Ladies and gentlemen, thank you for standing by, and I would like to welcome you to the Second Quarter 2024 Earnings Call of Huuuge. The speakers today are Wojciech Wronowski, the CEO, and Marek Chwałek, EVP Finance. The call will start with a presentation from the company, followed by Q&A. For the Q&A session, we'll be joined by Erik Duindam, the COO, and Maciej Hebda, SVP, Strategy and Planning. The presentation will be available for download on our website after the call. You're also welcome to type in the questions in the chat box while the presenters are speaking. So with that, I'll pass the line over to Wojciech to start the presentation. Please go ahead, sir.
Hello, everyone, and thank you for joining us. This is Wojciech Wnowoski, the CEO of Huuuge. Today, together with Marek Chwałek , our treasurer and EVP of Finance, we'll be summarizing our operational and financial performance for the second quarter of 2024 . Following that, we'll share our outlook for the rest of the year. As always, we'll conclude with the Q&A session. Before we move on to the second quarter highlights, I would like to take a moment to acknowledge that in this milestone year, marking Huuuge's 10th anniversary, Huuuge and Billionaire Casino have surpassed $2 billion in lifetime revenue. This is a proud moment for the company and an achievement that few peers in the industry have reached. Huuuge continues to be a highly cash-generative business, delivering approximately $33 million in net cash flows from operations in the first half of the year.
Management remains very focused on maintaining profitability discipline, which will continue to be a top priority in the coming quarters. Huuuge maintains its strong market position and is actively exploring multiple meaningful M&A opportunities. Our cash balance of almost $110 million gives us substantial flexibility in this pursuit, and we are confident that the right opportunity will come our way. Our focus is on acquiring companies that will broaden our game portfolio and benefit from our expertise in monetization and running games as a service. Quarterly revenues declined by 5.4% compared to the first quarter, primarily due to weakness in the social casino industry and the delay of our first half feature roadmap to the second half of the year.
In the second quarter, among the top 15 social casino operators, 11 experienced sequential declines as macroeconomic conditions continue to negatively impact consumer discretionary spending. However, our core games, Huuuge and Billionaire Casino, saw stabilization in daily active users, and our direct-to-consumer efforts are yielding positive results, contributing to improved margins. In the second quarter, D2C channels accounted for 12% of sales, and we are seeing strong momentum continuing in the third quarter. Now, let me turn to our core franchises and the development of new games. While UA spend increased by over 70% in the first half of the year, it remained flat quarter over quarter. We have not yet seen the impact of this increase trickle through the revenue, given our new feature roadmap has been slightly delayed. During the first half of the year, we have been developing numerous innovative features.
Throughout this period, we conducted hundreds of A/B tests, soft launches, and player interviews, giving us confidence that our upcoming release pipeline will be one of the strongest in several years. This release pipeline includes tournaments, battle pass, new in-game collections, and one of the most significant economy upgrades we've undertaken to date. Many of these major features are deeply connected to our social core systems. These initiatives will lay out foundation for the games, core games future, and we are very excited to see this progress in the upcoming months. However, the delay in timing of this release will result in a lag in the anticipated revenue impact, with effects unlikely to materialize in the third quarter. We expect peak performance in late Q4, but it will be too late to fully recover and close the revenue gap compared to the first half of the year.
With industry challenges expected to continue, we have also modified our full year forecast to align with the projected market conditions. Additionally, we have adjusted our marketing strategy. We'll initially reduce spend to ensure strict payback discipline, but also better align spend with the timing of our second half releases. As these new releases see traction, we'll scale marketing further. Huuuge is steadily advancing its direct-to-consumer offering. In the second quarter, approximately 12% of our revenue came from our direct-to-consumer channels. Only a fraction of our player base has to date interacted with our D2C offering, and we believe significant upside remains. We are expanding this offering thoughtfully, balancing player experience with driving incremental growth while minimizing the risk of cannibalization. We have several teams working on new games, each focused on mastering specific genre. Currently, we have three games at various stages of development.
Recently, Huuuge invested in Empire Games, a small studio that will function as a new external team, contributing to our efforts towards organic growth. Building games is a complex process, and we plan to test and roll out numerous prototypes and early versions throughout the year. As soon as we know, as we see notable success, we'll share detailed updates and insights on those games. Now, let's dive in, into our financial performance. Marek, I will hand it over to you.
Thank you, Wojciech. Hello, everyone. Good afternoon. I'll cover the financial section of this presentation. So next slide, please. In the second quarter of this year, we saw an 8.4 year-over-year and 5.4 quarter-over-quarter revenue decline, driven mostly by our core franchises. These results are in line with our guidance for the first half of this year and stem from weaker social casino market and product feature roadmap being pushed to the second half of this year. At the gross profit level, we observed year-over-year and quarter-over-quarter improvement in the margin, primarily due to continuous expansion of our direct-to-consumer channel, which has helped partially offset the revenue decline. Our sales and marketing expenses increased by 40% year-over-year, but only 3.1% sequentially.
We ramped up spend throughout the last year and in the first quarter of this year as we optimized paybacks. But in the second quarter, we decided to adjust our marketing strategy to better align with performance trends and the timing of our second half releases. In the second quarter of this year, we observed slight increases in other cost categories, both year-over-year and quarter-over-quarter. This is because the lower cost base, resulting from the last year's restructuring initiatives, was already corrected in the second quarter of last year. Strengthening of the Polish zlotys against the US dollars by 4% year-over-year negatively impacted cost dynamics. As mentioned in previous earnings calls, we remained very focused on maintaining strict cost discipline. In the second quarter of this year, our Adjusted EBITDA amounted to $19.4 million.
The year-over-year decline is a combination of increased marketing investment and a lower revenue. Now, let's move on to the balance sheet. So next slide, please. During the first half of this year, the structure of the balance sheet changed, primarily due to the $70 million share buyback settled in April, partially offset by a highly positive net operating cash flow of nearly $33 million. As a result, total assets amounted to $173 million, a decrease of $44 million compared to the end of the prior year. As of June 30, 2024, current assets were composed of 78% cash and cash equivalents, totaling nearly $110 million. Our non-current assets of $32 million include a $3.5 million long-term investment in Banana Studios, completed in March this year.
The equity decreased by $39 million due to the share buyback executed in the first half of this year, partially offset by $32 million in current year earnings. The decrease in current liabilities is primarily related to the payment of corporate income tax liabilities from the previous fiscal year. Turning to the next slide, we can expand a bit on our cash position and cash flow generation. In the first half of this year, our pre-tax profit decreased by $14 million year-over-year due to increased UA spend and revenue trends. Thanks to better profit to operating cash flow conversion, this resulted in only a $5 million decrease in net operating cash flow compared to the first half of last year.
As the net operating cash flow in the first half of last year was impacted by a substantial increase in the net working capital of $14 billion. The negative investing cash flow in the first half of this year was primarily driven by a long-term investment in Banana Studios of $3.5 billion, along with ongoing purchases of tangible and intangible assets, and was partially offset by interest received from short-term bank deposits and money market mutual funds. The negative net financing cash flow is mainly related to the share buyback. Turning to the next slide, I'd like to sum up our financial update. In the first half of this year, we delivered an adjusted EBITDA of $41.4 million and a net operating cash flow of $32.7 million.
Our net operating cash flow to adjusted EBITDA conversion rate for the twelve months ended in the second quarter in of this year amounted to 82%, and has slightly increased compared to the previous financial year. We are a highly profit-oriented and cash-generative business. Even after returning almost $220 million to our shareholders within nine months, we maintain a strong cash balance of almost $110 million, allowing us to pursue inorganic growth options. Now, I will discuss our guidance for this financial year. In light of the observed negative impact of the macroeconomic environment on player behavior and the product roadmap being pushed to the second half of this year, we expect a year-over-year revenue decrease in the full year 2024.
Our future roadmap for the second half of this year is exciting, laying a strong foundation for the coming year. Looking at the entire 2024 , we expect marketing spend to grow year over year. However, in the second half of this year, it will be reduced in order to align investment with product performance. Maintaining strict payback discipline remains our main priority. We will continually be seeking operating cost efficiencies across the company and expect to realize further savings in the second half of this year. We are confident that these measures will lead to solid adjusted EBITDA and high profitability, even with lower than expected revenue. With that, I'm turning to Wojciech for his closing remarks.
Thanks, Marek. Thanks to everyone for tuning in and for your continued support. If there is anything we want you to remember, it's these key, key takeaways. Huuuge continues to be a highly cash generative business, delivering around $33 million in net cash flows from operations in the first half of the year. We maintain a strong cash balance of almost $110 million. We are actively exploring multiple value-adding M&A opportunities, and our focus is on acquiring companies that will broaden our game portfolio and benefit from our expertise in monetization and running games as a service. Huuuge Casino and Billionaire Casino saw stabilization in daily active users, and our direct-to-consumer efforts boosted margins, with D2C channels accounting for 12% of sales. We are very excited about our release pipeline in the second half of the year.
Our future roadmap is the strongest we've had in several years, and we expect big revenue impacts for late Q4. Thank you again, and let's start the Q&A.
Thank you very much for the presentation. We'll now move into the Q&A part of the call. If you have any questions and are dialed in via the telephone, please press star two on your keypad. That's star two on your keypad for any questions. You may also ask a voice or a text question via the web. Okay, we'll be just going through the text questions. The first few are from Jimmy Johnson from Fold Equity. The monthly conversion rate has been trending quickly downwards in the past quarters. Can you please elaborate about it? What kind of features is expected to raise this metric during the second half?
Yes, I'll take this one. In terms of the conversion, if you look at our user base and monthly active users, it's been steadily growing in the recent quarters. And some of these players are coming from outside the U.S., which typically means lower conversion. In terms of features, it's a mix of monetization, engagement, features. We have a really packed roadmap in the second half of the year. There is a lot of features that have been requested by our players, mainly tournaments, or Huuuge Pass or bigger economy change, most probably the one of the biggest one we have done so far to date. And we know that those have been bringing results, especially the last one we've done in August last year. So we are quite confident about our pipeline.
Okay, thank you. The second question from Jimmy: The revenue mix has changed a little in the past years, where Europe now holds a larger part of the total. What is the reason behind this?
Erik, would you like to take UA questions?
Yes, definitely. So we've diversified our UA spend to be less U.S.-centric. And so we've invested relatively more on the user acquisition side in the E.U. And generally, our product, our slots in the game, have specific slots that are attractive for E.U. players because their behavior is a bit different from U.S. players. And this is also where we have some unique capabilities compared to most competitors. So this is why, to diversify and for the fact that we have good product offering for E.U. players, it now leans more towards that.
Thank you. You mentioned there will be lower UA during the second half. Are we talking about levels more like the first half, 2023?
I'll take this.
Yeah.
Over the past eight quarters, our average UA to revenue ratio was around 50%, and going forward, this should fluctuate a bit around this level, but it will depend on our cohort performance. We'll always follow the performance, so we cannot give a specific number for the upcoming quarters. H1 2023 was definitely below this level because we did quite a big restructuring of our marketing team and capabilities in Q1 2023. That was a time where we were ramping up and a bit below our steady state level.
Okay, follow-up question. Speaking of UA, how do you look at UA being invested in the past year now with declining revenues in the first half? I understand it's early, but please elaborate.
Yes, I can also take this one, so we've increased our UA spend gradually since this Q1 2023 change, and we've done this because we've seen increasingly good paybacks at the time because our team really upgraded their capabilities, and so we expect H1 of this year to pay back over the next quarters and years, just as expected. And going forward, we're adjusting our UA spend to maximize profitability and not just look at the payback windows, and this gives us also more capacity to invest when we see the new product roadmap initiatives kick in, in which case we will evaluate that and potentially invest more, depending on the performance.
Okay, thank you. How did you find out about Empire Games? Are you looking for more deals like this?
We are constantly exploring the market and looking for attractive investments, and we are not ruling out more investment like Empire Games in the future. Empire Games for us is a very solid, small team, and we are going to treat this as a separate and external team.
Okay, thank you. Are there any plans to do an opportunistic buyback in the market? As a larger shareholder, I think it would be a great idea to cancel the current treasury shares and launch the new buyback program at the market of 10% of outstanding shares.
Yes, Marek, would you like to take that?
Yeah, I'll take this one. So as you know, we have deployed $220 million in two buybacks in the last one year, whereas the last buyback was completed in April. But we are prioritizing M&A or other investments. We are not excluding, however, further share buybacks in the future if we don't see any interesting opportunities. And please note also that we have already retired all shares that have been repurchased within last two buybacks. The remaining treasury shares pool is about 4 million shares, and the shares are required to maintain our existing long-term equity program.
Okay, thank you very much. The next set of questions come from Sir Michał Wojciechowski from Ipopema Securities. Good afternoon. I have a few questions. The outlook for Social Casino deteriorated, whereas general market, mobile market seems to slightly revive. Is there any particular reason for Social Casino weakness? Could you elaborate more on what exactly surprised you to such an extent, to adjust your expectations for this year?
Um, Maciej?
Sure. So, maybe starting with the social casino market, it's slightly different in terms of a smaller and more concentrated player base versus the broader mobile games market. It's also a slightly older demographic, so it's difficult to pinpoint the exact reasons for market weakness or differences between genres. We think macro factors in general can be one of the drivers, consumer sentiment and/or consumer discretionary spending, specifically. If we look at third-party research, such as Eilers & Krejcik, they pointed to overall industry weakness and competition from adjacent genres.
And then as far as our expectations for the coming quarters or for this year are concerned, I would say that the product roadmap development or calendar had a bigger impact on our decision on the outlook.
Okay. You've noted in the report that Privacy Sandbox is expected to be introduced in the fourth quarter of 2024 or 2025 . Is this project accelerating and its final application visibly coming, or might it be delayed once again? Could you tell us more how the Sandbox will work? Should we perceive it as some kind of a testing phase with no material impact on your business at the initial stages?
Erik, go ahead.
Yeah. So the latest is that Google postponed it again to next year without being very clear about exactly when. What Google is very clear about is they're rolling this out very slowly. They've been saying this from the beginning, and it's logical as their business relies almost entirely on ads and ad revenue. And so, what I can say is, what we know right now in terms of how it will work, is that the approach that they're taking, and also the consequences, are quite different from the Apple IDFA, ATT situation before. At least this is our expectation right now. They will probably deprecate this Google Advertising ID for individual tracking. However, the big difference is that the Play Store has a way to still attribute installs through direct referrals.
This is already in use heavily, and this means we can still track all of our campaigns and attribute that. So we essentially expect relatively minimal impact. And we're also working very closely with Google. This has already been the case for around a year, that we're working on this Privacy Sandbox and partnering up with them. So we will, we'll see when exactly this will be rolled out, but it has been delayed again.
Okay, thank you very much. Next question comes from Krzysztof Tkocz, from Dom Maklerski BDM. Could you please provide more information about Banana Studios and the progress in the development of the Slots Cash? Are you satisfied with the progress?
It is an early stage game and a small studio. We are closely cooperating in a number of areas, including marketing. We are happy, but it's too early to comment more.
Okay, thank you. Could you tell us more about the recent investment in Empire Games? What makes the company's product stand out in the market? What potential do you see in it?
... Empire Games will be our external partner, so we are investing more in the team rather than the product. We like the team, we found a founder impressive, and we will cooperate with them for a long term, and we'll be focusing on the building new games.
Okay, thank you. Next question is from Maria Mickiewicz from Wood. You mentioned in the press release that a significant impact of the new feature implementations and the revenues should be visible in late fourth quarter. Could you please give more color on the roadmap of planned changes? What has made you more cautious on the second half 2024 expected revenue outlook?
In terms of, I already commented regarding the roadmap for Q4. We've done some changes to the pacing and the schedule of the release. There were no particular delays in terms of the delivery or studio operations, but before we decide to release a feature, we typically conduct player interviews and run extensive A/B tests to help us understand potential and direction of the future. We have seen positive signals, but also opportunities to polish and adapt before rolling out to the full audiences. That's why we pushed those releases back to H2. We are going to roll out several features that our audience has requested, so mainly tournaments or Huuuge Pass, and we'll be doing one of the biggest economy upgrades so far.
What has made us more cautious is that, yes, because if there is a lag in the release, those effects on the revenue won't materialize in the time we initially anticipated, so this is why we are more cautious on the revenue outlook.
Okay, next question is a follow-up question from Michał Bojarski from XTB Securities. What do you exactly mean by increasing focus on M&A? Have you implemented changes to your strategy in this regard or noticed visible change in the market, i.e., more opportunities?
Um, Eric?
Yes. So compared to before, we are more focused on M&A in the sense that right now, the multiples in the market are relatively low, so it's a buyer's market, essentially. And we've ramped up our internal capabilities quite a lot and brought in some people that are very well known in the industry and that can bring in more deals. So we've just increased our focus heavily in order to do slightly bigger or bigger deals or more deals because of this buyer's market. So that's what it means.
Okay, thank you. A related follow-up question from Krzysztof Koc from Dom Maklerski BDM. Do you see any interesting investment opportunities, for example, in companies that have products generating solid revenues and are in the early stages of their life cycle?
Feel free to continue.
I'll take this one as well. So it-
Yeah.
Yeah. Our M&A team is actively exploring the gaming market, and we're just searching for attractive M&A or investment opportunities. In general, we're looking for diversification, but within the space that we know and where we can add value or that are complementary to our business. And I will not comment on the target multiples, but I think ultimately it's the same as I previously said, it's a good market to potentially do M&A.
Okay, thank you very much. Are games like Light Up City or Tasty Merge Journey, which are associated with Huuuge Games accounts on the AppMagic platform, examples of test launches? Do the titles announced for the second half 2024 stand out with better KPIs compared to the previously mentioned games?
So yes, this is our one of our test accounts, and there is more, and we are deploying many prototypes and many early versions, and we'll be continuing to do so. If there will be any material success, we are definitely going to notify the market, and hopefully new releases will get the KPIs that will allow us to scale and invest further.
Okay, thank you very much. Next question comes from Mr. Wojciech Demski from Aurora. Please provide some details on the M&A approach, target multiples, product types, stage of development.
Eric?
Yeah, I think I probably already answered this with my previous question.
Yeah.
So ultimately, we're looking for things that are complementary and where we can add value. And, we are looking for slightly bigger, deals than this Empire Games, just to give an example, because we think it's a good opportunity right now.
Okay, thanks. Next question comes from Michał Stopka. Do you use artificial intelligence to analyze player behavior and maximize profits?
Erik, do you want to take this one as well?
Yeah, sure. We do. We've been using various AI models and methods for quite some time, so our product and also on the marketing side, a lot of things are driven through by machine learning. For example, understanding the player behavior and the purchase behavior, the churn behavior, paybacks, predictions, and things like this, and we're also using generative AI across the company in various ways to-
... generally optimize our operations and be quicker or lower cost in how we operate.
Thank you. Follow-up question from Mr. Wojciech Demski from Aurora. Can you please comment on the impact of seasonality on the delayed new releases at year-end? Is the timing around year-end better seasonally for monetization of new items?
Yes, seasonality Q4 is typically the strongest, and there are a number of events and sales, like Black Friday, Cyber Monday, Christmas, and then New Year's Eve. And, we constructed the roadmap so we can actually capitalize on exactly this seasonality factors.
Okay, thank you. Next question comes from Mr. Max Stenberg, private investor. You talked about realizing further cost savings in the second half of 2024 . What specific cost savings are you talking about?
There is no very specific area where we are going to look for the cost. We definitely are very mindful about the cost structure of the company, and we are looking for savings in all areas across the board.
Okay, follow-up question: Are you looking for M&A in social gaming?
Erik, you want to take the M&A question?
Can you repeat the question, please?
Yes. The question was, are you looking for M&A in social gaming?
Depends what the social gaming means. So, if we are talking about the social casino, like, definitely we are not ruling this out. But, if there is a question about games with a strong social components and elements, definitely, we are interested in. This is our expertise, and definitely that's something that we would consider.
Okay, thank you very much. We'll just please stand by for additional questions. Please press star two for any voice questions. You may also ask additional text questions. Okay, next question is from Mr. Michał Stopka. What is your store's target percentage share of revenues?
I'm not sure if I understand this question correctly, but if the question is about direct to consumer offering our webshop, we are targeting the mid-teens by the end of the year.
Okay. Well, thank you very much. It looks like we have no further questions. I'll be passing the line back to the management team of Huuuge for their concluding remarks.
Thank you for joining the call today. We appreciate your continued support. Have a great weekend, everyone.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and-