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 Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-session for analysts only. I would now like to hand the conference over to your speaker today, Jason Bailey, Board Chair, CEO, and Founder of East Side Games Group. Thank you. Please go ahead.

Thank you, operator, and welcome, everybody, to East Side Games Group's Q2 2023 Results Call. On the call with me today is Jason Chan, our Interim Chief Financial Officer. We are also joined by our Chief Operating Officer, Lisa Shek; and our Chief Product Officer, Jim Wagner. I'm very excited to share highlights from the second quarter ended June 30, 2023. I will also be giving an update on our business strategy and key events that have taken place since we last reported in May. Mr. Chan will go into greater detail on our financial results commentary for the period before turning it over to Lisa and Jim for some remarks before we open it up to analyst questions. I'd like to remind you that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call includes references to non-GAAP measures. Please refer to our second quarter press release and MD&A for cautionary statements relating 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. Additional materials can be found in the Investors section of our website at www.easigamesgroup.com under the Financial Information section, and an audio replay of this call will be available on our website. Q2 was a quarter that saw us achieve our core goals, namely, we posted $2.5 million in adjusted EBITDA, bringing our year-to-date total to over $5 million. This was achieved primarily through cost reductions and smart fiscal management by our new C-suite. We have talked about this refocus extensively on the past 2 earnings calls, and Q2 shows the fruits of that labor. We have a strong business that is profitable, growing and well-financed, and lean, a business with a strong pipeline of new products to layer on top of our existing strong foundation. Revenue for Q2 was $21.3 million despite having no new game launches and reducing ad spend from $24 million in Q2 2022 to $11.6 million in Q2 2023. Naturally, this spend reduction saw revenue decline, but we feel we have reached a sustainable margin with our 7 live ops titles. They are all running with a lean and focused team. Our new games pipeline is strong, and we continue to invest heavily in it. Lisa and Jim will speak to this more later in the call. We have a strong, growing, profitable business with an enviable IP portfolio and a broadly diversified base of games driving revenue. We have 7 titles that make up almost 95% of our revenue, and no single title accounting for more than 25% of revenue. I'll now pass to Mr. Chan, our Interim Chief Financial Officer, for some comments.

Thank you, Jason. As mentioned, although revenues this quarter have declined, I want to emphasize that our strategic decisions and operational efficiencies have driven higher margins and positioned us well for sustained success. We ended Q2 with $21.3 million in revenue and adjusted EBITDA of $2.5 million, roughly an 11.7% margin. This is our highest so far this year and almost twice as much as Q2 of 6.4% and our third straight quarter of over 9% margin and $2.5 million in adjusted EBITDA. Our focus on optimizing our cost structure and refining our UA strategy has yielded remarkable results in terms of profitability. As mentioned before, for UA spend, specifically in Q2 2022 year-to-date, our expenditure was roughly $24 million. This year, it's down to $11.6 million, a 52% decrease. We will continue to improve and adapt this as the market landscape changes. Our average daily users for the quarter were $273,000, which is slightly down from the first quarter, with the rate of our repeat daily users remaining strong at 28%. Our cash on hand at June 30 ended at $2.8 million. This drop is mostly related to the timing in Apple payment structures and minimum IP guaranteed payments. This is offset with a rise in our aged receivables, which has since been collected to bring us back to $5 million cash level. This included Apple as well as $1.4 million in outstanding GSE returns delayed by the CRA strike. Cash flow from our core operations before working capital changes is strong at $4.8 million, which is consistent with last year's Q2 results. In addition, we've also purchased 682,653 shares under our NCIB. Through June 30, this is an average cost of $0.98 per share, and we'll continue to be as aggressive as we can on that front. As we navigate the road ahead, we remain steadfast in our long-term vision, and we'll continue our focus on the path of sustainable growth and profitability. Thank you for your continued support. And with that, I will pass it off to our Chief Product Officer, Mr. Jim Wagner.

Thank you, Mr. Chan. Looking ahead to the remainder of the year, ESG will see major releases and continued development into new games for some of the biggest names in television, sports, music, and toys. We have a diverse set of projects we are developing to double down on our success with IP-driven idle games as well as expanding into the idle RPG category where we found success with Gopal's dry-grade superstar. The idle RPG category offers more depth and strategy for mid-core players leading to increased stickiness, long-term engagement, and opening up more IPs in the future that map favorably to the subgenre. With our existing portfolio of games, we'll be focusing heavily on profitability by porting successful revenue-driving features such as season passes, interstitial ad placements, and live event mechanics that have proven themselves on at least one other game in our portfolio and can be expanded to all of the games in our portfolio. This applies not just engineering but design and balance as well, where we can release a new event balance in one game, see the positive uplift in revenue and turn that around in weeks to our other games. Producing and innovating on new balances is a huge focus for Q3, as we saw those initiatives having the strongest lift in Q2. Supplementing our idle games, our Match 3 game Bud Farm Munche Match, continues to grow month-over-month in its core KPIs as we innovate on the Match 3 genre with our best-in-class live ops strategies that we developed in home on our idle simulation games. Continuing on this trajectory, we are excited about the indicators of future success in the match genre and the potential product and IP pairings that open up any opportunities for the studio in the future. Over to Lisa Shek, our Chief Operating Officer, for additional comments.

Thanks, Jim. In Q2, we've been piloting new and innovative ways to promote our games outside of traditional paid user acquisition. We are seeing support from our celebrity influencer partners like Glu Pall himself, who has a 4.4 million person following on social media. We recently signed a partnership with BOSS Media to promote our exclusive Rupall Drive superstar mobile game across all live shows around the world as well as engage influencers through podcasts and referral codes. Furthermore, you can now see our game trailers on the Jumbotron at Universal Park and at the physical office experience in Washington and Toronto. The landscape has changed, and we're approaching our go-to-market strategies completely differently, embracing cross-channel marketing. Towards the end of August, we will be announcing our biggest new games for 2023, which will be the best example of this approach. We are working with an extremely supportive IP partner and planning a strategy that will span televised advertisement, social media, influencers, communities, and massive physical event spaces. For our soft launch, we are expecting to reach an audience of over 300,000 people before we even touch traditional paid user acquisition. We see our celebrity partners expand their own presence outside social media from launching pet food brands, physical products, and clothing lines, embracing shows, and so on. IP partners are more interested than ever to tie in and market all their initiatives across channels. With our announced Squish malls launch in 2024, you will see a game QR code on every toy. With another partner, we will have trailers playing at every physical event. With a third unannounced celebrity partner, we will be on the packaging of their physical products. We're looking forward to continuing innovative approaches to grow the next wave of our IP games. Back to you, Jason.

Thanks, guys. In Q3 of 2022, we made a promise to investors to focus on EBITDA over top-line growth. We have very much delivered on that promise with 3 consecutive $2.5 million quarters. We have grown our margin to over 11% and plan to continue that focus and increase that margin further. Thank you for your time today, and we will now open it up to questions from the analysts.

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

Yes. I wanted to see if you are able to provide any more details on the time of the timeline for the 6 titles you referenced in active development. I know you did just reference one that's scheduled for the end of August. Just trying to get an idea for sort of the cadence or sort of upcoming catalyst of when we might expect to see some of these new games launched.

Neil, it's Jason. Yes, we can talk a little bit about the -- like we said, there is a big one coming in the end of August that we're super excited about, which will be -- it's already in tech launch if you're smart and crafty enough, you all know where to look to see exactly what it is, but I'm not going to tell you. And the -- so that one's coming in August, someone's going to soft launch in Europe then in conjunction with some major in-person events, and then it will go worldwide later in the year. There's another one coming that's soft launching again very soon, but that will be a much slower rollout, and that will probably launch worldwide in Q1. And then there's another one with a well-known rap star that is coming out late in the year. And then there's another one, probably Q2, Q3 of next year, that will go worldwide. And then, of course, Budmatchagain that we've been talking about for a long time that continues its growth and development through soft launch, and we're hoping to go do a proper worldwide marketing launch, hopefully as soon as October.

Okay. Great. I appreciate you going through that. A question on the gross margin. This quarter, it was a significant improvement up to just over 67% from 60 last quarter. I think the last time we were up this level was Q1 of '22. Is there something unique in this quarter? Or is this something that's more sustainable going forward with some of your cost-reduction initiatives?

So yes, I mean I'm not too worried about the growth mark as that fluctuates with the differences between ad, what how much is ad revenue, and how much is IP. And of course, with ad revenue, we don't have to pay the 30% tax to Apple and Google. So we're always starting to grow that portion. I don't think you'll see it significantly increase or decrease. It kind of fluctuates between there. We're much more focused on the kind of the bottom line net income and making sure that we're stacking cash. As our cash position is okay right now, but it's not what we'd like it to be. So especially in today's market, second cash into the tail is a primary priority.

Okay. Maybe one final one for me before I pass the line. Obviously, you did mention the reduction in UA spend. I saw that in the MD&A as well. Are you going to continue to reduce that from these levels, supported by some of what Lisa went through as far as your organic marketing initiatives?

The level we're at right now, we're very comfortable that all of the money we're spending is coming back and is a profitable spend. There's all of the spend that was kind of the old adage of half my marketing spend is working and half of it is and I just don't know what half it is. We kept the half that we know for sure is working. The half that was questionable is gone, and we have no plans to bring box anytime soon as the user acquisition paid growth market continues to tighten up despite the fact that our friends at Appleman put out a record quarter. Yesterday, I strongly encourage you to look a little deeper on that one. There's definitely shenanigans going on there. But yes, we're -- I think the -- as a percentage of revenue, it should remain around where it is. I don't see -- I mean, honestly, that's where we've seen -- why we've seen that drop in revenue. I'd love to be able to increase it because I know that if we do increase it, it's because it's -- we know it's going to be profitable and therefore will increase both ends of the spectrum. But right now, we're pretty comfortable where it is. We're sure we're in the right zone.

[Operator Instructions] And your next question comes from the line of Adhir Kadve from Eight Capital.

I wanted to ask on the demand environment in gaming. I know the summer months are a little bit tougher. People aren't on their phones and that kind of carried over from -- or that's kind of a contrast to last quarter. But broadly speaking, what are you seeing in the demand environment for gaming and mobile gaming in particular?

So I'm not seeing a lot of -- like people still play games even in the summer. It's just the number of sessions a day where we see the biggest difference. And then come September when everybody is going back to school and the rains start to come, we see an uptick in usage. And then Christmas is always a fun time because everybody gets a new phone and is excited to download the latest devices. I don't think demand as a total level is changing much, but what we do see is with the new console development and the new wave of console is finally being available, people are splitting their gaming time between multiple devices more often, and they're spending more time playing on their play stations and their Xboxes than just on their mobile phones. But again, people tend to play both. So we're not really seeing too much change. You can see that in our Dow numbers that are kind of flat Q-over-Q. And that's mostly going to be influenced by success of new titles to really see that take a significant uptick. But we're holding on to the eyeballs that we got.

Understood. And then you guys mentioned that you'll be somewhat adaptive with your UA spending. I'm just wondering, what would you need to see to really kind of push the pedal on that? Is it more -- like what would you have to see in the broader environment to increase that? And if Idil kind of rearing its head in your UA spending?

IFA is a long deep pocket of inflow that I don't want to get too deep into, we've covered it extensively in the past. But with the changes in fingerprinting, we'll see how that plays out. But the biggest hope right now around UA and Padua is new inventory coming into the ecosystem. Right now, the core source is the Apple Lovins and Unity Iron sources of the world, Facebook, providing a lot of that inventory that we use to place our ads to get new players. TikTok is really interesting in what they're doing and the game platform that they're trying to build. But that, as we all know, is also a very complicated place with international regulations and issues around that and a slightly younger audience. But TikTok is definitely a place we're watching closely as that inventory expands and becomes more accessible. And then the other places, free advertising support of television. So the Rokus and there's a dozen different kind of streaming aggregators and television aggregators out there as well as the Netflixes and Disney uses of the world. But Netflix is talking about their advertising-supported tier. As we see that rollout, we hope there will be inventory available in those places. So that would give us a spot where we can spend. So right now, we know we're doing a very, very good job in the existing marketplaces. New marketplaces are always dangerous. These guys will take your money all day long and proof it will disappear. So you need to be really smart about how we're and what you spend in these platforms because you can evaporate millions of dollars really fast. So we watch those markets. We're always doing a little tests in those markets. And the hope is that over the next months, one of those opportunities come together. But that's what would get us to step up spend is that access.

And your next question comes from the line of Scott Buck from HC Wainwright.

Jason, you've proven that the model can be operated on profitability. With the new games, I guess, set to launch at the end of this month, are we going to take kind of a step back in terms of positive EBITDA as you market around those new launches? Or are you going to continue to try to operate at this kind of profitability level?

I'm going to try and continue to operate at this profitability level and, in fact, continue to increase it. As this new title comes out, as Lisa was saying, we're really leveraging our IP partners to allow us to reach those audiences more effectively. We will do pay A as part of that, but we're not -- and to be fair, we're not in a position to do what we just saw our friends at Scopely do, which is launch the MonopolyGo game, which has been a great example of success in the mobile games market this year. But they did that by spending at least $50 million, if not $75 million a month marketing the hell out of that thing. So it's a great title, and it's doing well, and it will make its money back. But that's not our plan for this title that we're launching at the end of the month. We're going to be much more focused on leveraging the IP partner. We will do some paid user acquisition, but I don't anticipate spending $2 million and have that come back over a longer period of time, at least not at the end of August. If the numbers come back and are absolutely fantastic, and the justification is there to do it, then we do that in Q4.

Great. That's helpful. And then I'm curious, obviously, you have a pretty strong new game pipeline here over the next few quarters. Looking further out, what are your conversations with IP owners like today? Are they still as excited about the opportunities in mobile gaming as they were maybe 12, 18 months ago?

I don't think anybody is as excited about mobile gaming as they were 12, 18 months ago, as the marketplace has significantly shifted and changed and definitely become a big boys' game. Apple and Google have changed their outlook on that ecosystem, not only by changing the app or access and organic discovery but also all the crackdowns around privacy. Console games have really had a bit of a renaissance in the last 6 to 8 months. And so a lot of focus is going over there and a lot of them are excited about that. A lot of them are excited about the transmedia stuff, and everybody wants to be Barbie right now. And even SupermarBrothers, that movie did really well. So people are looking at a lot of that and mobile is no longer the non-focus and especially on the challenges of launching a new game right now. So the conversations are ongoing, and that's bad news in some ways, but it's also good news because it allows us to be more aggressive on our negotiations and be more choosy about the titles we want to work with. And also being that it has become a big boys' game. The competition to build for those IPs is much less than it used to be. So we're able to pick and choose much better, and that is very much our focus right now is we've done a great job in the idle market, and we feel like we really truly are the leaders in that space. And right now, our goal is to do the same in Match with Bud Farm. For example, over the last 2.5 months, we've been able to dramatically increase our base in that game. So the game has always had phenomenal retention rates, but the ARPDAU have always been a little bit lower than we wanted them to be. So with the features and additions that we've made to that game over the last couple of months, we've seen a well over 50% increase in ARPU, and we believe we can achieve that much, again, if not more, over the next few months with the features that we have planned. And if we're successful in that, which we're confident we will be, now we can take that formula and apply it to many, many other IPs and essentially do the same thing and have a trailer for boys match and teach and show that in an office match and a [indiscernible] et cetera, on Dattels. That is our focus right now. We don't want to get too far ahead of our skis, so we want to make sure that we know Bud Farm is going to work in that manner before we start committing to massive MGs to these IT partners. But it's around the corner.

Thank you. Mr. Brailey, there are no further questions at this time. Please proceed.

All right. Well, thanks for coming out, everybody. Feel free to ping me by e-mail for any follow-up or specific details. The short answer here is really that we continue to be focused on margin, EBITDA, and profit growth. So we're going to keep that -- Neehal has got popped up at the last second, trying to squeak in under the wire. If you want to ask a question, buddy, you just made it. Operator, can you let Neehal ask a question?

We have another question that comes from the line of Neehal Upadhyaya from Industrial Alliance.

In terms of [indiscernible], obviously, you mentioned you can go out and speak with individual cleans and do social media promotions there. But I imagine for titles like the office, it'd be much harder to get individual characters to market to their social media platforms. So beyond that, how are you thinking about differentiated marketing in those types of IP titles?

Yes, it's definitely challenging working with talent, especially in today's strike environment. But yes, working with people to push not just other social media followings but doing videos in more and more live and person events happening, that's where our real push is. And as you'll see through this new title, we're launching at the end of August. It is a live event-based IP. So we'll really be pushing out at those live events that are also televised. So having exposures and codes and et cetera, for our actual things going out on TV at live events, in-person events to users, we're hoping is going to make that significant difference. So we're focused on that.

Okay. Good. And then apologies if I misheard, but I believe you mentioned that you entered into an agreement to promote the Rupall game across the shows that they kind of host. Can you talk about the economics of this? Is it a one-time payment? Is it payment per show? How does that work?

So it's slightly different everywhere. In some cases, we're able to just use up unused inventory with some partners. In other cases, we have to -- especially what they're going out on a network, then we might pay to be part of that if we feel like the value is there. And others, it's when it's going out on their social channels, et cetera. We're trying to leverage all of the different things we can. I mean the -- being on the Jumbotron at the Universal Studios theme Park is a great example of playing it across the board. I mean we're not as big as we would all love to be, but a great marketing example for the year, of course, is Barbie. And that movie was successful not only because it was a great script and a great story and incredible acting and directing but it was a marketing campaign unlike any other. Everywhere you went, things were pink and kind of hitting on multiple fronts. And that's our feeling right now with the Queens. It's great that it was pride month, but you want to be in live events on the TV, on the social media, and in e-mail every possible place you want to try and hit people. So any place that we can do that affordably is a place we'll do it, but we always try to leverage those, call them free opportunities from our IP and partners, but they're not really free because, of course, we're revenue sharing back to them and giving them guarantees.

And then maybe one last one for me. What is the appetite for OTT providers like Netflix to produce games like Dragon Up? Is that something that you remain bullish on as a major catalyst for the mobile gaming industry?

We continue to have ongoing discussions with all of these partners. Netflix, in particular, like an active discussion with them on various titles. Yes, I can't say too much. I can't see too much on that one. All I can really say is the discussions are ongoing. They very much are invested in that platform as are several other OTT providers. Who's going to win at that? Who's doing it right? All I can say is there's lots of people figuring out how to do it wrong, and we're helping them figure that out.

Thank you. There are no further questions at this time. Please proceed.

All right. Well, once again, thanks, everybody. Like I was saying earlier, we're focused on increasing margins, increasing profit, making sure that we have a long-term sustainable business. Video games aren't going anywhere. The phone in your pocket isn't going anywhere. The marketplace is changing and evolving as all marketplaces do. The markets are a ship show, but we all know that. I don't have to tell the people on this call that, but we are very confident that we have a strong, profitable long-term business with a long tail that will come out of this, and where we've got a lot of swings lined up. One, if not several, of those swings are going to be successful. And we'll keep on plugging away at that. But right now, it's really important for us to stack cash into the till and to make sure that we are in a position that if we do have a Barbie-like product we have the marketing budget and the ability to push hard and do a Barbie to it. Thank you, everyone.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.