Motorsport Games Inc. (MSGM) Earnings Call Transcript & Summary

Appreciate that, Stanley, and good afternoon to all of you joining us for Motorsport Games' third quarter 2026 earnings call. This is now the seventh consecutive quarter in which we've posted positive net income. Revenue for the first nine months reached $11.3 million, a 52% increase over last year. Gross margin rose to almost 86%, compared with 80% previously, and adjusted EBITDA for the quarter came in over 75% higher than a year earlier, leaving a bigger portion of each dollar inside the business. Peter, our CFO, will walk you through the specifics afterward. Le Mans Ultimate and Race Control continue to drive these improvements, and I'll come back to Race Control shortly. I'd like to highlight an important milestone. Across every channel, Le Mans Ultimate has now surpassed 2 million sales, including more than 520,000 copies of the base game, and as of today, 1.5 million units of downloadable content, or DLC. By DLC, we mean paid additional content. That comes out to roughly 3 DLC items per base game copy, with players coming back to spend more on a title they already own. Our thanks go to the whole Studio 397 team and everyone at Motorsport Games. This is a fantastic outcome, and every one of us should take pride in it. Every one of those online competitors has a Race Control account on a platform that belongs to us and that we run ourselves. That setup allows us to onboard them with less friction, communicate with them straight, and keep putting money back into how their experience feels. Race Control stands as a standalone business, and it is growing up in a stable way. The money it brings in comes back regularly and can be counted on, its margins run high, and unlike a conventional title it does not swing up and down alongside game launch cycles. It holds players' attention, gives us a way to make money from our most dedicated fans, and sends those earnings back into whatever we create next. Roughly one out of every ten people who own Le Mans Ultimate is now a paying subscriber, and in our view that stacks up favorably against what a typical subscription converts at. Race Control already sits at the heart of our offering, and for many years ahead it will serve as the foundation of the best-in-class experience we deliver; over about two years it has come along nicely, and yet this exciting journey is only just getting started. December saw us launch the new web portal at racecontrol.gg, which for the first time is wholly owned and operated in-house; it runs across mobile, tablet, and desktop, and it allows our players to reach and interact with our ecosystem without so much as launching the game. For the launch celebration, we're planning a special offer for players, and we anticipate a jump in both players and subscribers through December and on into Q1 2027. Moving Race Control entirely in-house shows our conviction that we ought to create a protective advantage around a segment of the business that has done remarkably well from the very start. We figure rivals will attempt to copy it, though the majority will seek easy workarounds rather than make the investment and gain the insight required to provide a full platform experience. We possess that knowledge, our platform runs today, it has been proven and is generating solid revenue, and anybody who tried to replicate what we have achieved would begin from a very distant position. And importantly, Race Control keeps moving forward. We will continue broadening its offering through additional features and further incentives to subscribe, and we intend to launch new titles that extend the recurring subscription momentum it has generated. Our American content packs have drawn a strongly positive response, with Pack 1 producing the largest DLC launch day ever recorded for Le Mans Ultimate, and Pack 2 arriving on schedule in September. American Pack 3 is still on course for a December release, and fresh, exciting content will keep coming across 2027. We have no intention of pushing Le Mans Ultimate into racing categories that are unrelated, yet there is ample space to continue adding content for many years ahead. Every expansion teaches us what draws players in beyond endurance racing, and we intend to apply that learning in new products targeting comparable and wider audiences down the road. Moving to console, another significant milestone has been achieved, since a playable development build of Le Mans Ultimate now runs on console, a little ahead of our December timetable. The work is demanding, but it opens the game up to a far bigger audience, and the lessons we gain will help our future releases. Looking further out, the long-term project we discussed on our previous call is in motion; we are pursuing it on several fronts, some with partners and licensing, some developing new capability, all aimed at a larger, more diversified business that relies less on any one product or relationship; we have more options now than at any moment in our recent history, and we are extremely close to choosing which ones to accelerate. Le Mans Ultimate demonstrated what this team is capable of. That success was built by us, and we know how to reproduce it. The next phase has the potential to go further still, and our efforts will be aimed at the areas where shareholder value is greatest. We won't announce anything until the agreements are signed, though we hope to share more during our next earnings call. This all is part of a wider change in the way we look at the company. Season 1 was the start-up phase and Season 2 the turnaround, and that chapter is now behind us. Against the odds, this team has achieved great things. Season 3 is the leap forward — an evolution rather than a complete reset. Everything our people have done well will be carried forward and built upon toward a bigger, brighter future. Each choice I've described here was guided by that principle. Before passing things along, a quick note on our people. Peter Anton Chambers has now completed his initial quarter in the Chief Financial Officer role, and collaborating with him has been enjoyable. I'd also like to express appreciation to Stanley Beckley and the finance group for assembling this quarter's reporting, as well as to our studio crews for 2 American content packs and for the Le Mans 24-hour event held successfully in October, which Peter will cover shortly; so with that, I'll turn things over to Peter. Thanks, Stephen. Good evening, everyone. As on our last call, no forward-looking guidance will be offered today. Instead, I'll walk you through the third quarter and our results for the nine-month period, along with what those numbers tell us about the business. Over the first nine months, revenue totaled $11.3 million — an amount that already exceeds everything we delivered in all of 2025, and there's still one quarter remaining. Our balance sheet, as I'll explain, is also in a fundamentally different place than it was when 2024 ended. That is the product of hard work by a talented, committed team, and it's worth celebrating. Even so, Stephen and I are absolutely clear about one thing: the turnaround is the foundation, not the destination. The real priority ahead is creating a company less dependent on any one title, and we're already working on that. Let me start with the figures. I noted last quarter that our performance reflects when we ship our games, plus actual motorsport happenings and the usual seasonal patterns. That means you shouldn't expect results to simply rise in a straight line quarter after quarter.

That’s still the right way to look at it. Judge us on the multi-quarter trajectory, and that trajectory is clearly upward. That said, third-quarter revenue was $3.8 million, up 21.8% from the same quarter a year before and up 6.7% from the second quarter. For the 9 months, revenue is $11.3 million, an increase of 52.3%. DLC for Le Mans Ultimate and Race Control subscriptions drove that. Over the 9 months, Le Mans Ultimate sales rose $2.8 million, mainly from DLC, while Race Control subscriptions rose $1.3 million. The U.S. Track Pack shows well why we keep investing in content. U.S. Track Pack 1 launched with version 1.4 on July 28 and delivered the biggest DLC launch day in Le Mans Ultimate’s history. Pack 2 followed on September 22, adding Road Atlanta and Long Beach; it also shows how we work. We stay close to our community, act on their feedback, and keep improving the game. Players’ commitment to the game also shows on our balance sheet. Deferred revenue, meaning cash players already paid us for content and services not yet delivered, was $1.6 million at the end of September. That is the highest quarter-end balance since our IPO, and it is up from $1.1 million a year earlier. After the quarter closed, we also saw a strong showcase for our online service. We ran our 24-hour Le Mans special event on October 23 and 24 — a live, full-day race for players worldwide, hosted entirely on our own Race Control platform. It tested the service, and we came through successfully, reaching 11,941 concurrent players, a new all-time record for Le Mans Ultimate. Stephen has already covered where Race Control is headed, so let me give you the numbers behind it. Race Control subscription revenue for the first 9 months was roughly $2 million, versus about $0.7 million a year earlier — an increase of 186%. That segment is now about 17.3% of total revenue — almost double the 9.2% share in the same period a year earlier. Business revenues overall grew by more than 50% over that same stretch. Using October’s monthly recurring revenue of about $282,000 as a base, Race Control is currently generating roughly $3.4 million in annual recurring revenue, compared with approximately $2.9 million at the time of our August report. September closed with more than 45,000 paid subscribers, a year-on-year increase of more than 157%. And to be clear — this growth remains entirely organic. As Stephen noted, the new web portal at racecontrol.gg launches in December and is wholly owned and managed in-house. Going forward, we will no longer pay the revenue share to our original technology partner. On a per-share basis, that came to $0.07 a share, with $0.19 for the quarter and $0.21 a share for the nine months, compared with $0.45 last year and $0.51 for the nine months. From a financial standpoint, that accounts for 10% of Race Control revenue which we had previously been sharing until now, and going forward it stays inside the company. Having the platform fully in-house also gives us more control and brings Race Control closer to our product teams. Growth matters, but what really pleases me is that the growth we're seeing is efficient. Gross margin in the third quarter was 88%, compared with 80.7% in the same period a year earlier, and over the first 9 months it reached 85.8% versus 79.6% last year. Operating income for the quarter was $1.2 million, up 52.4% from a year earlier. That's our sixth consecutive quarter of positive operating income; over the 9 months, operating income was $2.9 million versus $2.7 million. Bear in mind that the prior-year figure included $1.6 million of one-off other operating income, mostly from settlements. Strip that out and the improvement is considerably bigger. Turning to development costs, you'll notice the development expense line declined this quarter. That doesn't mean we've pulled back on investment, quite the opposite. We capitalized $1.7 million of development over the 9 months versus $0.7 million last year, reflecting continued investment in Le Mans Ultimate, Race Control, and console; in the third quarter we also recognized roughly $0.69 million of U.K. There's the video games tax relief, which reduced the development expense we reported. That relief relates to the development work we carry out in the U.K., and we expect to keep claiming it, though the timing and amounts will vary. Below operating income, the biggest item this quarter was a $0.5 million tax provision, largely tied to Studio 397, a Dutch subsidiary. As a result, net income was $0.7 million for the quarter, our seventh profitable quarter in a row. Net income attributable to Motorsport Games was $0.3 million for the quarter, equal to 7 cents a share, and 21 cents a share over the 9 months; on an adjusted basis, which we believe offers a clearer view of the underlying business, adjusted EBITDA for the quarter was $1.8 million. That's a 75.7% increase from a year ago, and more than double the $0.8 million we posted in the second quarter. Adjusted EBITDA for the nine months through September 2026 came to $4 million, a 99% gain versus the prior-year stretch. Non-GAAP adjusted diluted EPS was 19 cents in the quarter and 51 cents over the nine months, compared with 45 cents a year ago, while on a per-share basis earnings came to $0.07 a share for the quarter and $0.19 across the nine months, against $0.45 last year and $0.21 a share for the nine months. Reconciliations of net income to adjusted EBITDA — including certain one-off professional fees we removed this quarter — are in the press release and earnings materials available in the Investor Relations area of our site. Nothing shows the progress made over the past two years more clearly than the balance sheet. Through the opening nine months of 2026, our operations generated $4.1 million in cash — about $0.5 million each month — compared with $2.8 million over the matching nine-month period a year before. For context, operating cash this year came in above the $3.7 million we used during the second quarter to buy back Driven Lifestyle shares. September ended with $5.4 million of cash on hand, $1.3 million higher than the prior year, and that number includes $0.9 million in proceeds from the August warrant exercise. Against where we finished 2024, the difference stands out: working capital was negative at roughly minus $2.2 million back then, whereas it now sits at $4.2 million. When 2024 ended, obligations to suppliers and vendors were around $3 million. Today, accounts payable are approximately $0.4 million. Total stockholders' equity rose to $8.2 million as of September 30, 2026, from $1.2 million at the close of 2024; on top of that, a $3 million revolving credit facility with Citibank runs through February 2028, and $1.2 million has been drawn on it. Our capital structure has also become less complicated. Now that the Class B shares are retired, every share carries identical voting rights, and the August warrant exercises cut the number of warrants still outstanding; put simply, merely staying alive is no longer the goal. Today we hold a solid financial foundation, which gives us confidence to deploy capital in a deliberate way. And per-share results reflect that: $0.07 a share, $0.19 for the quarter, $0.21 a share for the nine months, against $0.45 last year and $0.51 for the nine months. So what comes next? As Stephen noted, Season 3 has arrived, and the company has already achieved considerable progress on the strategic groundwork required. In straightforward terms, this is a shift from an organization shaped by weathering hard times to one centered on growth. As any business ought to, we begin with purpose — setting out our vision, mission, and values, because those will steer the wider direction for what we build, where our capital is deployed, and how we structure the company.

Through this effort, we will draw on the strength of our brand, our people, and our culture. Beyond that, we are reviewing our corporate structure to resolve legacy matters, so the group becomes simpler, more efficient, and positioned to scale. Our goal is to establish a very deliberate path for growth. Season 3 will also influence how we allocate our capital. A stronger balance sheet provides the means to act, and clarity on our strategy will enable us to move decisively when the right opportunities arise. We will invest where we see potential for clear returns, and we will do so with speed and discipline. We are already out there actively pursuing partnerships and other opportunities that would speed up growth for the business. Consider what we've accomplished this year, mostly from just one title, and it becomes clear what a wider portfolio could do for this business; we'll share more as that work moves forward. To close out the quarter, revenue came in at $3.8 million, up almost 22%, gross margin was 88%, adjusted EBITDA reached $1.8 million, up almost 76%, and this marks our seventh quarter in a row of positive net income. Across 9 months, we brought in $4.1 million of cash from operations. We finished September with $5.4 million in cash, and deferred revenue hit a record quarter-end balance of $1.6 million. Please assess us based on the overall trajectory rather than any individual quarter. Thank you. Stephen will now return for the closing remarks. In summary of the first 9 months, Le Mans Ultimate continues to expand. Race Control has proven itself a true platform business that competitors will attempt to copy, and our margins and cash are trending favorably. Such consistency demonstrates the way we operate this business. We head into Season 3 now with a solid foundation, meaningful options, and clear ambition, and we anticipate sharing updates on our next call. Thank you for attending and for your interest in Motorsport Games. Operator, the floor is yours again.

Since the December release of the new Race Control version is coming up, what does that mean for the revenue it will bring in, and where does it sit within your model?

Hello, Stephen here. Appreciate the congratulations. It was a strong quarter for us. We're not giving forward guidance about what the Race Control update will actually deliver, but the main thing to note is that Race Control's growth over time has been visible. From the beginning, nearly all of that growth came organically; it has done remarkably well for the business and today stands as a significant revenue driver. Of course, it is linked to how well Le Mans Ultimate, our present game, performs. As I think we mentioned on the past two earnings calls, the plan is to genuinely start putting investment into the Race Control platform. Because it's performed so strongly on an organic basis, we want to move nearer to that technology and that platform, and figure out how to encourage a wider share of the people playing Le Mans Ultimate to take it up. So in order to properly get a handle on that and begin marketing to the players, add new features, and lift uptake—given how well it's been doing—we don't want to let it slip; we've made the decision to start investing in that platform and deliver new features and services to it. Predicting the exact path forward is difficult, I'd say, but we're definitely not allowing it to stall. We'll continue driving it ahead. Peter, is there anything else you'd care to add? Sure. Thanks, Stephen. I believe Stephen has addressed it quite thoroughly. Obviously, this matters a great deal to us strategically. We aren't only focused on what Race Control does for LMU at present. That function is fairly clear. But in our view, Race Control will be a significant piece of where our product lineup goes next, and we're already planning and preparing for that. Given this, keeping that expertise entirely within the company strikes me as the smart move. We said in the script, I believe, that we're moving Race Control nearer to the product groups. My sense is that this assists the team in taking in the kinds of lessons that arise from running a service such as Race Control, which differs somewhat from selling game boxes, so to speak. And per Stephen, there's substantial room for us when it comes to lifting adoption of the service. And yes, my view is that keeping it in-house will simply make us more thoughtful as professionals while we set plans for the future.

All right, thanks. Turning to gross margin, that's a strong result. How much of that can be held onto, and what's the right way to think about gross margin going forward? Could it expand further as you scale?