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

Hey, everyone. As I mentioned earlier, I am doing something different on my live stream today. As you may know, I'm the Chief Innovation Officer of GameSquare. A Nasdaq-listed company that trades under the ticker GAME. Every quarter, our company hosts a conference call, which we thought would be a great opportunity to feature on my live stream. So you will see more of what I do at GameSquare. We also thought it will be a great opportunity to host investors on my Twitch channel to get the live streaming experience that is such a big part of our community. I'm sure there will be questions, so the chat will be emotes only for today, and I'll pin a message that can take you to GameSquare's website where you can learn more about our business and ask questions. Justin Kenna, who is GameSquare's CEO, is hosting today's stream from Complexity's live streaming room in Frisco, Texas. You know, at the address they share with the NFL team that the Lions will be absolutely destroying in a few weeks. Complexity is also owned by GameSquare. The entire thing gives me conflicting feelings about being a Detroit Lions fan, but I better be on my best behavior and not go there today. Most importantly, he is Tim's, Cloakzy's and my boss. Which also probably makes me Tim and Cloakzy's boss. But we also won't go there. Not today. So let me hand over the stream to Justin for some formalities before we talk about what the future holds at GameSquare.

Thanks, Ninja, and good luck on December 30 when the Lions come to town. I think you might need it. I'm extremely excited to be here today and to review the progress we are making at GameSquare as we create a leading technology-enabled platform that helps connect brands to gaming fans and youth audiences globally. Today's live stream is being broadcast over Twitch as well as our social channels and our company website. We believe that we're the first public company ever to live stream a quarterly conference call on Twitch, reflecting our core focus of driving stakeholder engagement through innovation. I'll start today's stream with an overview of the progress we are making, including the recently announced definitive agreement to acquire FaZe Clan. Before joining Ninja in a Q&A discussion on the future of GameSquare and the innovation we are bringing to our markets, our customers and gaming fans across the world. Before we begin, I have to satisfy our lawyer's advice by stating that certain statements in 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 information about forward-looking statements and risk factors, please see our MD&A for the quarter ended September 30, 2023, which can be found on our company profile at sedar.com and on the company's website. So with these formalities out of the way, let's get down to business. For those not familiar with GameSquare, our journey started only a couple of years ago with 1 operating subsidiary and annualized revenue of approximately $3 million. Since our inception at the end of 2020, our strategy has been focused on creating a leading media company focused on gaming and youth culture and rapidly getting to scale. I'm extremely encouraged with our success over the past 3 years as we have announced 5 acquisitions, including recently announced FaZe transaction, which will create a company with approximately $138 million in revenue. Our ability to grow revenue by over 45x in under 3 years is a result of the comprehensive platform of media and agency solutions, gaming and esports organizations, production services and technology capabilities that we have assembled. Our modern end-to-end media platform continues to drive growth even during challenging market conditions. Brands are coming to GameSquare because of our ability to provide clients with best-in-class technology assets, a large influencer network and award-winning agency and creative capabilities. As a result, GameSquare can offer unparalleled insight into consumer behaviors, develop data-driven creative strategies and measure and optimize campaigns towards customer acquisition goals in real time, creating impactful marketing solutions that drive strong returns for our customers. During the third quarter, revenue increased 13% over the second quarter to a record $16 million and was up 58% from the same period last year. Reflecting the benefits of the Engine Gaming acquisition and strong organic growth, our third quarter results also reflect the strides we are making to improve our cash burn. For the third quarter, our adjusted EBITDA loss was $3.6 million, a $0.5 million or $500,000 improvement from the second quarter of 2023. We also continue to strengthen our balance sheet to support growth and invest in our business. During the quarter, we announced a $10 million working capital line with SLR Capital Partners that matures in September of 2026. After the third quarter closed, we announced that we entered into a definitive agreement to sell our noncore radio business assets for $4 million. We expect the transaction to close by the end of November, which will further strengthen our balance sheet and will allow us to streamline our focus to support our marketing technology capabilities. We ended the third quarter with a solid pipeline for the fourth quarter and a strong outlook for 2024. We expect sales in our fourth quarter to be up significantly from third quarter levels, reflecting strong seasonality and solid demand for our media and creative services and technology solutions. Our strong outlook reflects the solid integration of the April 2023 acquisition of Engine Gaming, which significantly enhanced our scale, remove duplicate operating and corporate expenses and most importantly, added technology-based capabilities to complete our differentiated end-to-end marketing technology platform. As a result of this transformative acquisition, we have quickly expanded our client offerings to take advantage of notable commercial trends that enable brands and game publishers to target key audiences and measure performance and attribution data points. Engine Gaming is creating exciting revenue opportunities, including the growing success of new performance marketing strategies as companies are increasingly looking at ways to maximize their returns on marketing investments. During the third quarter, we announced multiple new clients representing over $2 million of annual revenue in 2023. Based on our current pipeline and customer relationships, we expect performance marketing sales can grow to $8 million to $10 million in annual revenue in 2024, with gross margins between 25% and 30%. And we are increasing our investment to accelerate growth even further. As we've highlighted in the past, by currently serving 8 of the top 10 largest game publishers in the world, we are able to uncover trends through our comprehensive data and insights access. Game publishers are currently generating 60% of their revenue through creators and brand ambassadors. Being able to manage and activate those relationships through our creative marketing platform has opened up a number of game publisher relationships and enabled us to cross-sell these additional platform capabilities to drive more revenue per customer. We are also seeing growing adoption for our Unreal Editor for Fortnite or UEFN services that leverage GameSquare's design, production and digital experience capabilities. These innovative marketing campaigns build custom worlds for brands in popular gaming titles such as Fortnite. During the third quarter, we announced 4 new UEFN campaigns with prominent blue-chip global brands worth nearly $1 million. We expect growing demand for our UEFN services as large brands look at ways to engage with gaming audiences by creating custom gaming worlds. The activations also reflect GameSquare's ability to create a seamless bridge between brands and gamers by offering a unique platform for interactive brand experiences in the digital world. We believe this will be an important growth engine in 2024 and beyond. As you can see, the Engine Gaming acquisition has contributed to significant revenue and cost synergies and we are focused on replicating its success with the recently announced acquisition of FaZe Clan. FaZe Clan is one of the biggest brands and influencers across the global gaming market. The combination with FaZe Clan continues our strategy of acquiring leading companies focused on esports, gaming and youth culture to increase capabilities, grow scale, unlock cost savings, empower fans and creators, and ultimately drive value for shareholders. We believe there are significant strategic and financial benefits to the acquisition as we leverage the powerful infrastructure we have created and full spectrum of resources within the GameSquare ecosystem to reinvigorate and drive value at FaZe. I'm extremely excited to welcome back FaZe Clan's founders to lead FaZe and reestablish the brand's authenticity. FaZe Banks, Temperrr and Apex are highly motivated to reengage with FaZe Clan's core fan base and empower FaZe's creators and community. As a result of the FaZe Clan acquisition, GameSquare will be the top creative network in gaming and esports with over 250 million hours of content watched annually. The company will have a powerful talent network that includes Ninja, TimTheTatMan; Trevon Diggs, Max Holloway, Cloakzy, Nickmercs, FaZe Banks, Rug, Temperrr, Apex and FaZe Bronny just to name a few. GameSquare and FaZe Clan will also combine a hyperengaged global fan base with over $1 billion of combined audience with a core focus on 13- to 34-year-old audiences. We'll have a powerful portfolio of brand partners that include Porsche, Nike, Jack in the Box, Xfinity, Miller Lite and GHOST. Finally, we have identified an $18 million future run rate cost savings supported by reduced corporate costs and focus on driving efficiencies across the organization. The combination of GameSquare, Engine Gaming and FaZe Clan have created a business with approximately $138 million in annual revenue and an annual gross margin of over 26%. We will have taken nearly $30 million of costs out of merging corporate overhead and other cost saving actions. Going forward, significant cost savings combined with expected double-digit organic revenue growth will support a highly profitable financial model. With 1 quarter remaining in 2023, I'm extremely excited about the progress that we've made so far this year and the opportunities to drive value for our shareholders in 2024 and beyond. We entered the fourth quarter with a robust pipeline and expect sales will be up significantly from third quarter levels, which we believe will drive positive adjusted EBITDA in the fourth quarter. I'm thrilled by the direction that we are headed and I look forward to updating you on the continued progress that we're making. So with that, I'd like to bring Ninja back, and let's jump into a little bit of Q&A.

Justin, now it's my turn. We have both been in the business of gaming, esports and youth culture for a while. How has the overall market influenced GameSquare's financial results? And how do you see the market evolving in 2024 and beyond?

Great question, [ Ty ]. Yes. Look, there's no doubt it's been sort of a challenging brand and ad market, and there's been a number of sort of macro factors. I think to sort of touch on esports firstly, I think that there's been -- there's some different sentiment out there around esports winters and other pieces. I think esports in general is going through a very sort of natural growth stage of consolidation. I think -- and we remain really bullish on the future of esports, and we're seeing publishers and orgs come together and partner together a lot more. I think we'll continue to see that. We see a lot of opportunity in that space. More broadly in the sort of gamer and creator economy in general, look, by every metric in terms of audience and eyeballs, it's only going north. So we feel really good about how we're positioned to take advantage of that, as we start to see markets return and they will. We're starting to see that brand and those branded ad dollars come back. And I think that we're really well positioned at GameSquare to take full advantage of that. Ninja, you built a very large following. And as one of the original streamers, how do you continue to engage with your following and produce compelling and relevant content?

That right there's a doozy! Ain't that -- that's what it's all about Justin. I think that for me, like it's just continuing to -- as a streamer, the way that I've been producing content my entire life has been it evolves with the game that I play or the games that at play, right? So it started off early in my career where it was Halo competitively and 1v1. So like that was like my way of entertaining my viewers. And then that evolved into still competing for a very long time. And then that evolved into Destiny, right, switching games to Destiny, then switching games to then Battle Royale's came out, right, H1Z1, PUBG, Fortnite and now I'm starting to -- obviously, we've added the podcast, right? We're starting to go a different route that way. And we are about to start Ninja News is going to be another incredible event. So I think just continuing to give really cool experiences and something -- giving people something to look forward to. And it's like a small event here and there to attend. And just giving them the content that they've always like -- that they continue to want, you know what I mean. If it isn't broke, don't fix it and like what I've always loved to do with my content and how I've always -- something I've lived by is I just want to entertain people with my voices, any funny voices, accents I can do, impressions, references and my game play and also offer a little bit of like humor, right, alongside of just the daily streams in and out. So like just things like that, man, I'm going to continue to stream, continue to produce funny content, hit clips and just keep popping off, I don't know. Just -- as long as I love it, I feel like it's just natural. We come out with content daily, like and it's just -- it makes -- it literally writes itself, it makes itself, especially when I'm playing with my boys and some of my friends, then at that point, it's just like it's just [ freelo ], right? Everyone loves a good squad game when we get the boys on. So...

Awesome. Can you tell me what you've accomplished so far and what's in store for the remainder of the year?

Goal, year -- our goal for year 1 is to be innovative, have new experiences and create content. So innovative experiences and creating content is our goal for year 1. Our goal for year 2, we're going to be focused on accelerating more growth and driving more product-based sales. This is -- one of the shirts I'm wearing right now, this is actually one of the shirts that we did was a super small release like we just wanted to kind of get out there. And this is literally one of them -- like the most favorite shirts I own. And everyone talks about the quality, it's incredible quality and it looks amazing, everyone is super happy that they -- like the people who did buy when we dropped a small launch are ecstatic, and people have been asking -- and this is something so small. It's just like a little tiny merch drop, right, like a drop in the bucket to literally the things that we can accomplish. But yes, this is one of my favorite shirts and one of my community's favorite shirts and they always ask me to bring it back. So just...

Why don't you tell everyone what attracted you to GameSquare? And how we support your efforts to drive innovation and engagement within the gaming community?

Great question, Justin. It's a great question. I think the thing that attracted me the most about GameSquare and is -- I mean you just did an incredible job selling in some when we were talking about what it is that you guys do differently than all those other companies out there, especially with Complexity as well. And I think what really just drew me to you guys over picking anyone else, over starting something my own, over, over anything like that is you guys just absolutely have -- you always say -- you always save this in your pitch, you guys have like a front to back, right, like a start to beginning -- start to end like process of being able to run events, right, being able to start events and then being able to literally get everything that goes into those events, and you guys actually also understand the space, right? So the fact that you guys don't have to go out of your way to reach out to other companies or other people to accomplish the things -- to get things done, right, take the TimTheTatman's event, for example, TimTheTatman Tailgate and Dallas was one of the most amazing events ever -- I was super blessed to be a part of it. It was out of this world, a knock out of the park, and you guys were able to do all of that in-house, right, with the companies that rock with GameSquare. So that -- and just again, I think the true understanding of the gaming space and the culture and like you guys get it, and I think that's very, very, very important. You can't buy that. And that's what drew me to you guys. Justin, there have been so many sports, gaming and media companies that are trying to figure out how to compete in the market and engage with youth audiences. How is GameSquare able to differentiate itself and create a successful business when so many other companies have not been successful?

Yes. I mean it's -- people joke about the hard-to-reach audience. But to us, that represents a real opportunity. And I think it really is a focus on data and on technology. We -- the acquisition of Engine Gaming really did give us differentiation with Stream Hatchet and access to data in-house and understanding this audience in these communities. Obviously, having a world-class team that can execute is important. But I think understanding the audience first and foremost, is critical. And then having a media network in-house that is specifically designed to reach these audiences. This really does give us a differentiated end-to-end solution that nobody else in the market has. Now we do have competitors in these different areas. But from an end-to-end solution from data, marketing and creative services, technology and media, it's unmatched. And I think that it's proving to be the right formula.

How do you envision FaZe as a part of Gamesquare?

Yes. I mean it's an incredibly exciting opportunity. I was just actually talking about this the other day, and for those that aren't as close to the industry, FaZe really is the New York Yankees or more importantly, the Dallas Cowboys of the gaming world. And they truly are the biggest global gaming brand in this space. I see a lot of really immediate opportunities in the infrastructure that we've built. There are -- and we currently already work with FaZe. But there are a lot of areas at FaZe that, they do outsource that we'll be able to bring in-house and really sort of capture a little more revenue and expand margin. And I think there's sort of a really good blueprint. We acquired Complexity sort of 2.5 years ago. In that time, we've grown aggregate audience 10x. We've grown revenue by over 200% and taken a burn and reduce that by around $10 million to a point we're effectively breakeven. So I think if you sort of look at that blueprint as to what we're going to be able to do with FaZe, it's a pretty good indicator. We're extremely excited. I mean, again, FaZe is the largest gaming brand by audience and they have a larger audience across their sort of core platforms than any other sporting team in the world. So yes, the opportunities are there for us, I think we've built the right infrastructure and we're extremely excited to get to work.

But -- yes, that's it, man.

It has been a lot of fun, Ninja. Thank you for joining today's call and for helping expand GameSquare's offerings. To everyone on today's live stream, we are just getting started, and we believe the long-term opportunities at GameSquare are met. 2024 is going to be a transformative year for GameSquare as a result of strong organic growth and the successful integration of the FaZe Clan acquisition. I'm thrilled by the direction that we are headed and excited to report on our success in the coming months. We hope that you'll continue to follow us. I appreciate everybody tuning in. Thanks very much.