Snail, Inc. Class A Common Stock (NASDAQ:SNAL) Q1 2024 Earnings Call Transcript

Snail, Inc. Class A Common Stock (NASDAQ:SNAL) Q1 2024 Earnings Call Transcript May 17, 2024

Operator: Ladies and gentlemen, greetings, and welcome to the Snail Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jake Pisano, Investor Relations. Please go ahead.

Jake Pisano: Thank you. Good afternoon, and welcome to Snail Inc.’s first 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. By now, everyone should have access to the Company’s first quarter 2024 earnings press release filed today with the SEC after market close. This earnings press release is available on the Investor Relations section of Snail Inc.’s website at www.snail.com or the SEC’s website at www.sec.gov/edgar. 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 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. It disclaims any duty or obligation 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 such statement is based. On today’s call, we will refer to bookings and EBITDA, which are non-GAAP financial measures that provide us with useful information for the Company’s investors. You will find the historical reconciliation of bookings in EBITDA whose corresponding GAAP measures are in the earnings press release and the Company’s SEC filings.

And with that, I’ll turn the call over to Tony. Tony?

Tony Tian: Good afternoon, everyone, and thank you for joining us today. It’s an honor to be speaking with you for the first time as the new Co-CEO of Snail. I first want to express my gratitude to Jim Tsai for his leadership over the past several years, in building Snail into the successful gaming company it is today. He laid a strong foundation, and I am excited to build upon it as we enter this next chapter. I’m thrilled to have the opportunity to lead Snail forward. This company has an incredibly passionate and talented team with cutting-edge technology and leading franchisees like ARK that have cultivated incredibly engaged and dedicated communities of gamers. As a longtime player of ARK myself, I have a deep appreciation for the creativity and innovation this company embodies.

Looking ahead, I’m mostly excited about our plans to further leverage artificial intelligence across our development pipelines, the AI technology as Jim mentioned in the past, such as [Natasha], Luma AI, [FDev] and the society of brands have immense potential to accelerate our creativity while maintaining premium quality. Our goal is to make Snail an AI trailblazer that enhances our talented human teams rather than replacing them. I’m also eager to capitalize on the widespread attention of the ARK animation. The gaming world’s eyes will be on this franchise, providing an ideal opportunity to engage new players and further energize our existing community. With that, let’s quickly review the quarter and then I will hand it over to Peter Kang, our COO, to dive a little bit further into recent updates to our product road map.

Our AG franchise continues to be an incredible successful story through March 31, 2024. ARK has been played for a astonishing 3.5 billion hours with an average playing time per user of 163.7 hours. Impressively, the top 21% of all players have spent of over 100 hours immersed in the game according to data from Steam’s platform. For the first quarter of 2024, Snail generated net revenue of $14.1 million, up from $13.5 million in Q1 2023. Net loss for Q1 2024 was $1.8 million versus a $3.0 million net loss in Q1 2023. With that, let me hand it over to Peter to review our product road map. Thank you.

Peter Kang: Thank you, Thank you, Tony, and hello, everyone. In Q1, our indie publishing label, Wandering Wizard released Zombie Within a second entry into the social deduction genre by NewGen the developers of our hit title, West Hunt. The title has entered into early access on Steam, and we are eagerly awaiting player feedback to improve the title. We’re looking forward to a 1.0 release in Q4 of 2024. West Hunt has also released onto Nintendo Switch, which will bring the social deduction mayhem to Nintendo’s handheld devices, providing cross-play access to the title. We’ve also updated the plumbing road map for ARK: Ascended’s DLC release schedule, which indicates a new map every two months throughout the 2024 calendar year.

After the release of Scorched Earth in April of 2024, the next DLC map to come will be the center. We’re excited about continuing to provide content for ARK: Ascended at a much steadier pace. Between DLCs, we will also be adding a few dinosaurs to the world to add more flavor to the ARK universe. The animated series for ARK was released on Paramount Plus to great acclaim. Using the backdrop of the ARK universe, players of the game will be able to see an adaptation of the ARK universe while enjoying the very elements that attracted them to the game: dinosaurs. So far, reception has been great, with IGN giving the title an eight out of 10. We also see a draw of new players learning about the ARK franchise, which we are complementing with cosmetic skins from the animated series across all available platforms.

Our development pipeline continues to investigate and research advances in AI, primarily focused on our pipeline currently. AI has allowed us to rapidly prototype and ideate on our vision for products and development. Currently, we have three projects which are yet to be announced in development, and we have been using AI to concept the game world, allowing for the development team to envision the virtual worlds before assembling the pieces. On the topic of ARK 2, we’re still holding off on new announcements in Q1. The game is still in the development stage, and we’re taking learnings from ARK: Ascended into consideration as we continue to work with the 305 engine. New advances in technology bring great promise, and we hope to integrate the latest features in time for the release.

More news about this title will come later this year. And now let me hand it off to Heidy Chow for our Q1 financials.

Heidy Chow: Thank you, Peter. Hello, everyone, and thank you for joining our first quarter 2024 call. Net revenues for the three months ended March 31, 2024, was $14.1 million as compared to $13.5 million in the three months ended March 31, 2023. The increase in net revenues was primarily due to the release of ARK: Survival Ascended. To properly account for revenues from sales, Snail has recognized 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 players will be engaged with our games. The timing of future game updates and content release is based on the projection of when our developer will hit further milestones.

However, those estimates can change if developers meet unexpected delay or if the game platform requirements dip unexpectedly. Essentially, properly accounting for our game revenue over time involves making projections that are subject to change based on the development milestones. The estimated service here 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 revenue into future quarters. Net loss for the three months ended March 31, 2024, was $1.8 million compared to the net loss of $3.0 million for the three months ended March 31, 2023. Booking for the three months ended March 31, 2024, were $19.6 million as compared to $13.3 million for the three months ended March 31, 2023.

The recent release ended in March compared to $13.3 million for the three months ended March 31, 2023. The recent release of ARK: Survival Ascended on the Steam, PlayStation and Xbox platforms was a primary factor in generating net revenue of $14.1 million. And the Company deferred an additional $5.5 million in revenue for ARK: Survival Ascended DLCs, which have not yet launched. Earnings before interest, taxes, depreciation and amortization was a loss of $1.9 million versus a loss of $3.4 million in the prior year period. The decrease was due to a decrease in net loss of $1.2 million and a decreased benefit from income taxes of $300,000. As of March 31, 2024 unrestricted cash and cash equivalent was $16.1 million. When you review our detailed financial statements, please refer to the earnings release and also our most recently filed Form 10-Q, which was filed today with the SEC.

Thank you for joining us today, and let’s open the line up for questions.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from the line of Pat McCann with NOBLE Capital Markets.

Pat McCann: My first question is, I guess, with the modding program, I was wondering, so far, could you provide any updates on the reception of the modding of the premium mods. Are users showing a propensity to pay for those? What are the early returns so far? And how do you feel about that going forward?

Peter Kang: This is Peter Kang, and I’ll speak a little bit about this modding program. So what we’ve noticed was there’s a growing tendency inside this sector of the industry to start getting into allowing what’s called user-generated content on your gaming platforms. And it’s a feature that has to grow and snowball in order to gain success. So our biggest hurdles, I would say, are to allow for content creators in this sector to understand the differences between our modding programs and others out there, such as pay rates, such as adaptation and actual professional-level tools to do so. So what makes our program stand out is that our program uses Unreal 5, which is a professional-level engine. Our program also allows for content creators to create content at a very polished level and eventually distribute the product across all console platforms.

So right now, we see a growing adaptation rate. I believe there is around three mods that are fairly popular with sizable revenue. And we’re watching and keeping a close eye on the amount of growth that is coming out of this program. Coming out in Q2, we will see more of this type of product. There is several exciting mods that are in the pipeline, and we’re looking forward to releasing them.

Pat McCann: And then my next question was regarding the DLC road map. You mentioned that you’d be releasing DLC about every two months that were, I guess, included in ASA. What about other DLC — other potential DLCs that are sort of more stand-alone offerings that weren’t included in that? What’s the prospects of releases — for releases like that? And when would those fit in?

Peter Kang: So inside this road map that’s public across our announcement channels for ARK, we have several unmentioned surprise types of content drops to the players. And within those time slots, they will be DLCs that were not inherently part of the previous ARK universe and are just being upgraded, those will be new DLCs with new features. We’re just currently not ready to fully unveil what they are yet, but they are being worked on. And they are part of the slotted schedule of a new map every two months.

Pat McCann: Great. And if I could just squeeze in one more. I was wondering with — I believe this quarter that the ARK: Survival Ascended had a higher number of daily active users than ARK: Survival Ascended. Is that a surprise at all? Or what would be your expectations with — I guess, ASE has been around for quite a while and has a loyal fan — or user base. Is that something that you expect for it to still have a higher daily active user than ASA? Or is that a surprise?

Peter Kang: So it’s not too much of a surprise. As it stands, ARK: Survival Ascended uses the latest Unreal 5 Engine. And we really have tuned the product to use the most of the engine’s new features. And what this results in is a product that is cutting-edge, that requires a very high PC spec system to fully optimize the game. And when you’re on PC, what you’re looking at is a growth curve of players who are on ARK: Survival Evolved now using lower-end PCs. And as they start to adapt into the better technology, they will find themselves more eager to convert to ARK: Survival Ascended and be able to enjoy the full effects of the Unreal 5 Engine. So I would say this is the nuance of creating a product that’s using the latest technology.

As the mass population adapts to higher-end PCs, which will become more accessible across economic gaps, we will see ARK: Survival Ascended continue to grow over time. And that’s why we’re okay with this new life cycle of releasing the DLC maps because we know, over time, more and more players who have been exposed to the IP will adapt to higher-end PC and be able to convert to ARK: Ascended.

Operator: Our next question is from the line of [Paul Pay] with U.S. Taiko Securities.

Unidentified Analyst: So my first question is, given the success of the ARK franchise, what plans do you have to further expand this universe beyond games and the animated series?

Peter Kang: This is Peter Kang. So I’ll be giving a little bit more detail about this question. As always, we’ve looked past video games in most of our endeavors to assist in expanding the ARK universe. Previously, we have operated with IP licensing models where we’ve created products that are still in gaming to expand a universe, to expand their reach to different audiences and age groups. Products such as PixARK of Oxalate game, products such as ARK Park, a VR game. And then with the latest onset of ARK animated series, we have started to explore outside the confines of video games. Moving forward, we will continue to look for opportunities to license the IP and merchandising and other facets of entertainment and potentially even more diverse genres of gaming. So we will continue to grow the reach of the IP and the exposure of the IP to centralize around the various platforms that we have published products in.

Unidentified Analyst: Got it. That’s helpful. And then can you provide more details on the three unannounced projects currently in development and how AI is being leveraging the conceptualization process?

Peter Kang: Absolutely. So mostly, when we go to create a video game, we start with concept art, which is 2D. From there, we go into what’s called 3D modeling, and after we do the 3D modeling, we put texturization onto the model. And this process takes quite a bit of time to see a final product inside the video game. Right now, we’re using AI to quickly iterate on conception phase of the pipeline, where we’re able to rapidly prototype different looks and visual effects inside the world using AI to generate the look and feel of the character model. As AI continues to improve, soon we will be able to use AI to turn our 2D concepts into 3D models. And the growth of AI is astounding at this point. We foresee in the future, within 1.5 years to 2 years, that we will be able to fully create the process of 2D art to 3D model and texture all with the help of AI.

And what that does is it provides us with the ability to reduce cost across the board, to ideate at a much faster pace than previously, and we’re able to really flesh out what the world is going to look like before we even start creating the product. And what this means is it’s going to be a quicker development cycle to the end user. It’s going to be a higher-quality product while maintaining a lower cost to the end consumer.

Unidentified Analyst: Yes, that sounds exciting. And then my last question is what is the expense contribution from the Nintendo Switch release of West Hunt? And are there any plans to bring other titles to the Switch platform?

Peter Kang: Absolutely. So the release of West Hunt on the Switch is for us to reach a greater audience. The game itself being a social deduction game is very fitting for the Switch console. As we can see, players start to adapt to play the game while they’re on the move, whether they’re in a car, a train or airplanes, they’re able to enjoy the game because it is a short-session game. It is something that they can quickly play, enter and exit at a rapid pace. And we do plan to continue to bring some more of our products to the Nintendo Switch platform. But we are slowly working on selecting which ones are the best fit. We do feel that it’s important for the products to fit the platform. And so we’ll continue to evaluate our library and catalog to see which ones are the best fit.

Operator: Thank you. Ladies and gentlemen, this concludes our question-and-answer session. The conference of Snail Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.