of view to notice. We are using ARK: Ascended as an indicator on mass adoption for Unreal 5 game engine on multiplayer game play. So yes, you're absolutely right. Once we see that the mass market is ready to accept that Unreal Engine 5 in a multiplayer environment, able to process with the right computing power, that will give us the right market window to launch ARK 2.

[Patrick McCann, analyst]

Great. And if I could squeeze in one more. I was just wondering if you could give any update on how the modding program is going? Is word of that spreading? And on the other hand, has there been any pushback from users who don't want to pay for mods and that sort of thing? How is the community accepting the program?

[Peter Kang, executive]

The program is being very well received. Our partners [ over both ] who are handling the curation of the mods have reported nothing but great things about the success of our program. Recently, we've launched a Power Rangers mod through program, which was 100% contributed by a third-party studio and this mod performed exceptionally.

As we're launching our programs, we have seen other games also launch similar pay-for-modding programs, and the other titles have not received the amount of support that we have from our community. We have received no lash back, no negative reviews about our ecosystem in allowing content creators to generate revenue from the modding program, whereas the approaches from other competitors have received backlash due to their approach being significantly different from ours.

[Operator]

This concludes our question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect your lines.