GameSquare Holdings, Inc. Q4 FY2021 Earnings Call

Greetings, and welcome to the Engine Gaming and Media Fourth Quarter and Fiscal Year End Conference Call. Please note that this conference is being recorded. Before we begin, I want to remind listeners that comments made by management during this call may include forward-looking statements. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to various factors. For a description of these risks and uncertainties, please refer to Engine’s Annual Financial Statements and MD&A for the fiscal year ended August 31, 2021, available on SEDAR and EDGAR. Important qualifications regarding forward-looking statements are also found in Engine’s earnings release distributed earlier today and available on SEDAR and EDGAR. Additionally, the information shared in this conference call is time sensitive and accurate only as of today, November 23, 2021, and Engine has no obligation to revise or update any statements to reflect events or circumstances after this call. I would now like to turn the conference over to Mr. Lou Schwartz, Chief Executive Officer, and Tom Rogers, Executive Chairman of Engine Gaming and Media. Please go ahead.

Thank you, and good afternoon, everyone in attendance. I’m Lou Schwartz, CEO of Engine Gaming and Media. Thank you for joining us for our fourth quarter earnings call. I have here with me our Executive Chairman, Tom Rogers. As you can see from our fourth quarter and full fiscal year twenty twenty one earnings release and corresponding investor presentation, which is available on the IR section of our website, we are pleased with the continued progress we have made in building an integrated gaming and media company with complementary assets that drive highly differentiated audience experiences. We have been investing into the future of Engine’s portfolio and proceed continued growth across both our gaming and media business units in fiscal year twenty twenty two and beyond. Our revenue growth for the fourth quarter and the trajectory of revenue growth since the beginning of the fiscal year were real standouts in our results. With the combined media and gaming sides of our business, we saw total revenue for the full fiscal year of thirty seven point two million dollars, up from ten point five million dollars in the previous fiscal year and revenue of eleven point eight million dollars in the fourth and final quarter of the fiscal period, an increase of sixty seven percent over the same quarter in the previous year and twenty two percent higher than the sequential third quarter of this fiscal year. Our subscription software or SaaS revenues grew to six point four million dollars for fiscal year twenty twenty one, up from two point six million dollars from the previous year and two million dollars for the fourth quarter alone, twenty eight percent higher than the third quarter of this year. Advertising revenue for fiscal year twenty twenty one was twenty six point seven million dollars and eight point eight million dollars for the fourth quarter. This is one hundred and sixty three percent better than the same Q4 of twenty twenty of three point three million dollars and a thirty seven percent sequential increase compared to the previous six point four million dollars in the third quarter of twenty twenty one. Moreover, CPMs for ads sold were up thirty six percent and RPMs were also up fifty two percent year-over-year. This resulted from our sales team's aggressive strategy of trading lower yielding programmatic field demand for premium advertising partners and platforms, including the Trade Desk, to which we gained access over the past year. For the full year, game development revenues were four point seven million dollars when including one point three million dollars of deferred revenue, an increase of seventy two percent over the previous year on an apples-to-apples basis. Net loss amounted to forty point seven million dollars for fiscal year twenty twenty one as compared to net loss of thirty two point three million dollars for fiscal year twenty twenty. Net loss amounted to thirteen point five million dollars for Q4 twenty twenty one, as compared to net loss of ten million dollars for Q4 twenty twenty. Net loss for fiscal year twenty twenty one and Q4 twenty twenty one included eight point five million dollars and eight point one million dollars in non-cash expenses, respectively. The most notable of such non-cash expense items include six point five million dollars stock settlement reserve, six million dollars in fair value adjustment on convertible debts, and three point nine million dollars of goodwill impairments. You may also refer to the detailed schedule in our earnings release. As of the end of the fiscal year, we had fifteen point three million dollars in cash on the balance sheet and another eight point six million dollars in receivables. In addition to growing top line revenue, we are managing operational expenses, including our litigation expense with an eye toward cash conservation. At the same time, we are weighing various opportunities to add cash to the balance sheet such as the announced process to explore strategic alternatives for Eden games that would yield substantial cash for Engine. Our outstanding debt that requires cash interest payments is now only six point seven million dollars in principal value. In addition, balance sheet liabilities have dropped to forty one point nine million dollars from the third quarter of fifty point nine million dollars primarily due to further adjustments in our warrant liability. The unique sports and esports gaming experiences we provide are supported by our other businesses, which encompass advertising, influencer marketing, data and analytics, and IP. Significant progress was made in a number of key areas of the business. In the Stream Hatchet/Sideqik business, in addition to Stream Hatchet expanding its partnership with numerous top game publishers such as Activision and Tencent, Engine successfully acquired influencer marketing innovator Sideqik in the fourth quarter, enabling a three hundred and sixty-degree measurement, analysis, and activation of influencer marketing programs across both live-streaming channels and social media platforms. For Frankly Media, we continued to sign sports, esports, and lifestyle digital publishers to our advertising network such as VSiN and Esports.gg, and renewed our largest advertising client, Newsweek. Additionally, the team has continued to drive digital advertising revenues by exceeding a number of internal benchmarks. For WinView, we released a major product update enabling users to enter numerous contests before and during a live sporting event providing significantly more opportunities for users to play. We encourage our shareholders to download and play WinView on our iOS and Android mobile apps. For UMG Gaming, we renewed our partnership with Microsoft's Gears Esports, as well as resigning Logitech's Astro Gaming and adding Logitech's Blue Microphone as major sponsors. Over the last year, UMG also advanced its relationship with a number of key esports industry players having administered and broadcast events with Riot Games, EA, Epic Games, and the twenty twenty one Call of Duty League Champions, Atlanta Faze. For Eden Games, after reaching the milestone of one million units sold of the Gear Club franchise on Nintendo Switch, Eden Games and publisher partner Microids announced they will release the hit game on PlayStation five and Xbox Series X, as well as partner on a new racing game leveraging the IP of The Smurfs' animated characters. We are excited for the opportunities before us and remain confident in the growth potential that will stem from the investments we have made and will continue to make into our core businesses. To speak further on the overall strategy of our business, I would like to pass it off to our Executive Chairman, Tom Rogers.

Thank you, Lou and hello to everyone joining us today. I’m Tom Rogers, Executive Chairman of Engine Gaming and Media. And I'm excited to be here with you all to share some further updates on the future of our company. As Lou mentioned, we are positioned for substantial growth in both our gaming and media division, and this potential is reflected in our recent change in name to Engine Gaming and Media. In renaming the company, Engine Gaming and Media, the company's name now reflects the two broad areas the company's units engage in. Engine’s WinView, UMG, Stream Hatchet and Eden units all contribute heavily to the gaming elements of our company with Frankly, Sideqik and other elements of Stream Hatchet providing key advertising, data, analytics, and influencer marketing capabilities that complement our gaming units. Starting with first quarter financials, beyond the top line revenue breakout we are currently giving, we plan to provide breakouts on gaming and media performance of the company to provide more transparency in our business going forward. We continue to grow the business. We will apply significant discipline to our cash expenditures to slow or defer investments in certain businesses in order to manage our cash appropriately while continuing to drive key areas of the company aggressively forward. Taking a step back, we are a company only slightly over a year old. We have done a lot to integrate the company, selling off less productive units, creating shared services across the company, and minimizing corporate overhead in terms of personnel to preserve as much firepower to invest in our six business units. We have uplisted to NASDAQ. We have initiated activities to protect our intellectual property. We have put together an especially talented management team and a seasoned, very well-respected Board of Directors. We have developed trusted relations across a wide spectrum of gaming, media and sponsorships that include Microsoft, Electronic Arts, Microids, Logitech, Riot Games, Activision Blizzard, Tencent, Take-Two, Facebook, YouTube, United Talent, Corsair, FaZe Clan, Universal Music, HYPERACT, WarnerMedia, Fox and Newsweek. We are continuing to mold our group of businesses together by the themes of social gaming and social marketing, two macro trends, which have enormous tailwind. Moreover, we are highly mindful of driving these businesses in a way that is differentiated so that they not only ride highly investable trends, but do so in a way that investors can understand how Engine’s businesses have enhanced prospects because of the unique ground they trade. We have put all that in place with a very experienced management team that came together in the midst of COVID, barely having any opportunity to work face-to-face, yet in our first year, as Lou related, we increased revenue by sixty seven percent from Q4 twenty twenty to Q4 twenty twenty one. We have a long way to go and plenty of running room ahead. You may ask yourself against this backdrop, why our stock price is down so dramatically since uplisting to NASDAQ? I wish I had a good explanation for that. Especially given that the progress and our advancements along the way have been so positive, much of the decline of the stock seems to be in line with how most small cap gaming stocks have fared over the last six months. However, whatever the reason for the stock value decline we've suffered, we believe that given the multiple paths that Engine has to value creation, many more than the peers to which we are often compared, we will be able to keep our focus on building out these businesses and demonstrating to investors that Engine truly has game.

Thank you. Our first question comes from the line of Michael Kupinski with Noble Capital Markets. You may proceed with your question.

Thank you. And first of all, congratulations on your quarter. It exceeded my expectations. That's always a good thing. A couple of quick questions here. I was wondering, can you give us any color of the possible sale of Eden Games, where are you at in the process? I have a few other questions here as well.

On Eden Games, we have initiated a process with Boutique bank Progress Partners that is helping us evaluate the potential for various strategic relationships that might not only benefit the growth of Eden, but would substantially allow us to take in cash from a strategic partner of Eden. We are in the process of putting together all the information necessary for both inbound interest that has been expressed as well as a number of others that we believe would be interested in some kind of strategic opportunity for us with Eden. We consider it a very substantial opportunity in terms of raising non-dilutive cash for the company.

Great. Thanks for that color. I know that the company has an expensive patent portfolio and I was wondering if you can give us an update on the patent suits against DraftKings and FanDuel?

Sure. A little background here first probably would be useful. WinView, which is a subsidiary of Engine, owns over eighty U.S. patents, many of which relate to online gaming. In July of this year, WinView filed a separate patent infringement lawsuit against both DraftKings and FanDuel. We filed those in the United States District of New Jersey related both to their sports book businesses and their daily fantasy businesses. We alleged that DraftKings and FanDuel infringe four of WinView’s patents. I won't name all the patents now. One relates to methodology for equalizing systemic latencies. One relates to method of conducting multiple contests to scale with a single performance. And the recent status of the lawsuits is that FanDuel filed a partial motion to dismiss as to two of the four patent claims that were alleged in our complaint and we've responded to that and the motion is currently pending. DraftKings filed a motion to dismiss WinView’s complaint, which was withdrawn without prejudice after WinView filed an amended complaint. There's really little I can say at this early stage of the litigation, except to say that while potential damages may be significant if these lawsuits are wholly or even partially successful, at this time, we can't predict the outcome of the suits or determine the extent of potential damages. So, we're in the early stage right now.

Thanks for that. And I know that you have multiple business units and to some they may seem disparate. I was just wondering if you can just outline or tell investors, again, the central theme that leads through the multiple units the company and that provides the basis for unifying and integrating the company. I’m just wondering if you could just add a little bit more color and explain that.

Sure. Important question. If I was really going to go to the heart of the theme that unites the business, I would stress one word: social. We put together social gaming. We focus on social marketing, particularly new focus on social commerce and even social as a means of enhancing other revenue streams to the company. We create experiences that are all about people engaging in the social context. We measure social activity. We provide a way for clients to activate against social communities and really whether you're looking at the gaming side or the media side of the business, social is really that theme that runs throughout. Just to give you a little more color on that as it relates to each of the units, with WinView it’s a game that is about friends or family or fan bases playing against each other. It's not us against the house. UMG gaming, it's a way for players to have pickup games, buddies playing against each other or teams competing against each other. Within that play, you can become a better player or become more recognized in the broader gaming community. Eden games, our Motorsports studio game development unit, is really about driving enthusiast passions among car racing fans, and we are working on many ways to make that even more socially engaging than the kind of gaming competition that it has created today. Stream Hatchet, which is our esports measurement and analytics service, is really all about measuring the esports communities that gather on these live streaming platforms and determining what really has the most traction and social traction, where the pulse of the global gaming community lies. Sideqik, which is our social media platform and influencer analytics business, provides a basis for brands to activate within the social conversation that’s taking place within these communities so that they can gain greater awareness and resonate up their brands. Even Frankly Media, which is our programmatic advertising unit, we are looking for ways that our underlying clients can use contests and competitions to create greater community and with that new revenue streams and enhanced revenue streams, so social runs through everything.

Thanks, Lou. And I have one more question. You obviously have a number of multiple business units and each one has a very large market opportunity. I’m just wondering if you can just remind us what do you view as the key macro trends to drive Engine’s growth?

By the way, this is Tom. Sorry. I didn't indicate that when I took your first question.

Sorry. Go ahead, Tom.

Yeah. There are a number of trends here. And I think that’s what we think makes for a very exciting company. We don't ride a single trend. I think we ride multiple trends. We ride trends in the area of sports television, both their viewership issues and their subscription fee issues. Just like with esports, we ride major trends in their viewership issues and their fee issues. They're kind of near mirrors of each other; sports viewership, with the exception really of the NFL, is overall declining and particularly declining hard among young males. The subscription fee side, cable and satellite fees to sports media are declining very rapidly as cord cutting and other factors weigh in. With esports, viewership is expanding and expanding significantly. I think one of the misnomers about what's going on in the entire gaming arena has been the notion that coming out of the pandemic esports play, particularly on the live streaming platforms, is going to decline. Well, instead what we have seen is total hours actually have increased substantially. Stream Hatchet measures this stuff, and year-to-date in twenty twenty, there were about twenty billion hours of viewing across the live streaming platform. Year-to-date in twenty one, that's up to twenty six billion hours, almost a thirty percent increase in viewing. Yet, on the fee side of esports, it's not that they are increasing or declining; there isn't much fee development at all. Monetizing direct-to-consumer in some way with the viewership that esports has garnered is clearly something that we think we can address. Both of those relate to the experiences that we're creating to attract now younger viewers in particular. Then you get to the issue of how to target and monetize that audience in novel ways that we think are also key trends. When it comes to monetizing and targeting that younger audience, influencer marketing is a massive macro trend that year-over-year is up over thirty percent in spend and really hasn't even begun to hit its stride as the additional trend of social commerce increasingly utilizes influencers, not simply for brand awareness, but as a way that people transact and buy. We are seeing four percent to five percent CAGR growth coming out of social commerce quarter-over-quarter, which is up year-over-year and we saw in the second quarter an increase of over twenty five percent. So, another major trend that we ride there. And of course the programmatic advertising trend is probably the fastest growing of the digital advertising elements. When you combine that with the esports viewer trend where we're trying to monetize advertising taking on esports content sites, you find the nexus of programmatic advertising meeting esports, which we believe is a combined trend that we ride. We look at the landscape of creating experiences for that young male viewer and finding ways to target and market to younger audiences; both comprise multiple trends that we think we are right in the middle of.

Thanks for that, Tom. And I will recognize your voice next time. But that's all I have. Happy Thanksgiving.

Thank you. Thanks very much.

Our next question comes from the line of Jason Tilchen with Canaccord. You may proceed with your question.

Hey, Lou and Tom. Congrats on the strong results and thanks for taking the question. First one for me, when you look across the platform, what do you think are some of the specific differentiated approaches that you're taking, particularly on the media side of the business that have positioned you guys to take advantage of some of these secular tailwinds you've mentioned during the call so far?

Thanks for the question. I think the broadest answer I give to that is that it's not enough to ride macro trends. You've got to be able to demonstrate you have operating businesses that can be recognized as relevant. In our mind, that means unique and differentiated, so they can make their mark in a way that you are giving investors an opportunity to put money against to ride those trends which gives you standout opportunities to create growth. I think across our businesses, we really try to emphasize how that differentiation can be recognized. When it comes to WinView, the notion of people watching and being able to play alone in a social context is key. We think the heart of sports television has always been about social interaction; fans watching together and discussing the game. Social gaming has shown us that what people enjoy is social interaction. Gambling in the sports arena is popular, but that's betting against the house, rather than viewers, friends, and family competing against each other. So really focusing on how we can bring the social experience to sports viewing is a key differentiation. We create unique competitions between fan bases, think of college rivalries as schools engage in football games. We also differentiate in our esports service, where we provide a full suite of capabilities for major game publishers, and we also think what we can do in esports is highly differentiating as well.

Absolutely. And just a follow-up on that. There's a lot of interesting things that clearly as you've discussed across the portfolio, if you were to pick out maybe two or three key drivers of revenue growth as we look towards fiscal twenty two, what would you say those would be?

Lou, I'll let you answer that.

Okay. Thanks, Jason. So, our formula for continuing significant revenue growth really begins with our top line growth across the business units. Our latest fourth quarter revenues were eleven point eight million dollars, representing sixty seven percent growth over the same period in twenty twenty and also is fifty seven percent better than the seven point five million dollars we did in our first fiscal quarter, which is seasonally our strongest period of the year. Additionally, we believe in investing in our products and driving greater differentiation through our B2B and B2C segments will result in higher levels of growth, market adoption, and improved margins across the businesses. For our B2C businesses, including WinView, UMG, and Eden Games, we continue to deliver unique social gaming experiences that will make it easier for individuals to compete against one another, whether that's their favorite video game, sporting event, or even a multiplayer mobile racing game. There are billions of dollars of invested capital behind the sports and esports content being produced today, and we are uniquely positioned to leverage that invested capital and overlay our social experiences to drive deeper audience engagement and monetization. For our B2B subscription software and data services, we continue to provide deeper insights and targeting in a calculus world that enables publishers, brands, merchants, and performance marketers the ability to target audiences. Today, we sit in a very unique position in the creator economy by not only enabling discovery and connection of influencers but we also provide the measurement and facilitation of payments to such influencers in an end-to-end social e-commerce platform. At the same time, we continue to look for opportunities to partner with bigger companies or acquire compatible businesses that support our underlying products and growth themes at very attractive multiples. And I believe our growth strategy is already beginning to pay off. SaaS revenue from fiscal year twenty one grew to six point four million dollars from two point four million dollars in fiscal year twenty or one hundred and forty seven percent and typical revenue multiples for SaaS companies can range from six to twelve times revenue. We continue to grow our SaaS revenues by twenty eight percent compared to previous Q3. Our growth margins on business units outside of advertisements are high at scale and we continue to emphasize growth in higher contribution margin lines of business. Unlike other single solution providers, as Tom stated, Engine has multiple paths to value creation, including sports gaming, esports viewership, influencer marketing and monetization, programmatic advertising, data, and IT licensing. That's it.

Great. Thanks a lot for the detailed answers there and have a nice holiday weekend.

Thanks, Jason.

Thank you. Operator, I'll turn it back to you.

Thank you everyone for joining today. We look forward to continuing the dialogue and updating you on our progress ahead. Have a great holiday weekend.

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.