Snail Inc

NASDAQ:SNAL

Earnings Call Analysis

A Year of Transition for Snail Inc with A Focus on ARK: Survival Ascended

Snail Inc. ended 2023 with a notable shift in their revenue streams and financial performance, marking a year of transition toward future potential growth. The company generated net revenues of $28.6 million in the final quarter, a substantial hike from the previous year’s $15.3 million during the same period, predominantly fueled by the successful launch of their flagship game ARK: Survival Ascended. Despite this quarterly success, yearly revenues slid down by 18.2% to $60.9 million, as ARK Mobile sales dwindled, and certain one-time revenues recognized in the previous year were absent.

From Net Loss to Net Gain with High Hopes on Deferred Revenues

In a stark turnaround, the final quarter of 2023 saw a net income of $2.4 million contrasted to a net loss of $2.3 million in the same quarter of 2022, thanks in part to the leaner operation with reduced expenses. However, the full-year figures painted a grimmer picture with a net loss of $9.1 million. A significant factor was the deferral of revenues, which included approximately $22 million related to upcoming ARK: Survival Ascended DLCs, shaping investor expectations for a potential revenue surge when these are recognized.

Booking a Seat for Future Growth Despite Annual Downticks

Bookings for the last quarter soared to $52.6 million, a testament to ARK: Survival Ascended's strong market reception across major gaming platforms. The full year’s bookings followed suit, reaching $85.7 million, hinting at robust consumer demand. These numbers, coupled with significant deferred revenues poised for future recognition, suggest that while the full-year performance saw a dip, the foundations for future financial prosperity are firmly laid.

EBITDA Reflects Mixed Results Amidst Tax and Operational Adjustments

The company’s EBITDA increased by 169% in the final quarter of 2023 – a striking rise, illustrating effective operational improvements and profit margins. Yet, the full-year EBITDA sank by $9 million, mirroring the annual net revenue and income declines. This decline due to operational changes and a drop in various one-time boosts that were present in the prior year. The decrease in net revenue was driven by a decline in ARK Mobile sales, lower deferred revenue recognition, and absence of one-time payments that had buoyed 2022's figures.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to Snail Inc.'s Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. I would now like to turn the call over to Jake Pisano, Vice President at ICR. Please go ahead.

[Jake Pisano, executive]

Thank you. Good afternoon, and welcome to Snail Inc.'s Fourth Quarter and Full Year 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 fourth quarter and full year 2023 earnings press release filed today after 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 the 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 fourth quarter and full year results. We had a great year and accomplished many things, including releasing of Survival Ascended, releasing an improved product road map, announcing exciting initiatives like the ARKade ambassador program and using artificial intelligence to bolster our product offerings. In October, we released the highly anticipated of sSurvival Ascended game. Since then, we have sold more than 1.5 million copies and logged more than 97.5 million gameplay hours. Our community is still captivated by the ARK experience, and we continue to improve the game with exciting DLC updates.

Since its launch, ARK: Survival Ascended has had an average DAU, or daily active users, of 182,000, which is a healthy increase of 4x the average DAU observed during the same period of the original ARK: Survival Evolved launch. Increased DAU reflects our commitment to creating an enjoyable experience for our player base. 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 also plan new DLCs for the ARK franchise, which are coming to ARK: Survival Ascended. All news about this will be released soon. The ARK franchise will be reaching new heights coming up in late March. Our animation will be released by a well-known streaming platform, Paramount+, initially in the North American region. And globally, 2 weeks later, the notoriety of the IP will reach a new generation of players, and we are planning marketing campaigns to capitalize on this newfound reach. The fact that sandbox survival games are top rated currently with a plethora of new co-opus games entering the market in this genre, we still stand alone at the top on a multiplayer level, along with our technological advancements in our premium ARK program that provides endless content based on user-generated content as the user base of sandbox survival games continues to grow. ARK will continue to be the standard by which other gains are measured, although while we continue to innovate on gameplay and technology, keeping us on the frontier of innovation for this game and genre. We are excited to start 2024 with an improved product road map.

Last year, with the emergence of AI technology, Snail began to research how AI could impact our production pipeline, we sort ways to reduce development time while maintaining a high-quality standard. We quickly found that AI was progressing rapidly in the sector of AI-generated 2D assets. We adapted to this by training our 2D concept artists in using emerging AI technologies and the state and more than doubled our 2D concept art team's production capabilities. The results of this are that our development projects can dramatically reduce the time between ideation and implementation. As we look forward into the near future, we are now sampling emerging AI technology in the next step of the development pipeline, where 2D art is produced into 3D assets. In this step, we have already identified several technologies that have shown great promise, and we are confident that within the year, they will be ready for direct use in our production pipeline for prototyping and ideating concept. The 2 main tools being research on Meshy and Luma AI, both progressing in AI-generated 3D assets.

In the future, we will witness the emergence of AI actors who can replace some development team members. Grouped in a common goal they can act as a complete development team, such as coders, artists, designers, project managers and marketing members. Independently operating, they can take feedback from social media and pass it directly into the development process to be evaluated and implemented into the game project. These AI agents can work together as a team to generate a game project. The two main tools we are researching in this sector are Chatdev and Society of Brain by Google Brain. The industry is trying to hand on to the hand crafted model and compare games made by AI tools to those made by factories. At sale, we want to use AI while making high-quality games, reducing cost and passing the savings on to our consumers. We look forward to the developments we make during the year, and we'll continue sharing more information on our upcoming quarterly earnings calls. I will now hand it over to Heidy to review our financial highlights on the quarter.

[Heidy Kingwan Chow, executive]

Thank you, Jim. Hello, everyone, and thank you for joining our fourth quarter and full year call. Net revenues for the 3 months ended December 31, 2023, was $28.6 million as compared to $15.3 million in the 3 months ended December 31, 2022. The increase in net revenues was primarily due to the release of ARK Survival Ascended. Net revenues for the year ended December 31, 2023, decreased by $13.5 million to $60.9 million, or 18.2%, compared to $74.4 million in the prior year period. The decrease in net revenue was due to the decrease in ARK Mobile sales of $2.9 million, a decrease in 1x deferred revenue from contracts recognized in 2022 of $10.3 million, onetime payments in 2022 of $8.5 million that did not occur in 2023, and an increase in deferred revenues of $25.2 million related to ARK sales, partially offset by an increase in ARK sales of $32.7 million.

Net income for the 3 months ended December 31, 2023, was $2.4 million compared to the net loss of $2.3 million for the 3 months ended December 31, 2022. The increase in net income is due to the release of ARK: Survival Ascended, reduced general and administrative expenses of 2.5 units, and a decreased professional fees related to compliance with public company requirements and litigation-related expenses, partially offset by increased advertising and marketing costs of $900,000 related to ARK: Survival Ascended release and the $3.9 million decrease in the income tax benefit for the period. Net loss was $9.1 million for the full year ended December 31, 2023, as compared to net income of $1 million for the year ended December 31, 2022, representing a decrease of $10.1 million. Bookings for the 3 months ended December 31, 2023, were $52.6 million as compared to $11.9 million for the 3 months ended December 31, 2022. The increase was due to the strong release of ARK: Survival Ascended on the Steam, PlayStation and Xbox platforms. Bookings for the year ended December 31, 2023, was $85.7 million as compared to $63.7 million in the year ended December 31, 2022. The increase was due to the release of ARK: Survival Ascended in the fourth quarter of 2023.

In addition to increased sales of ARK: Survival Ascended, the company deferred approximately $22 million in revenues during the fourth quarter of 2023 for the ARK: Survival Ascended DLCs that has not yet released and had $10.3 million in 1x deferred contract revenue recognized in 2022 that did not occur in 2023. Earnings before interest, taxes, depreciation and amortization, EBITDA for the 3 months ended December 31, 2023, increased by $8.8 million, or 169%, as compared to the 3 months ended December 31, 2022. The increase was primarily the result of an increase in net income of $4.7 million, partially offset by an increase in provision for income taxes of $3.9 million. EBITDA decreased by $9 million compared to the year ended December 31, 2022, primarily as a result of a decrease in net income of $10.1 million, partially offset by a decrease in interest income of $700,000 and an increase in interest expenses of $600,000. As of December 31, 2023, unrestricted cash was $15.2 million versus $12.9 million as of December 31, 2022. To review our detailed financial statements, please refer to the earnings press release our most recent 10-Q and our 10-K filing.

[Operator]

[Operator Instructions] Your first question comes from Pat McCann with Noble Capital.

[Patrick McCann, analyst]

My first question was just about the animated series. I'm wondering if you could give any information on how that has been received so far? And maybe you could also touch on the animated series DLC as well.

[Jim Tsai, executive]

This is Jim Tsai, CEO of Snail Games, to answer the question related to animate series. I think by far, we already know that the animated Series, the first season, the episode has been released in video streaming platform, which already received quite, I would say, positive review and also the critic and the score has been quite promising. And I think the -- another benefit from releasing the video on the video stream platform is that it has provided the free promotion and marketing to outside of the ARK fans. So they can understand what the story is wrapped around for the ARK: Survival Evolved video game. That's a great health and benefit for the sales of the ARK: Survival Evolved even back in 2015 the master game. It's -- fans haven't heard about it, and then they reviewed the animation and then they make curious. They may start from the master game and going on DLC. The other question on the animated DLC, we are planning. And then, we don't have the exact day and news to de announced, but we are working on it and expect to have more visible day and schedule and the information in the coming forum in the coming days.

[Patrick McCann, analyst]

And then my next question was, given the MOD revenue sharing program, I was just wondering how the moding -- has there been an uptick in moding? What are you seeing right now insofar as moding is concerned with the game?

[Jim Tsai, executive]

Okay. Yes. This is Jim again. Thank you for the question. So if we talk about moding, this is a very exciting news because before we open on to the Mod platform, -- we're already doing the Mod program for 5-6 years in the past. And if you look at the current server occupation, there's actually 50% or 60% or even more was -- we call it private server, which would be very popular in the matter that they are playing the ARK in their own version. That's only like 10-15 a little bit about its official server that we provided in the past, which is to provide as the great potential to be on the moded system, right? So right now, the moded platform we provided is not it's still the same features and a more enhanced tool for the moder to be able to utilize whatever the data and the features in that tool. But also it opens up for the monetization, not just for the company, but also all the creator, the content creators. So it's exciting news, but this is just beginning. So other than the product cycle in the past, this will be a new trajectory in the coming days, and we expect that it will be a long-term strategy and also amortizing another long-term monetization for the ARK franchise.

[Patrick McCann, analyst]

Okay. Great. And then if I could ask one more question. I was just -- I was wondering if you could comment any on the -- any updates in the development of ARK 2 when you look at potential release, what quarter you might want to release it when you're looking at late 2024 or early 2025? I'm just wondering how much flexibility you might have to kind of pick a time to release it that makes most sense as far as user adoption. I'm thinking about like in Q4, with the Christmas holiday, how are you viewing that? And how much flexibility do you have when it comes to re-leasing ARK 2?

[Jim Tsai, executive]

Yes. Thank you for the questions. Yes, there was another question right around when it's actually coming out even -- especially after the ARK: Ascended release and also the minister released and see all the voice over -- and one of the voice over was Vin Diesel was actually in the ARK 2 trailer. So you see the connection. The team is working very hard, try to have the ARK 2 release early. But as we may know because there was long-time for the ARK: Survival and ARK: Ascended and then definitely the ARK 2 has the higher bar that the quality has supersceded in the past and even the ARK: Ascended. So we don't have a clear day. I think, would have a more clear schedule in the coming months. I can say for now, but it definitely would be good news and information in coming days.

[Operator]

[Operator instructions] There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines, and thank you for your participation.