GameSquare Holdings, Inc. (GAME) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us for the Game Sport Esports -- sorry, GameSquare Esports' Third Quarter Financial Results Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Paul Bozoki, CFO; Paolo DiPasquale, CSO; and Kevin Wright, President and Chairman. [Operator Instructions] And conference is being recorded. [Operator Instructions]. Before management discusses the results, I'd like to remind everyone that certain statements on this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For caveats about forward-looking statements and risk factors, please see our MD&A for the quarter ended September 30, 2022, which can be found on our company profile at sedar.com and on the company's website. I would now like to turn the call over to GameSquare's President, Kevin Wright. Kevin?

Thank you, Gaylene, and good afternoon to everyone. I'm Kevin Wright, President and Chairman of GameSquare Esports, and I'd like to welcome all of you to today's conference call to discuss our third quarter 2022 financial results for the period ending September 30, 2022, which we filed on sedar.com earlier today, along with the company's management's discussion and analysis. It's important to note that as of Q1 2022, the company did change its presentation currency to U.S. dollars to reflect our interest in pursuing a future U.S. listing of our stock and to reflect our focus on pursuing business opportunities in the large and rapidly growing U.S. gaming and esports market. Before we begin, I'd like to reiterate that during today's call, we will be making comments containing forward-looking information. I invite you to read our financial disclosure for some of the risks and uncertainties that may affect GameSquare's performance in the future. And as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult our most recent MD&A and filings on SEDAR. And as noted, unless otherwise indicated, all figures are in U.S. dollars. With that formality out of the way, I'd now like to turn the call over to GameSquare's CEO, Justin Kenna.

Thanks, Kev. Good afternoon, and thank you for joining us. Our record quarterly revenue and strong operating results reflect our robust business model, which we believe is at an inflection point as our business rapidly scales. In addition, our recent success is the result of the talented experienced and motivated team we have assembled who are executing and proving out this model. Everyone across GameSquare's platform of companies, I want to say thank you. I appreciate your hard work and dedication as we work together to create one of the largest companies in our sector. Third quarter results speak to the tremendous progress that we have made in the company. We are delivering outsized revenue growth, attracting some of the best talent in the industry, and fans and brands are committing time and money to what we are building. Third quarter revenue increased by 50% sequentially, driven by record revenue within our Agency businesses and expanding base of recurring revenue within the Team segment and the contribution of the July 2022 TimTheTatman Tailgate. Most importantly, global brands are increasingly recognizing our valuable offerings and ability to connect and interact with the gaming and esports fans. During the third quarter, we started working with new customers, including Denny's, YouTube, Chipotle, L'Oreal, Pizza Hut, MiO, a liquid water enhancer and Tyson Foods to name a few. We also continue to grow and expand our relationships with existing clients, including The Kraft Heinz Group, Epic Games, NFL, Lenovo, Jack-in-the-Box, Mavic, HyperX, U.S. Polo Association, the Dallas Cowboys, Miller Lite and Dairy MAX. These companies are engaging GameSquare to help them navigate a complex environment and to captivate the attention of the important and affluent Gen Z demographics. Our platform is allowing us to accelerate growth in an industry that is proving to be highly effective in reaching this elusive demographic. For example, a recent survey conducted by Deloitte highlighted that the Gen Z demographic is the first generation turning to gaming as their primary form of entertainment. Brands are noticing this paradigm shift, and we are uniquely positioned to capitalize on the secular trends underway across the media and entertainment industries. To take advantage of interest in our offerings from global brands, we made the strategic decision to invest in sales and marketing during the third quarter and accelerate positive momentum across our sales pipeline. The investments have driven near-term results and have had a material impact on contract signed for 2023. In fact, we signed a record number of new contracts during the third quarter. Each new customer relationship drives our growth engine as we seek to leverage our success throughout our customers' organization and expand the number of services that we provide. We can support this land-and-expand strategy because of the investments we've already made in our sales, content, merchandise and product organizations. Momentum is building across our land-and-expand approach as we leverage our vertically integrated platform and capture incremental revenue and margin opportunities. During the third quarter, we further elevated our platform by showcasing our talent, capabilities and innovation by hosting the Tatman Tailgate. This event was the first of its kind that brought gaming, music and youth culture together, attracted 8,000 attendees and generated more than 500,000 social posts from around the world. Importantly, the success of the Tailgate amplified GameSquare as a unique and innovative media and entertainment company, while further growing our exposure to new brands and existing clients. This event has been recognized by the gaming industry with the recent announcement of the Tempest Awards in Las Vegas, where the Tailgate won esports event of the year. I want to congratulate Tim and the entire team at GameSquare for putting together an incredible weekend, which is the benchmark for future gaming and esports events. We also continue to invest in new business segments. And at the end of Q3, we successfully launched our merchandise and consumer product business called Mission Supply. Mission Supply is led by Derek Chestnut, formerly the VP of Consumer Products at FaZe Clan. During his time at FaZe, he built a thriving merchandise business and drove industry-leading collaborations with brands including Takashi Murakami, Juice Wrld, work closely with the NFL and many more. Since formally launching Mission Supply in September of '22, our merchandising business is already driving revenue growth and is materially contributing to our growing sales pipeline for 2023. The investments we are making in sales, marketing and new business segments, combined with the success of the Tailgate have resulted in accelerating sales momentum. As a result, during the third quarter, we experienced a significant increase in our sales pipeline, which is fueling our optimism for strong revenue growth in 2023 and beyond. In addition, we believe that we are on a path towards profitability as our business rapidly scales, we benefit from a compelling gross margin profile, and we begin to leverage the investments we have made in our platform. In less than 2 years, we have grown from a company that delivered annualized revenue of $3 million at the start of 2021 to an estimated $30 million in 2022. We expect this rapid growth to continue, having recently issued financial guidance for 2023, targeting $45 million to $50 million in sales with gross margin of 35% to 40%. We believe that our recent results and favorable outlook continue to highlight that our unique model is leading to increased market share, and we are achieving scale faster than any esports and gaming organization that I know of. Our growth trajectory heading into 2023 demonstrates the leverage of our vertically-integrated platform. Today, GameSquare offers differentiated and complementary services to our brand partners. And with the reach of more than 220 million, we have grown into one of the largest audiences in gaming. We will continue to invest in expanding our audience as overall reach is a material driver of revenue growth. During the third quarter, we also added experienced team members to support our record results and help us achieve our long-term strategic growth plan. New hires include the roles of Chief Operating Officer, Chief Strategy Officer, regional sales directors and social media lead. Additionally, we created a Head of Partnerships and brand experience role at GameSquare, which was filled internally. Overall, I'm thrilled by the external talent that we are attracting and the internal talent that we are developing. Most recently, Ms. Jeremi Gorman joined GameSquare's Board of Directors. Currently, Jeremi is the President of Worldwide Advertising at Netflix and is a proven media and entertainment executive. Ms. Gorman was the Chief Business Officer at Snap, Head of Global Field Sales at Amazon, and was the Director of Advertising Sales at Yahoo!. I look forward to her contributions as a member of GameSquare's Board of Directors which will no doubt help strengthen our ethos of connecting brands with youth culture. I have never been more excited, confident or energized by the opportunities that exist within gaming and esports. We have an incredible platform that is connecting brands with fans. We are proving that what we have built is working. And brand fans, leading industry talent and investors are all taking notice. I'm extremely pleased with our financial progress in the first 9 months of 2022 and the solid financial foundation that we have built as we look to 2023. There are incredible opportunities ahead of us, and I'm confident that we have the right people, the right strategy, the ambition and the drive to exit 2023 as one of the largest esports and gaming companies on the planet. With this overview, I'll turn the call to Kevin to review our financial results in more detail.

Thanks, Justin, and good afternoon, again, everyone. Once again, we posted strong sequential revenue growth as we enter the seasonally strong second half of the year. Revenue for the 3 months ended September 30, 2022, was USD 10.1 million, a 52% improvement over Q2 2022 revenue and a 5x increase over Q3 of 2021. Quarter-over-quarter growth was a result of continued strength in our Agency segment, which benefited from conversion of our large pipeline, which, as Justin outlined, remains robust and is the healthiest it's ever been heading into the new year. Gross margin for the third quarter of 2022 was 35.4%, which is in line with our annual guidance of 35% to 40%. Year-to-date, we've delivered $21.8 million of revenue with a gross margin of 37.8%, which is slightly ahead of the midpoint of our gross margin guidance and well ahead of gross margin in Q3 of 2021 of only 28.1%. We continue to make improvements in our business, and we're targeting higher margin business, which is evident from another quarter of strong gross margin performance. Last quarter, we talked about looking for areas to intelligently reduce costs without hampering our ability to grow, while deploying capital in other areas to accelerate growth. The third quarter reflects this approach as we controlled most expenses from Q2 levels, while investing in sales and marketing initiatives. The initiatives -- pardon me, the investments we made during the third quarter in sales and marketing have driven a significant increase in our pipeline, which we expect to support strong year-over-year growth in the fourth quarter and throughout 2023. In addition, as our sales and marketing expenses return to more normalized levels, we expect to achieve a strong ROI for future sales run through our income statement. The company generated an adjusted EBITDA loss for the 3 months of $2 million, excluding noncash expenses as well as an investment in marketing of $1.2 million in the quarter in order to accelerate sales and to build the brand. This investment has led to a growth in sales for the second half of the year, robust contracted revenue this year and next and a significant sales pipeline for 2023. Additionally, we've seen an increase in inbound interest from brands that are seeking to spend real dollars within the platform that we have built. The company ended the quarter with just over $4 million of cash, working capital of roughly $5.4 million and an undrawn USD 5 million line of credit, which positions us well from a balance sheet perspective. As we've highlighted in the past, we've built a robust foundation for growth. Our model has significant leverage and the pieces largely in place to support outsized growth. While we're constantly reassessing our business, looking at opportunities for higher ROI and any cost saving initiatives, we have the foundation to get us to profitability in 2023. I'll turn it back to you, Justin.

Thanks, Kev. Our foundation is solid, and another quarter of outsized growth is evidence of the platform we have built is unique and it's working. We have accelerated revenue growth in the back half of 2022. And based on our large pipeline for the remainder of the year, we are well positioned to comfortably meet revenue guidance. Our investments in sales and marketing has led to us booking significant revenue for next year. We have added to our sales team, and our pipeline is growing quickly. We are converting large opportunities, and across GameSquare, we are monetizing our high-margin inventory and creating innovative solutions for our existing clients and for new brands entering the space. We are creating incredible outcomes for clients, which is leading to repeat business, and we are competing for and winning larger RFPs. On behalf of the company, I want to say thank you for joining this call and for your continued support. With that, I'll turn the call over to the operator to take your questions.

[Operator Instructions] Our first question is from Robert Young with Canaccord Genuity.

Nice to see that top line. I think you alluded to it in the prepared comments, but I'm curious about the sales and marketing line, the big jump. I think you said $1.2 million is non-repeating. Maybe you can just help with the modeling on that going forward? That would be very helpful.

Rob, I can jump in. It's Paul, the CFO. Yes, the $1.2 million was extraordinary expenses that we invested at the request of some of our sponsors to support the brands going forward as we made clear in the call. So that would certainly be nonrecurring. A larger portion of the balance is incurred related to the Tailgate. So I think for your own modeling, $400,000, $500,000 a quarter would be sufficient as a clean sales and marketing.

Okay. Great. Great. And then maybe another quick one around the gross margin. I think the quarter-over-quarter dip was -- is that related to the big sponsorship win in Q2? It looks like the trend is still [indiscernible] just the quarter-over-quarter change, that would be the compare?

Yes. Q2, we had some extraordinaries. You might remember, Complexity with its sponsorship and also some of the in-game monies we earn is a little bit lumpy. And so we had a bit of that in Q2 that wasn't recurring in Q3.

Okay. Great. Okay. That clears that up a lot. The revenue trend now looks really good relative to your previous guidance of 27.5% to 30%. I'm not too sure if you reiterated that in the release or not. But should we be thinking that this could dip down quarter-over-quarter in Q4? Is there some revenue that was pulled forward into Q3? Or are you expecting to see improving on this strong revenue you reported here in Q3?

Yes, Rob, I'll take that. It's Justin here. Yes. So look, Q4, we're in a really strong position. So as we kind of stated in the script there, we are really comfortable in meeting revenue guidance with the revenue we've got booked, thus far, in Q4. And our pipeline would indicate exceeding that guidance. So we feel really comfortable about the Q4 numbers and where they are at. Look, it would be remiss to not look at the fact that there are some tough macro sort of headwinds at the moment affecting brands. But I wouldn't say that this industry is recession-proof by any means, but there are still brands spending dollars in this space. So we've definitely had to pivot a little bit. Brands are looking much closer at the ROIs. And I'd say that our investment in our sales resources and team has been a really smart one because our team has pivoted extremely well, have worked really closely with new brands and making them feel really good about our service offering. So all in all, we will meet our 2022 revenue guidance, and feel really good based on booked revenue for Q4 in pipeline that we will exceed that. We are still seeing a really large and growing pipeline coming in from brands. And we do feel that while macro headwinds are affecting everybody, we're actually really uniquely positioned to come out of this in a really strong way, which I think you'll see evidenced by our Q4 results.

Okay. Okay. I guess I maybe come at the question a little bit of a different angle. Just the seasonality of -- understood in the businesses that builds through the year into Q4, and then maybe a slowdown in Q1 and then repeating that process. Maybe if you could just sort of give me a sense if that's still the way you expect the business to operate over the next year or so?

Yes, absolutely. I mean, look, from a seasonality perspective, in the back half of the year, as stated, is always stronger. There are a number of reasons for that, brand and ad dollar spend as well as more gaming and esports events. And obviously, leading into -- from a consumer product, a merger standpoint, holidays coming up. We actually have a large job this Friday coming up, a holiday job for TimTheTatman & Cloakzy. So I absolutely expect that to continue. However, I would say that the booked revenue that we have for next year and the start of next year is significant. Our pipeline is also growing every day, and we certainly were not in this position at this time last year. So yes, I would still think about the back half of the year being stronger than the front half from a seasonality standpoint. But obviously, we feel really good about where we're at from a booked revenue standpoint and a pipeline perspective and obviously reflected that in the revenue guidance of $45 million to $50 million.

Okay. That's helpful. Maybe last question, and I'll pass the line to someone else. The last quarter, you said, Justin, that perhaps you might put a little more structure around the comment that you're heading towards profitability. I know you haven't put a time line around about it, and that growth is more important than the path to profitability. But if you could just give us a sense of what the priority is? Or if you've taken out this unusually high sales and marketing, you would have, I think, continued to see an improvement in trend on the profitability in the business. And so maybe you can just give us a sense of that. Do you expect that trend to continue?

Yes, absolutely, Rob. So Kev mentioned in the call that we have a foundation to get us to profitability in 2023. We've talked about that before, but we haven't given specific guidance here, but nothing has changed in that regard. The reality is that we're in year 2 of the business, what's been really important to us while being focused on growing really intelligently that we can -- so we can continue to scale is really getting to scale. And I think we've proven that out, right? This model works. We're in year 2 effectively and achieving that $30 million that we talked about and looking to $50 million in revenue next year. And I've talked about this previously, and nothing has changed on this front. $45 million to $50 million really represents breakeven to profitability and gets us to scale where we can start to leverage that operating margin. We -- nothing has changed on that front. I would say that there were some higher-than-normal spend in Q3, but that has absolutely set us up for that scale that we need to achieve. We are really looking at optimizing the business and there are areas that we can become a little more efficient. So I would kind of look to that in the coming quarters around getting a little more efficient around cost spend as well as margin expansion, which we touched on. So I would still think that nothing has changed, Rob, in that regard in terms of that $45 million to $50 million revenue, and from there, really being able to leverage and get to real profitability. So we do expect that in 2023, we haven't given specific guidance to exact timing, but nothing has really changed on that front for us. You said areas to kind of focus on and think about, look, the 3 key areas really are for us to obviously achieve that revenue scale, number one, which I think we're clearly proving out. Number two is to really start to expand margin as we hit scale. So that's something that I would focus on and look for; as well as optimize to become a bit more efficient. That's definitely an area of focus. You heard some of those new hires that we have. We've got a COO in now and some others that are really focusing on that around how we become a lot more efficient. So they're probably the 3 main areas where we have to look to, but I'd expect profitability in 2023 in the near term.

All right. Good to see those 3 things on that play here in the quarter, and I'll pass the line.

The next question is from Dan Duong Trang with Hodges Capital.

Nice quarter. Kind of -- I don't think this is a number you all talk about too much, but is there an average range as far as, Justin, you talk about the contracts you all are signing, but is there a ballpark range as far as the average size contract that you signed when you're going out in contract with the brands?

Yes, absolutely, Dan. I mean I think the incredible thing to see in real time is how our teams have come together and how we're now really attacking market from a GameSquare perspective and our GameSquare go-to-market offering, right. We talk often about this vertically-integrated platform, and that's great, but actually seeing that work in real time is really rewarding. And what we're seeing from that, Dan, is that those contracts are materially increasing because if you think about -- we've kind of talked about some of these in the past. Brands like Dairy MAX, who may have been a sponsor of Complexity, we've been able to resign for more dollars because of following an audience that we've been able to attract with, and because of the capability that we now have in the group [indiscernible] are now working from an agency perspective with Dairy MAX, while GCN and the Dallas Cowboys are creating gaming events and tournaments. So there's been many examples of this, Dan. What I'd say the best way to think about it without giving you an exact average number is this time last year, when we're talking through our numbers that we're growing and expanding and super exciting. We're talking in the hundreds of thousands. We're now talking in the millions. And these RFPs are coming in there readily, they're large. And as I talk to you, our pipeline for 2023 is incredibly strong. So we feel really, really good about that growth. And again, the way that we approach market and brands from a GameSquare perspective, having all of these specialist skills internally, 1 team hyper-focused expertise, it's really paying off.

Okay. And as far as I know some other companies have talked about with the gray cloud depending of a possible recession. Have you all noticed any lengthening of your sales cycle or anything like that when you're going out, getting RFPs or whatnot?

Yes. Look, I kind of touched on it a little bit before, Dan. And I think so. I think the reality is that it's a tougher marketplace today in terms of these brand relationships. And that's why I'm, again, even more impressed by our team because look, we are in an industry that again, I'm not going to go as far as saying it's recession-proof, but it is an area that brands know that they still need to spend in because this audience is enormous, this audience is fragmented, and this audience is hard to reach. So the answer is yes, absolutely. But our team has done an incredible job building relationships, pivoting, finding. Again, I go back to that ROI. This isn't about some cool, sexy campaign, integrating some great talent and going to market, right? This is about understanding the data, understanding the ROI, understanding the client and brand needs and wants, and ensuring that we deliver. And we're doing that time and time again. So yes, I would say that we have had to pivot a little bit. But overall, the size and quantity of RFPs is larger than it's ever been before.

The next question is from Dave Jones with Stonegate.

Congrats on the strong quarter. I was wondering if you could just start at the top line. I know you mentioned in the call that the revenue came from a mix of recurring revenues, record revenues in Agency and then some from the Tatman Tailgate. Would you be comfortable giving a bit of a further breakdown on which of those revenues are recurring? Which of those may be more onetime in nature?

I can help you a little bit. If you look at our financials, we've got a nice note, the segment note where we break out the various revenues by segment, so Teams, Agency and then content production. And as we ramp up merchandise, we'll add that going forward. The sponsorship in Teams is all recurring. The winning player buyout other is nonrecurring. And the Agency revenues, I won't give you a detailed split now. I mean we do have many recurring customers, but there is some level of churn in the Agency and content. Does that help? But yes, you've got the segments there and also geographic. It's all 3 months, 9 months. So hopefully, that helps a bit with your modeling.

Okay. No, that's very helpful. And then I guess going into just back to some of those contracts and some of the visibility that it gets you into 2023 and the confidence to get that strong guidance. I know you've mentioned earlier the size of some of the contracts signing. Has there been any push to sign longer contracts, just to shore up some of those revenues?

Yes. I think I'll start with this and then let Justin jump in. It's Kevin here. Yes, in terms of the sponsorships, we talked about Lenovo being a multiyear deal, and so we try to get a mix of contracts where we can recognize a bit of predictability and then some shorter contracts that are allowing us to up those contracts as the market grows. So certainly, we're looking for some longer term and then some 1-year, 18-month contracts that we can bump the size of them up. Justin, anything you want to add there?

No, I think that's spot on, Kev.

Sorry, Dave, this is Paul. What I just simply add on that is just when you see the amount of business that we've been bringing in, initially, it was just trying to kick down the door to get these brands in. And what you're starting to see is repeat business, right? So your foot's in the door. So we're starting to see that brand recognition between some of these larger logos that you can imagine, which is leading to repeat business.

That's perfect. And then one more, if I could. Just with bringing on someone Jeremi's caliber onto the Board, any actual thoughts around synergies or stuff like that, that you're hoping she brings to the team?

I think we're all very excited about Jeremi joining the Board. I'll start on this one. I think she's got great contacts within the industry. She's got so much experience at Snap. She -- I believe, she drove business from $1 billion to $4.5 billion in a very short tenure. So she's experienced. She's smart. She is such a great resource for us. And the inbounds that we have had from folks patting Justin on the back and telling us all how incredible she is, it's nothing we didn't know, but it's a real validation of her talent, but the amount of attention that people are giving to her joining the Board. So that's a long way of saying, I think there are some synergies.

Apologies. I've gone to talk 3 times in the -- I've been on mute so you missed a few pills of wisdom, but I'll just reiterate what Kevin is saying 100%. I met with Jeremi probably mid-last year in L.A. and went for a coffee. And I mean, she's an incredible person. Obviously, you can see her background on paper. But I mean she understands how to build media ad businesses. She understands how to connect with the youth culture. She's super excited by what we're building. There's clearly crossover in what she's doing an opportunity there, right. You look at Netflix's strategy into gaming and the possibilities and opportunity there to have somebody in-house with the credibility and the background that she has is an enormous win for us. So we're incredibly excited about what she's going to bring to the table.

That's perfect. And if I could ask actually just one more quick one. You put the teaser in there about the private placement at that great valuation. It looks like you're playing close to the chest intentionally. Any other information you can give us on kind of the timing on that? What's involved?

I think you are likely referring to the one that closed on September 30 at a premium to market. Is that the question?

Yes. Yes. The $3 million [ non-broker ].

Yes. Yes. Look, so that deal closed, we were able to bring in a strategic group of investors who have already proved to be extremely valuable in terms of connecting us with brands, also in the collegiate NIL space. Our -- all 3 of our different Agency teams have done calls with them as well as our content merged consumer product business, and they've actually already actively helped us to grow pipeline. In terms of sort of financing, if that's kind of where you're going down the path, I'm not sure in terms of insinuating any future financings. The reality is that we have a really clear pathway to grow. We have a nice runway. The reality is that we have a $5 million line of credit that we haven't pulled from. We have really strong receivables that we obviously have the optionality of a non-diluted financing there through looking at factoring opportunities on these really large media agency deals that we could also look at. So definitely nothing in the immediate on that front and no need for us to be sort of raising capital this time.

There are no other questions on the phones at the moment. I'd like to turn the conference back to Justin Kenna for any closing remarks.

Thank you. Apologies from my mute trouble through the end of the Q&A. But look, overall, we're extremely proud of what we're building. And if you haven't seen the video we're able to sort of release today through the GameSquare socials and through our IR e-mail distribution list, I hope you can jump on that and have a look at that and do have a look at what we've been able to kind of achieve in the 9 months of this year. Again, we feel really, really good about closing out the year in a really strong fashion as well as obviously scaling, and we've touched on sort of profitability for 2023 and beyond. So thank you so much to everyone for joining the call, for your continued support. We're energized. We're excited. We feel really good about where we're headed. So thanks again, and look forward to catching up in a few months' time. Thanks all.

This concludes GameSquare Esports Inc. Third Quarter of Fiscal 2022 Financial Results Conference Call. You may disconnect your lines. Thank you for participating, and have a pleasant day.