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

Ladies and gentlemen, thank you for standing by, and welcome to the Eastside Games Group First Quarter 2024 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jason Bailey, Board Chair, CEO and Founder of Eastside Games Group.

Thank you. Please go ahead. Thank you, operator, and welcome, everyone, to Eastside Games Group's Q1 2024 Results Call. On the call with me today is Mr. Jason Chan, our Interim Chief Financial Officer. We are joined by our Chief Operating Officer, Ms. Lisa Shek; and our Chief Product Officer, Mr. Jim Wagner. I'm happy to share highlights from the first quarter ended March 31, 2024. And being that we just updated everyone a few weeks ago with our Q4 2023 report, I will keep the call today fairly short and to the point. Mr. Chan will go into detail on our financial results commentary for the period before turning it over to Mr. Shek and Mr. Wagner for some final 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 third quarter press release and MD&A for cautionary statements relating to 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.eastidegamesgroup.com under the Financial Information section, and an audio replay of this call will also be available on our website. I'll now pass to Mr. Jason Chan, our Interim Chief Financial Officer for some comments.

Thank you, Jason. Q1 saws continue on the momentum from Q4 2023 and had us end with $20.8 million in revenue, flat from Q4 and adjusted EBITDA of $4.1 million, roughly a 20% margin. Compared to Q1 2023, this represents an 89% increase in adjusted EBITDA as a percentage of revenue as well as our second straight quarter with over $4 million adjusted EBITDA and sixth straight quarter of positive EBITDA over $2.5 million. We will be squarely focused on successfully launching our new games this quarter as well as scaling titles that are performing ahead of their payback windows. Several games in our portfolio, including milk, the office, -- but farm Monte Match and BFIT, are games showing opportunity to profitably scale and grow top line revenue. Many of the creative bets we've placed will flow through to May and June as we look to maximize assets against game launches, capitalized on IP content releases and test strategically scaling UA spend around in-app events where we see periodic spikes in revenue. Our average daily active users for Q1 was 228,000 with a $0.99 ARPDAU and a consistent stickiness rate of 28%. Our cash on hand at March 31 ended at $7.25 million, up 40% from last quarter. We will continue to build on these healthy cash inflows while keeping an eye on new strategic opportunities and profitably scaling upcoming titles in line with our goal of sustainable growth. We've also purchased 1,258 019 shares under our renewed normal course issuer bid through March 31, 2024. This was at a cost of $954,000 from our cash balance, but management and the board strongly believe that the company is currently undervalued and the best investment we can continue to make is in ourselves. Overall, as a company, we have continued on the momentum set forth from last year's restructure and our focus will be on setting ourselves up for further growth in Q2 onwards. Thank you for your continued support. And with that, I will now pass off to our Chief Product Officer, Mr. Wagner.

Thank you, Mr. Chan. I'm proud that as a company, we were able to follow up a strong Q4 that was bolstered by holiday spending with an equally strong Q1, which is often a slower quarter for the industry. On the idle side, we released 17 new balances into our idle games, a record number of new balances for our games in a single quarter. New balances regularly give us a 10% to 20% bump to event revenue with the potential to have a breakout balance that can lift revenue 50% over a weekend. In the office, somehow we manage, for example, we had a breakout balance that resulted in an ARPDAU of $2.16, which is the highest ARPA we've had in the lifetime of the game. Season passes continue to be a growing part of our business. And in Q1, we launched our seventh season pass across the portfolio into Cheech and Chong Bud Farm. The March season pass in particular, was exceptionally strong across all our games. And Bud Farm Idle Tycoon Trailer Park Boys Greasy Money and Cheech and Chong Bud Farm all saw higher 7-day averages for total revenue and peak ARPDAUs over Q4. We're looking forward to Q2 with more season pass launches in more games. Q1 also saw renewed interest in older games in our portfolio. Dr. Gulowsen time saw a dramatic resurgence of interest from the new television specials, debuting on Disney+ for the first time, resulting in that game hitting peak ARPDAUs to date, and we look forward to the new full doctor-wise debuting on May 10 to have an even bigger bump. In addition, product improvements to Milk Farm Tycoon produced 3x the ARPDAU and 5x the day 3 conversions, allowing us to scale down 300% and total revenue of 400%. We expect that growth to continue into Q2. But on the mat side of the business is where we saw the most exciting growth. We continue to improve the KPIs for Bud Farm: Munchie Match and hit a lifetime peak day of $0.80 ARPDAUs and the highest sessions per player per day since launch. We currently have 4 additional match games that leverage the code and learnings from Munchie Match. These new games are also paired with major IP partners to deliver even higher potential for growth and revenue than our original IP. And we're excited to announce that Cheech & Chong's Kush Kingdom will be the first of these 4 match games and is available now in all territories on iOS and Android. Lisa will talk more about Cheech & Chong's Kush Kingdom, but I'm confident that this game and the upcoming match titles will lead revenue growth in 2024 and 2025, but also in the next 5 years, this strategy will transform the potential for the studio by allowing us to partner with more and bigger IPs with 2 successful genres of gaming in our repertoire. Over to Lisa Shek, our Chief Operating Officer.

As discussed in our last call, we've been focused on operational excellence and building a strong leadership bench. I'm proud to say that we are now seeing the results of those efforts. One of the most significant people of achievements over the past quarter has been our success in reducing attrition to nearly 0. This is a rare feat in our industry and is a testament to the positive work environment we've been able to cultivate. By investing in our people and creating a culture of empowerment and support, we've created an environment where employees are satisfied and deeply committed to our company mission. As a result, we've been able to release more game updates than ever before, delighting our players with new content, balances, prizes, features and storylines. Additionally, we set a new record for ourselves, and we're able to build, test, soft launch and release our second match street title, Cheech & Chong's Kush Kingdom, in under 6 months. This marks our second collaboration with Cheech & Chong a brand that continues to captivate with its enduring relevance and dynamic presence. The success of our first game with them, which continues to flourish with over 3 million installs and 4.8 stars on the App Store is a testament to the power of their appeal and the strength of their brand. And that's not all. We are thrilled to announce our collaboration with Hasbro on the upcoming mobile game Power Rangers, set to launch worldwide in Q2. The game is currently available for pre-reg and preorder now. We believe that the iconic Power Rangers franchise combined with our classic idle mobile gameplay mechanics will resonate strongly with fans and players alike, driving engagement and monetization opportunities. With a robust and impressive pipeline of new titles, strong IP relationships with license holders, our leadership in the idle gaming space and our success in Match, we're well positioned to continue our trajectory towards sustained growth. Back to you, Jason.

Thank you, team. That's another strong quarter on the books and a great start to 2024. Thank you, everyone, for your time today, and we'll now open it up to questions from analysts.

[Operator Instructions] Your first question comes from Neal Gilmer from Haywood Securities.

Congrats on the quarter here. Maybe just a follow-up part of what I heard out of Jason's comments with respect to UA spend and given the fact that you guys have done a good job at building your cash balance on the balance sheet. How are you sort of philosophy or strategy, I think you sort of said opportunistically or pardon me if I didn't get the words correctly, but look at from time to time, increase that UA spend, what sort of sort of the strategy there? And what else can you share for us how you're going to approach that through the balance of the year with a decent cash position on the balance sheet.

The primary goal is to make sure that we're running possibly and adding to that war chest. So we'll -- we have pretty aggressive payback on dose. And as long as we can continue to buy traffic within those windows, we are constantly stepping it up, stepping it back where we can and stepping it back where we need to. Overall, we would love to spend 5x as much as we are right now, but the challenge is doing that in a way that we know it will come back. We could easily spend a lot more money, and we'd make that money back, but not until -- well, we wouldn't necessarily make that money back. But increasing top line revenue is doable, but at the cost of profitability. So it's finding that balance. And right now, with our near 20% EBITDA margin is what we're hoping to continue to see going forward on our existing titles. But as we launch new titles like Cheech & Chong, Power Rangers, et cetera, we spend like, for instance, right now, we're spending more than 100% of the revenue we're making every day with the launch of Cheech & Chong growing the game. Now that will come back over time. But it is -- it does have a drain on our short-term EBITDA. So as we launch more titles, it sets up some of our short-term cash, but it comes back over time, and we're always disciplined about that.

So I would assume that given the fact that you've got Kush Kingdom that came out yesterday, I think it was, and then you've got the partnership with Hasbro, you've announced here. You invest upfront and you get those initial engagements and then sort of scale it back as you see that return come back on the games or basically just monitoring the KPIs of those games.

Exactly. And then we're always working in the background to improve those KPIs, which allow us to further improve those windows. And like Jim was mentioning about introducing new balances, et cetera, that allow us to increase ARPU like we did on the office. And then of course, that allows us to be more aggressive with user acquisition as well.

And then just taking a look from a modeling perspective here, one thing that haven't gone through every single page of your financials yet. I know they're posted there, taking a quick read through or whatever. A little bit of a dip down in the R&D spend compared to historical levels. Is that just onetime in Q1? Or is that sort of a new sort of level that we should expect going forward?

Yes. I mean, like last year, we scaled back a lot of the titles we have been working on and focusing on a smaller number of bigger titles. So the reductions in R&D you're seeing are a result of that scale back and some of them took time to kind of place. But what you see there should be about what it is going forward to you. Again, unless we decide to -- and believe me, we're negotiating with a lot of different IPs. And if an opportunity comes that we feel is the right thing to do, we will do it. But I don't expect it this quarter.

Your next question comes from Adhir Kadve Eight Capital.

I wanted to ask on some of the newer game launches like AEW: Rise to the Top. How are those games kind of performing in early days? I know it's been out for called out, I guess, a month or so, a little bit more than that. How are those early games performing in terms of your expectations?

Lisa and Jim, you guys want to take that?

I can take that. So AW is about where we positioned that game to be in that it's a base hit. It's bringing in sustainable revenue. It's operating at a profitable level in terms of top line to UA spend right now. But it was -- it's not the breakout hit. It's not the thing that's going to substantially change the business going forward, but it's absolutely a profitable part of our portfolio.