Snail Inc

NASDAQ:SNAL

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to Snail Inc.'s Third Quarter 2023 Earnings Conference Call and Webcast.

I would now like to turn the call over to Jake Pisano, Vice President of ICR. Thank you. Please go ahead.

[Jake Pisano]

Thank you. Good afternoon, and welcome to Snail Inc.'s Third Quarter 2023 Earnings Conference Call and Webcast. On today's call are Jim Tsai, Snail's Chief Executive Officer; and Heidy Chow, Snail's Chief Financial Officer.

By now, everyone should have access to the company's third quarter 2023 earnings press release filed today after the market close. This earnings press release is available on the Investor Relations section of Snail Inc.'s website at www.snail.com.

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 risks and uncertainties. Please refer to the company's most recent 10-Q, 10-K and other SEC filings. The company makes these forward-looking statements as of today and disclaims any duty to update them.

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 Jim.

[Jim Tsai, executive]

Thank you, Jake, and hello, everyone. It's a pleasure to speak with you about our third quarter results. About 2 weeks ago, we launched the highly anticipated ARK remake, ARK: Survival Ascended. We are incredibly proud of this Snail and Studio Wildcard teams and appreciate all the passion, effort and creativity in getting this game in front of millions of players.

As today, we have sold over 600,000 ARK: Survival Ascended copies on the Steam platform. During the first 10 days following the ARK: Survival Ascended launch, we sold 1.5x units compared to the same 10-day period of the original ARK: Survival Evolved launch. For the same 10-day period, ARK: Survival Ascended had an average daily active users of 258,000, which is a healthy increase of 7.5x of the average daily active user observed during the same 10-day period of the original ARK: Survival Evolved launch. The increased daily active user reflects our commitment to creating an enjoyable experience for our player base. All in addition to units sold and daily active users, we are seeing tremendous excitement and commitment in our player base.

ARK: Survival Ascended players have amassed over 14.8 million hours of play time to date. We are thrilled to participate in the successful ARK: Survival Ascended launch as the number of units sold on Steam has exceeded our expectations. We are making significant progress on our strategy to build communities, attract and retain new and existing players and continue growing our ARK player base. We know we have a passionate and excited fan base.

Our fans have been playing ARK for 8 years, and now they can enjoy a fully reimagined version using the next generation of video game technology with Unreal Engine 5. We are excited about the upcoming release of the ARK: Survival Ascended Xbox version and the PlayStation version with cross-platform play with Steam on day 1. ARK: Survival Ascended will also feature full cross-platform modding between the consoles and PC, enabling user-generated content monetization opportunities to create a shared economy with our loyal fan base. This virtuous monetization cycle will allow ARK: Survival Ascended to transform into evergreen content with an extended life cycle.

With the launch of ARK: Survival Ascended, we are thrilled to see existing players forging their way to the reimagined version of the game. Our player base in ARK: Survival Evolved is active, and we look forward to transitioning those players to experience the new reimagined version of ARK.

I will now hand it over to Heidy to review our financial highlights from the quarter.

[Heidy Kingwan Chow, executive]

Thank you, Jim. Hello, everyone, and thank you for joining our third quarter call. Net revenue for the 3 months ended September 30, 2023, was $9 million compared to $15.6 million for the 3 months ended September 30, 2022. The decrease in net revenue was due to a onetime contract revenue payment recognized from deferred revenue for a free week promotion in the amount of $4 million that occurred in the 3 months ended September 2022, but not in 2023 and a decrease in sales of ARK due to a lower average selling price.

ARK sales and in-game purchases decreased by $2 million. Sales of the company's smaller titles decreased by a collective of $400,000. Net loss was $4.4 million for the 3 months ended September 30, 2023, as compared to a net loss of $1.5 million for the 3 months ended September 30, 2022. The decrease was primarily due to a decrease in revenue of $6.6 million, an increase in research and development expenses of $1.2 million, an increase in interest expense of approximately $100,000 and an increase in Internet, server and data center costs of $300,000, partially offset by a decrease in royalties of $900,000, a decrease in license cost and license right amortization of $1.7 million, a decrease in merchant and engine fee of $500,000, a decrease in general and administrative expenses of $1 million, Increase in other income of $300,000 and a decrease in the company's tax provision of $800,000.

We present bookings and EBITDA because they are key non-GAAP operating measures used by our management to assess our financial performance. Bookings adjust for the impact of deferral, and we believe provides a useful indicator of sales in a given period. For the 3 months ended September 30, 2023, bookings were $10.5 million compared to $11.3 million in the same 3-month period of prior year. For the 3 months ended September 30, 2023, EBITDA was a loss of $5.1 million versus a loss of $1.5 million in the same 3-month period of the prior year. This is mainly due to the decrease in revenue. As of September 30, 2023, our unrestricted cash was $4.9 million versus $12.9 million as of December 31, 2022.

To review our detailed financial statement, please refer to the earnings press release, our most recent 10-Q and our 10-K filing.

Thank you for joining us today, and now we are ready for our first question.

[Operator]

[Operator Instructions] Your first question comes from the line of Pat McCann from NOBLE Capital Markets.

[Patrick McCann, analyst]

Congratulations on the successful launch of Survival Ascended. My first question has to do with the pricing. It looks like it's -- you're charging around -- it's going for around $45 on Steam, and please correct me if I have any numbers wrong. But I'm wondering what is the differential between what you're getting for ARK: Survival Ascended versus the price point that ARK: Survival Evolved has -- is at this point in time? How much more are you getting now that it's -- you've relaunched the game and you're able to kind of charge a premium price again.

[Peter Kang, executive]

Yes, I'll take this.

[Heidy Kingwan Chow, executive]

Thank you for asking this question to Peter.

[Peter Kang, executive]

This is Peter. So what you're getting with ARK: Survival Ascended is a onetime price where it includes all of the -- not only the base game, but the DLC that will be converted and timed to the ARK: Ascended version. So it's one large package price for all of the content previously released on ARK: Ascended -- I mean ARK: Survival Evolved.

[Patrick McCann, analyst]

Got you. Okay. And then -- and what's sort of the average price for Survival Evolved around at this point?

[Peter Kang, executive]

I believe ARK: Survival Evolved is at, I think, $15 on Steam. And so that is only for the base game. And so if you wanted to come in and catch up on the content, not only would you have to pay for the base game, but each additional paid DLC that you're looking to acquire.

[Patrick McCann, analyst]

Got you. And then my next question was just how you guys view the early success of Survival Evolved -- or of Survival Ascended, I'm sorry. As an indicator for the demand for ARK 2, has it changed sort of your expectations for ARK 2 in 2024, given just how strong the launch you've just had?

[Peter Kang, executive]

Well, the results we're seeing is definitely positive in our eyes. As we look forward and see how the IP market itself is continuing to grow new user base past 7 or 8 years here now, it's definitely a positive thing for us to see the amount of attention the IP is receiving. ARK 2 will have varying gameplay from ARK: Ascended. And so we strongly believe that ARK 2 will continue to push the envelope as far as how much our technology is required to play the game and enjoy the content at the highest fidelity for Unreal 5.

[Patrick McCann, analyst]

Got you. And if I may just squeeze in a couple more. I'm wondering about the bridge loan with Nitrado and if that -- if everything -- if that has sort of -- the loop has sort of been closed on that with the revenue shares from Survival Ascended. And if so, just to clarify, going forward, the only lingering commitment there is just for Nitrado to be the sole server provider for the ARK franchise going forward for 7 years. There's nothing really else -- what other component to that, that I'm missing?

[Heidy Kingwan Chow, executive]

Good question, Pat. This is Heidy. Actually, within Nitrado, what we have is the loan is more of an operational loan. It's not a -- what we have is it is a separate transaction and the official server -- we're doing official server at Nitrado. However, for other user base or any of the unofficial server, it is not exclusive and -- to Nitrado, so they are different.

[Patrick McCann, analyst]

Okay. And then is the -- did the -- is the Nitrado -- I think -- and it was roughly $4 million. Is that paid off at this point after the launch?

[Heidy Kingwan Chow, executive]

Yes. Our plan is to pay it off. So basically, is the payment terms depends on our future cash flow. And so it's not a revenue sharing, but the payment will be coming out from our rev. So basically, there is specified terms and then we'll make our payment according with the terms, but it's not sharing of our revenue.

[Patrick McCann, analyst]

Okay. And again, congratulations on a strong start for Survival Ascended.

[Heidy Kingwan Chow, executive]

Thank you.

[Operator]

Thank you. There are no further questions at this time. Please proceed. Thank you. Ladies and -- thank you. There are no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.