East Side Games Group Inc. (EAGR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the East Side Games Group, formerly LEAF Mobile Inc, First Quarter 2022 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jason Bailey, Board Chair, CEO and Founder of East Side Games Group. Please go ahead.

Thanks, operator, and welcome, everyone, to East Side Games Group's First Quarter 2022 Results Call. On the call today with me is Jim MacCallum, our Chief Financial Officer. I'll begin by sharing highlights from our first quarter ended March 31, 2022. I will be also giving an update on our strategy and key events that have taken place since we last reported on March 10, 2022. Before we get started, please note, on December 6, LEAF Mobile began operating under the trade name East Side Games Group and announced its intention to change its name and will seek shareholder approval at the AGM next week. Effective December 8, 2021, shares started trading under the ticker EAGR on the Toronto Stock Exchange. And effective December 10, its shares started trading on the OTCQB under the new symbol EAGRF. Additionally, certain statements made on this call are forward-looking with the meaning of applicable securities laws. This call includes references to non-GAAP measures. Please refer to our first quarter press release and MD&A for cautionary statements related to the forward-looking information and reconciliations of non-GAAP measures to GAAP results. References to all figures are in Canadian dollars on an IFRS basis unless otherwise noted. East Side Games Group are pleased to report yet another record quarter. We did $35.6 million in top line revenue and the largest quarter player audience yet. We captured the full quarter of RuPaul’s Drag Race Superstar revenue, and we started to build an audience for our newly launched title The Office: Somehow we Manage. The FunkoPop! Blitz, the theme acquisition also added to our roster of successful titles in Q1. The revenue result is a 55% increase year-over-year and a 24% increase quarter-over-quarter. Monthly active users was also at a record high, clocking in at an average of 1.8 million in quarter 1. This was primarily driven by new game launches and the marketing investments in them. Adjusted EBITDA in quarter 1 was $3 million. Our mature titles such as Trailer Park Boys: Greasy Money, Bud Farm Idle Tycoon and others continue to drive EBITDA, which allows us to grow aggressively while still being cash flow positive. Strong EBITDA was assisted by some onetime events on several deals, such as Netflix and AppLovin. We remain committed to our goal of maximizing growth while maintaining a strong balance sheet. Cash on hand at the end of the quarter was $6.1 million. We also have $15 million in available credit. In quarter 1, we fully paid the contingent compensation resulting from the achievement of hitting over $100 million in revenue in our first year as a TSX-listed company. Our current debt is $1.9 million. Given our strong balance sheet, we are fully funded to achieve significant organic growth with existing liquidity available to the company and without the access to equity capital markets. Last quarter, we introduced operating metrics that we believe best outline the collective health of our business: daily active user, monthly active users and average revenue per daily after user, DAU, MAU and ARPDAU. Full definitions can be found in our MD&A. We finished the first quarter with record DAU of 407,000, up 47% year-over-year, and an average MAU of 1.75 million, up 74% year-over-year. First quarter ARPDAU was $0.94, an increase of $0.04 over last quarter. Game Kit is our development framework, which allows us and our third-party development partners to build games faster, with less capital investment and with a higher probability of success. With Game Kit, we enable creators to successfully deliver memorable mobile gaming experiences that engage players every day. RuPaul’s Drag Race Superstar continued to scale effectively despite the introduction of a software buggy-march which took several weeks to properly address and resolve. Significant stability improvements have been made as well as additional processes which will help our entire portfolio and future titles. The Office: Somehow We Manage, debuted worldwide at the end of January. The Office is following a similar trajectory as RuPaul’s Drag Race Superstar on iOS and marketing spend on the Android platform is ramping up for Q2. Our recently announced super marquee titles, Doctor Who, our first game with BBC, and Star Trek Lower Decks in partnership with CBS bought account are scheduled for worldwide launch in second half of 2022. We acquired the Funko Pop! Blitz game in January. The acquisition of Funko Pop! Blitz is accretive in 3 ways: additional revenue, access to a deep set of IP relationships and an added genre to the Game Kit in Blitz style games. We are actively scaling partnerships with developers all over the world. East Side Games Group now has signed agreements with developers in Brazil, Vietnam, Australia, Finland and Argentina as well as Canada and the U.S. Mighty Kingdom, NoPowerup, and [indiscernible] are 3 samples of newly signed and expanded partnerships in Q1. Possibly the most exciting news of all is our Netflix announcement. East Side Games' Dragon Up mobile game will be available to play exclusively on Netflix in May. This is a testament to the strength of our game platform. We're being recognized by leaders in technology as an ideal solution for iterative team deployment. This game is published with no monetization hooks, no ads and no in-app purchases. Our upfront compensation for this contributed to our strong EBITDA in Q1. We've seen Netflix revolutionizing the game distribution platform as they revolutionize the way we consume TVs and movies. We're excited to be part of the early entry into the $100 billion a year mobile games industry. Now I will turn the call over to Jim to discuss our first quarter results.

Thank you, Jason. Q1 was a strong quarter on all fronts, revenue, profitability and cash flow. As Jason highlighted, we delivered record revenue in Q1 of $35.6 million. This is a 55% increase on the prior year and a 41% increase on a pro forma basis. User acquisition costs were significantly higher than the prior year quarter as a result of the launches of RuPaul and The Office games. However, user acquisition costs were consistent with Q4 but lower as a percentage of revenue. For Q1, the company recorded net income of $0.5 million due to strong operating performance, partially offset by noncash amortization, accretion and stock-based compensation. This compares to income of $1.3 million in the prior year quarter, which benefited from a $5 million gain due to the East Side Games acquisition. The profitability and efficiency metrics to highlight are: Gross profit percentage which was 69% in Q4 2021 -- gross profit percentage was 69% in Q1 2022, an increase over prior quarters, primarily due to the higher revenue and the license revenue that Jason highlighted. Adjusted EBITDA was $3 million during Q1 2022, representing an 8% adjusted EBITDA margin. From a balance sheet perspective at March 31, 2022, East Side Games Group had $6.2 million in cash. Including the $1.9 million drawn against the credit line, net cash was $4.3 million, compared to $9.2 million at December 31, 2021. The decrease in cash of $4.9 million resulted from the $10 million earnout paid in full in March, offset by cash generated from operations of $5 million during Q1 2022. This was our strongest cash flow from operations quarter as a TSX-listed company. During Q1 2022, the company extended its bank credit facility from $3.5 million to $7.1 million, increasing its overall credit facilities to $17.1 million. At March 31, 2022, the company had undrawn credit facilities of $15.2 million, compared to $13.5 million at December 31, 2021. The year is off to a strong start, and we look forward to the Star Trek and Doctor Who game launches later this year. And now I will turn the call back to Jason for some closing remarks before Q&A.

Thank you. Those are some incredible numbers. Our growth in East Side Games has a long history of year-over-year increases and disciplined use of capital. Josh, Galan and I started this company with just a few hundred thousand dollars in the bank. We grew year-over-year and hired only when we could afford to do so. We never got in front of our skis. We never raised additional capital. And we were profitable every single quarter as a private company. I am extremely confident in our ability to continue this growth by using existing liquidity available to the company and without having to access equity capital markets. This next slide clearly demonstrates game development economics. Bud Farm Idle Tycoon is a wholly owned IP built and published by East Side Games Group and these are the 2021 actuals. We spent approximately 1 year and $1.5 million developing this game. It launched worldwide in early 2020. In the first year of editing, it was generally running a lot as we determine first whether or not it's going to be a viable title, then heavily invest in marketing and growth and building up with all the user base, adding new content and events. And ultimately, if the game breaks even in the first year, we're very happy. The example we illustrated here is the game in its second full year of success. So in 2021, Bud Farm Idle Tycoon generated over $30 million in top line revenue. The cost of goods sold, platform fees, server software, et cetera, was $6.6 million. We spent just over $9 million on user acquisition and marketing. The live ops and the support team of approximately 15 people cost $1.4 million. Therefore, the 2021 profit for this game was $13 million. If we were to shut down everything we do except this game, we would have a 43% net profit margin. We also expect this game to have a 10-year life span. Most of the IP games would need to pay a royalty from this amount and the same question that's going to be asked later in the Q&A, yes, we did cherry pick the best number. A more typical number would be 30% margin. This is our best-case scenario. Our goal at East Side Games is to grow revenues to $1 billion a year. In 2022, we will pay most of that EBITDA generated by our active titles and use the capital to fund growth, secure more IPs and expand our development partner network. We ultimately want 30% of $1 billion a year, not 30% of $93.7 million which we put up last year. Okay. Let's wrap it up. In the history of this company, I have never been more excited about the opportunities and our prospects. I've taken the helms of the company, and I will be hyper-focused on delivering value to shareholders, building an industry-defining products and game kit and building the East Side Games Group into a multibillion-dollar company. Thank you for your time today. And now let's open it up to questions.

[Operator Instructions] Your first question comes from the line of Neal Gilmer with Haywood Securities.

Congrats on a good quarter. Maybe if you could just sort of give us a sense and to use your expression in your prepared remarks to make sure that we don't get out over our skis, can you sort of talk us through maybe some of the seasonality, like with the summer months coming up, but you just launched Office in January, you're investing heavily into that, I just want to make sure that we sort of manage appropriately sort of the quarterly growth rate for revenue. I know that you're focused on year-over-year, but as analysts, we tend to get a little bit more on the quarters. But how should we look at some of that seasonality that may play into the fact this summer?

Yes. Thanks, David -- or sorry, Neal. You're absolutely right. I am focused on year-over-year and the long-term growth and health of this company and less focused on quarter-to-quarter, but that is your job to make that focus. And absolutely, there is seasonality. You can see some of that last year. And if you want to go back years and years behind, we like to stay in the games industry, summer sucks, because everybody goes outside, they're eating and drinking with their friends, they're going to the beach. We prefer the winter months when you're locked in the house, it's cold and rainy and you have nothing else to do and you have lots of spare cash in your pocket because you didn't spend it on beer or on a patio with your friends. So we do expect a small reduction in revenue over the next -- well, Q2 tends to feel the worst of it. Q3 starts to pick up. With September, everybody goes back to school. So there is definitely a little bit of seasonality coming.

Thank you for helping us understand and also focus on the year as best we can. With the Netflix partnership, obviously, that -- the game has been launched in May here. Are you expecting to get any sort of metrics from Netflix or you basically sort of close that chapter with them? Obviously, you're still in discussions, I assume, for potentially other games. But how you yourself going to try to evaluate the success of that? Or are you not as focused on that as far as just developing other games that Netflix would be interested in putting on their platform?

It's going to be really interesting to see that play out. Netflix is painlessly very black box to its partners. If you put a TV show or a film on Netflix, they don't tell you how many people watch it, how many minutes they hit. They keep that information very close to their chest. Now games are a little bit different in that they do hit our servers and hit our network, so we should be able to gather a fair bit of information. What we'll be able to share remains to be seen as we're under a pretty tight NDAs with -- and confidentiality around this stuff with Netflix. But I think we should be able to have a pretty clear picture of what kind of success it has. And our agreement with Netflix does include making additional content for this game, and even more yet, should it be successful. So our hope is what it does well and that we continue to expand on this game as well as, obviously, we're talking to them about multiple of other titles.

Your next question comes from the line of David McFadgen of Cormark Securities.

Just a couple of questions. So I mean you give us now the user metrics which is great. So picking at the ARPDAU and I was just wondering, does this really vary a lot by game? Or you kind of all target each game to kind of come in that $0.90 to a best range? Or can there be some big outliers, on the positive side?

Yes. Our -- so right now, a vast majority of our successful titles are in the [ IOR ]. So they're all incredibly similar, ranging -- that fluctuate day-to-day and week-to-week as different types of events and new content and et cetera. But on average, it's close to $1. It's a little bit under right now, partly because of a lot of new users coming in. So mature users tend to monetize around $1 a day each. And the -- some games perform better than others, of course, but they're all in kind of a plus or minus 20% range.

Okay. Okay. And then just on the...

I mean if we're under that we -- that's not a successful game. So that's one of the many metrics that we look for to decide whether a game is successful and to continue to invest heavily in it.

Okay. Okay. Yes, I was just wondering like maybe a home line you might be doing [indiscernible] or something like that, but I guess you just ramp the marketing spend not to drive even more revenue but keep that, if that was hit. Is that the right way to think about it?

That is a way to think about it. But if you also look historically, especially around our ad revenue, you'll see that, that's come up. And that is because of additional features and triggers that we put in place to improve that. We're always trying to get that ARPDAU to grow. So over time, we want that number to continue to come up. But additional genres are going to put a different ARPDAU. And -- but the real win here is reaching for audience. If we can get a game with 1 million DAU, then theoretically it should make $1 million a day.

Okay. Okay. And when I look at the ad revenue in the quarter, obviously quite strong, up 9%, 10%% year-over-year. So it would seem like you're beyond the IDFA thing with Apple, right? Is that correct?

Well, ad revenue and IDFA are not related. IDFA is more in line with the how would the money we spend to acquire users.

Okay. Okay. And then just on RuPaul, is -- I imagine the same is still ramping, right?

Yes.

Okay. Okay. And is it still -- is it coming in line with your expectations or exceeding your expectations?

RuPaul is an absolutely fantastic title. Like we mentioned in the call, there was a software bug introduced in March that took us some time to address and fix and put in things to -- so March was soft. And as a result, we also reduced ad spend. So we may have softer than expected. But now that the bug is fixed and we're back on the ramp, it's -- we're going to ramp it back up. But it has had a couple of soft months with that bug unfortunately.

Your next question comes from the line of Adhir Kadve Eight Capital.

You mentioned that The Office is doing really well on iOS and you are going to start increasing spend on Android. Can you give us a sense of when you expect the game to really hit a slide, similar to RuPaul?

So every game is slightly different. Audience is different, et cetera. But it takes a year for a game to fully ramp up to expectations or that kind of solid audience. Part of it is teaching people how to play the game, getting in more and more paying users. You acquire users and let's say 40% of them come back the next day. So 60% of your new users on any given day are bouncing off but over time, you're packing down that long-term retention. So we're continuing to build up that audience. It does take time. I would say, usually around 6 to 9 months is when we see its peak, which is about where RuPaul is right now with that bug not being a fun time what it means where there's a lot of gray hairs grown, but it's all behind us now. And so The Office is the same. It's going to take a few more months to get it to full capacity.

Okay. And then -- sorry, just on Game Kit, you mentioned some pretty expanded agreements with some of your partners. But looking forward, just given all of the momentum you've seen in the business, do you find that more developers are coming to you? And what kind of conversations -- are you having conversations with bigger developers, different developers? Maybe just give us a sense on the game pipeline there.

Sure. The -- we've talked to approximately 50 different developers about Game Kit so far. We only do outbound sales. We have no inbound sales. You can't come to our website and sign up. This is a -- if you know about it, you know about it only product. We have not begun to really market it as we solidify it. And the reality is, is we have more opportunities than we have bandwidth. So the partners we're already working with, so we have a very strong vetting process. So we've talked to approximately 50 developers. And we put all of those through the ringer and only 15 or so of them have been able to pass that vetting process. So we're only doing deals with the top 25% of the people that we talked to. As the product gets better and better and more and more built out, we'll be able to increase that range as we'll be able to take bigger chances. And we will have solved the problems that typical game developers run into, therefore, allowing game studios with less senior teams and not as much experience to be able to have success in the platform as well.

There are no further questions at this time. I will turn the call back to Mr. Jason Bailey. Please go ahead.

Thanks, everybody, for coming to the call. My first call as a CEO. I'm really excited about this company, couldn't be more so. Looking forward to hearing everybody's feedback and continuing to grow this company into the monster that we know it can be.

This concludes today's conference call. You may now disconnect.