GameSquare Holdings, Inc. Q2 FY2025 Earnings Call

Good afternoon, and thank you for joining us for the GameSquare Holdings 2025 Second Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. Before management discusses the results, I'd like to remind everyone 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 10-Q for the quarter ended June 30, 2025, which will be available on the company's website or with the Securities and Exchange Commission. I will now turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead.

Thank you, and good afternoon to everyone joining us on today's call. 2025 is on track to be a transformative year for GameSquare as we aggressively execute against a bold vision aimed at building a leading digital-first platform at the intersection of media, technology, gaming, and onchain finance. While our roots are in media, technology, and gaming, and those businesses continue to deliver strong revenue and operational performance, we have also recently launched a differentiated crypto-native treasury management strategy. Since its official launch in July, using the August 13, 2025, closing price, our treasury strategy has generated over $19 million in unrealized gains, and we now hold 15,630 ETH with a current market value of $74.3 million. We believe GameSquare is one of only a few companies globally that combines a proven high-performing operating business with a large-scale actively managed Ethereum treasury. This unique model positions us to capture meaningful appreciation and yield from our crypto strategy while leveraging the financial and operating performance of our core businesses. Our operating businesses and onchain treasury management strategy are complementary. In fact, our growing onchain presence is beginning to fuel new opportunities in our operating business, creating the potential for a powerful growth flywheel. Our strategy is also designed to smooth the volatility of the crypto market by balancing it with consistent diversified revenue streams. Over time, the cash flow and value creation from our treasury activities are expected to fund additional ETH purchases, opportunistic share repurchases, and reinvestment in our core businesses. With over $71.5 million in trailing 12-month revenue and a scalable onchain model built for both growth and resilience, this structure sets GameSquare apart and creates an extremely compelling value proposition for our shareholders. So with this, I'll jump into our operating performance before I share our early observations from the launch of our treasury management strategy in the third quarter. As we stated on our first-quarter earnings call, our priorities this year are focused on achieving profitability, streamlining operations, and driving higher-margin revenue opportunities across our core media, technology, and gaming businesses. I'm pleased with our progress. On a consolidated basis, we've reduced SG&A expenses by 15% and expanded gross margin by 120 basis points, driving a 16% improvement in adjusted EBITDA year-over-year. Additional restructuring efforts are underway, and we've identified a further $5 million in annualized savings that are expected to begin contributing in the third quarter. We also anticipate stronger gross margin in the second half of the year, supported by higher seasonal revenue and a more profitable mix of business. During the second quarter, we completed the divestiture of FaZe Media, selling our remaining 25.5% stake back to its founders. This valued FaZe Media at over $39 million compared to our original $14 million stock-based acquisition of both FaZe Esports and FaZe Media and further simplifies our business while reducing working capital requirements. Today, GameSquare operates across four focus areas: SaaS and managed services, agency and media, owned and operated IP, and FaZe Clan Esports. We believe this differentiated end-to-end platform enables deep partnerships with top game publishers and global brands. Our reach into gaming and Gen Z audiences is unmatched. And as brands compete for share in a challenging economic environment, we are confident in our ability to grow organically, supported by recent partnerships and a robust sales pipeline. While consolidated revenue in the second quarter was slightly below expectation due to extended closing timelines of several last deals, we're entering the seasonally strongest part of our year with significant momentum. The demand environment in our agency business is accelerating. Our pipeline is the strongest it's been all year, and many of the opportunities that have shifted out of Q2 are now on track to close in the coming months. We expect meaningful sequential growth with Q3 revenue higher than Q2 and Q4 building further on that growth, supported by both new wins and expansion with existing partners. This momentum positions us for a powerful finish to 2025 and a strong launch into 2026. We are also advancing multiple growth initiatives across the portfolio, including scaling our Managed Services business, launching new products, and expanding owned and operated relationships. Highlights here include Stream Hatchet's largest contract to date, supporting the launch of Monster Hunter Wilds. This week, it also announced a new managed services agreement with Ubisoft to support the launch of Tom Clancy's Rainbow Six Siege. These wins underscore Stream Hatchet's transformation from a pure data analytics provider into a full-service marketing engine, delivering measurable value for customers on a global scale. During the quarter, Stream Hatchet launched a proprietary AI-based solution that helps game publishers, global brands, and agencies connect with Gen Z and Millennial audiences across leading live streaming and social platforms. This engine uses machine learning to decode creative content, audience sentiment, and engagement patterns, enabling brands to identify high-performing influencers and design campaigns with surgical precision. Within GameSquare Experiences, we've launched a collegiate esports program to engage campuses nationwide in partnership with a national retail chain. In July, GameSquare Experience successfully produced and managed the 100 Thieves Summer Block Party, further showcasing our ability to execute large-scale high-profile events. Importantly, the strength of our operating momentum complements our onchain treasury strategy. The same relationships, reach, and capabilities driving wins in media, technology, and gaming are opening doors with crypto-native companies that see value in our expertise and our access to audiences. We are currently in active discussions with more than 15 crypto-native organizations, representing eight figures of potential deal value that are seeking partners with proven capabilities to help them reach and engage audiences at scale. GameSquare's established operating platform positions us uniquely to meet this demand. We believe these relationships will not only deepen our presence in the onchain ecosystem but also generate incremental high-margin revenue streams. Based on our current pipeline, we expect initial wins to begin in the third quarter, like our recently announced $2.5 million agency of record win with Azuki and building further into the fourth quarter, creating another powerful growth driver for our business. Our operating momentum makes this the perfect time to review our emerging onchain treasury strategy, which we officially launched on July 1. Our goal is straightforward: to build one of the most sophisticated yield-generating Ethereum strategies of any public company and to do so alongside a high-performing operating platform. Unlike pure crypto plays, our model is designed to compound value while buffering against volatility. We are pursuing a three-pronged crypto-native growth strategy, which includes: first, an Ethereum-based treasury strategy through Dialectic's onchain yield platform targeting annualized yields of 8% to 14%. This kicked off and we're excited to provide yield results at the end of the month. Second is our financialized art and culture asset strategy that looks to acquire culturally significant digital assets and NFTs targeting 6% to 10% annualized stablecoin yields; and third and finally, a Web3 operating strategy, leveraging GameSquare's creative agency and gaming businesses to help crypto-native organizations grow global audiences while also adding high potential digital assets and yield opportunities to our treasury. This has already resulted in $2.5 million of high-margin revenue for the back half of the year for our agency of record deal with Azuki. The cash flow and appreciation from these activities are intended to fund additional ETH purchases, return capital to shareholders through buybacks, and reinvest in our operating business, creating a self-reinforcing cycle of growth across both pillars of our company. We have built a dedicated onchain platform supported by best-in-class infrastructure and guided by proven leaders in the crypto and DeFi space. This includes the team at Dialectic who bring deep expertise in structuring, managing, and optimizing institutional-grade onchain portfolios. Our strategy is also supported by seasoned advisers such as Ryan Zurrer of Dialectic, Robert Leshner of Superstate, and Rhydon Lee of Goff Capital, all of whom have been instrumental in refining our portfolio construction, risk management, and yield generation strategies. This platform allows us to actively manage our ETH holdings in real time, identify high conviction opportunities, and move capital efficiently across strategies. Importantly, the systems we've put in place are built for scale, enabling us to increase capital deployment as our treasury grows while maintaining robust oversight and compliance controls. Although still in its early days, our onchain strategy has already begun to generate meaningful results. As of August 13, 2025, we held 15,630 ETH with an original cost basis of $55 million and a market value of $74.3 million, reflecting an average cost per ETH of approximately $3,519 and a market price of $4,751. We own one of only 24 Ape CryptoPunks in existence acquired on July 24, 2025, for $5.15 million or 1,084 ETH. Our NFT yield strategy managed by 1OF1 is targeting annualized yields of 6% to 10%. On August 1, we funded our yield strategy with Dialectic that is currently tracking within our targeted 8% to 14% annualized return range. As of August 13, 2025, our ETH, NFT, and cash totaled $99.4 million or $1 per share, with total debt of just over $1 million. As you can see, GameSquare has never been in a stronger financial position. Its strength provides significant flexibility to pursue strategic initiatives, invest in our operating platform, and return capital to shareholders. Reflecting this confidence, our Board of Directors has approved a share repurchase program authorizing the company to buy back up to $5 million of our common stock. The program will be funded directly from the net proceeds of our onchain yield strategy, ensuring that our treasury activities directly translate into shareholder value creation. So with this overview, I'd like to turn the call over to Mike to review our 2025 second quarter financial results. Mike?

Thanks, Justin. It's important to note that our second-quarter financial results do not reflect the July launch of our treasury management strategy. The contribution of this strategy will begin to be reflected in our financial results starting in the third quarter. Comparing our 2025 second-quarter reported results to the prior year, total revenue was $15.9 million compared to $17.8 million. The 11% year-over-year decline in revenue was primarily due to a reduction in programmatic advertising revenue, partially offset by growth across our other business segments. Gross margin for the 2025 second quarter was $2.4 million or 15.3% of sales compared to $2.5 million or 14.1% of sales for the same period last year. We expect gross margin to improve going forward, supported by a more profitable revenue mix in 2025 and additional actions underway to improve gross margin. Adjusted EBITDA loss for the 2025 second quarter was $3.5 million compared to a loss of $4.2 million last year and a loss of $3.0 million for the first quarter of 2025. Before I turn the call back over to Justin, I want to quickly review some balance sheet items after the second quarter that take into account our recent equity offerings, onchain purchases, and debt repayments. As of August 13, 2025, GameSquare had approximately 99 million common shares outstanding, cash and cash equivalents of $20 million, onchain treasury assets of $79.4 million, total debt of $1.25 million, and a market cap to net asset value ratio of 0.92x. As you can see, GameSquare has a strong financial position with excellent liquidity to pursue strategic initiatives, invest in our operating platform, and return capital to shareholders. So with this overview, I'll turn the call back over to Justin.

Thanks, Mike. As a result of the strong performance since the launch on July 1, 2025, of our Ethereum-based treasury strategy and continued restructuring initiatives aimed at streamlining operations and accelerating the path to profitability, we plan to reintroduce full-year guidance in the third quarter of 2025. That said, I want to provide investors with the following assumptions that we believe will add some insight into why we expect the second half of 2025 to be meaningfully stronger. As we've discussed, we launched our Ethereum yield strategy on August 1, which is targeting annualized onchain yields of 8% to 14%. Approximately 60% of 2025 revenue is expected to be generated in the second half of the year, in line with typical seasonal trends. We expect revenue growth combined with a more profitable mix of revenue will further improve consolidated gross margin in the second half of the year. Opportunities that shifted out of the second quarter are now on track to close in the coming months. We expect meaningful sequential growth with third quarter revenue higher than the second quarter and fourth quarter building further on that growth, supported by both new wins and expansion with existing partners. We expect additional wins in the crypto space like the $2.5 million recently announced Azuki deal to continue that were not modeled into our original numbers. Ongoing restructuring initiatives are expected to lower operating expenses in the second half of 2025, with approximately $5 million of additional annualized savings expected by the end of the third quarter. Taken together, the strength of our operating platform, the seasonally stronger revenue mix, our ongoing expense discipline, and the contribution from our onchain treasury strategy gives us confidence in a significantly improved performance in the back half of the year. GameSquare is building what we believe is a category-defining model that combines high-performance operating platform with one of the most sophisticated actively managed Ethereum treasuries in the public markets. Our dual strategy is designed to deliver growth, yield, and appreciation while providing the resilience to outperform across market cycles. We are focused on expanding our reach profitably into traditional and onchain economies and translate this advantage into meaningful lasting shareholder value. We believe the second half of 2025 will show the full potential of what our platform can deliver. So with this overview, Lou, Mike, and I are happy to take questions. Operator, please open the call to questions.

The first question comes from Greg Gibas with Northland Securities.

Great. Justin, Lou, and Mike. Congrats on the early progress and success with that Ethereum treasury strategy. I wanted to just kind of follow up on your, I guess, revenue performance in terms of a little lighter than you expected. Could you provide maybe a little bit more color on what maybe panned out differently than expected? And simply, was it kind of deal timing? Or were there other impacts? And appreciate the comments on kind of the expectations into the back half.

Yes, absolutely. Thank you, Greg. There are three main factors that influenced our performance in Q2, and the most reassuring aspect is that they are macro-related and these deals are still very much in play. First, we experienced the impact of tariffs, particularly with two significant multi-year deals with global gaming companies based in China. These seven-figure deals haven't vanished, but their progress has certainly slowed, especially one that we anticipated finalizing quickly, which was affected by the confusion surrounding tariff announcements. As a result, we've seen some challenges in advertising and agency segments. The positive takeaway is that these deals are still viable, and we have tangible inventory. I'm hesitant to use the term pipeline too much because these deals are converting into actual revenue. For instance, the recent Azuki deal is set to bring in $2.5 million in high-margin revenue that wasn't even included in our projections. Therefore, I am optimistic about Q3 and Q4 revenue, despite Q2 being a bit softer. The second factor was a slowdown in our programmatic advertising revenue. This part of our business has been low-margin, and as we aim to be a next-generation media company, our main focus is not on programmatic advertising but on developing meaningful connections between brands and audiences through large-scale campaigns in higher-margin areas. You can expect a sustained emphasis on this aspect, which will contribute to material margin growth in the latter half of the year. Although our revenue fell slightly, year-over-year adjusted EBITDA has improved. To highlight this, if we consider the EBITDA aspect going into Q3 and our path to profitability while accounting for a monthly burn of just over $1 million, combined with $5 million in annualized restructuring costs and potential revenue growth from our current Ethereum strategy, we are already nearing breakeven. We're confident about our operating business. The third factor involves a renewed emphasis on the crypto space, with over 15 active discussions currently. This isn't a shift in our services, but we've seen a surge of interest from blockchain gaming companies, exchanges, wallets, and neobanks wanting to engage youth audiences and traditional gaming audiences at scale. In summary, we've faced some macro challenges, including tariffs and a slowdown in programmatic revenue, but we've also seen year-on-year EBITDA growth. We understand there's still work to do, but we believe there's a clear path to profitability. We aren't solely relying on our unrealized gains in Ethereum, which currently stands at $19 million. While we're trading below cash value in Ethereum, we believe there is significant upside. However, we firmly believe that from an operational perspective, we will reach profitability soon.

Thank you for the detailed explanation; it makes sense. You addressed my follow-up question, but I have two more. You mentioned more than 15 active discussions in the crypto space, which is exciting. Can you provide some insight into the timing of these opportunities? Are they expected to be long-term or could they contribute in the latter half of the year? Lastly, regarding your guidance, do you have an idea of when you’ll have a clearer understanding of your treasury strategy and its progress? If possible, could you also share where you expect to see savings from the additional restructuring in the business?

Yes, absolutely. Firstly, I'll discuss the restructuring efforts. We have been working on consolidating our technology platforms, Stream Hatchet and Sideqik, and we've made significant progress in that area. We've continued to enhance efficiencies in the business, integrating engine gaming, and implementing strategic plans over the past two years. We’re focused on streamlining our offerings, and you should see the positive impact of these efforts in Q3 and Q4 as we aim to operate more efficiently. Our primary goal is to achieve profitability and scale from there, leading us to operational efficiency and growth into 2026. Regarding our involvement in the crypto revenue space, it has been quite interesting. We’ve been observing the market for some time and are not competing to accumulate the most Ethereum. We believe that our strategy is unique, particularly because of our exclusive partnership with Dialectic, which allows us to generate substantial yields on Ethereum. At the end of this month, we plan to report our first month's actual yield results, which we believe will showcase our differentiated approach, especially since our core businesses intersect with this space. We operate within technology, agency, events, marketing, and media, and there's significant overlap with the digitally native, crypto communities. We've previously collaborated with various blockchain gaming developers, and one of our largest sponsors on the FaZe Esports side is Rollbit, a crypto-native bidding site. We've focused on growth, and we anticipate seeing significant results in the latter half of the year. This isn’t a long-term strategy that takes years to yield results; we’ve actually seen substantial interest since announcing our treasury strategy, and have worked to educate our staff on this space. We believe we are well-positioned as a leading agency in Internet culture, especially given how fragmented both the gaming and crypto spaces are. These sectors aren’t engaging traditional agencies like many gaming publishers and brands do. Therefore, there’s a substantial opportunity for us in IRL events, marketing campaigns, and content creation. For example, we just announced a deal with Azuki worth $2.5 million, which will be accounted for in Q3 and Q4, and we expect to finalize numerous other deals in Q3 that will also contribute to our revenue in Q3 and Q4 moving into next year.

This concludes the question-and-answer session. I would like to turn the conference back over to Justin Kenna for any closing remarks. Please go ahead.

Thank you, everyone, for joining today's call. We've received significant inquiries regarding our treasury strategy and the factors contributing to the company's valuation being below cash and Ethereum. While we share the frustration as management, we remain committed to moving the business forward and achieving profitability to validate our yield strategy, ultimately driving long-term shareholder success. This strategy is designed for the long-term; it's not solely about benefiting from Ethereum's price appreciation, despite the positive $19 million unrealized gain. Our focus is on establishing real yield that can be reinvested into our operations. We believe we are well-positioned as a service provider in the crypto space, which represents a new vertical and revenue stream for us. Although we will continue to lead in the gaming sector, we are optimistic about our growth prospects. I want to express my gratitude to our investors, and we're here to answer any questions about our strategy. We feel very positive about our current position and future direction, especially as we approach Q3 and Q4. Our determination to achieve profitability remains unwavering, and we look forward to updating our shareholders with our Q3 results. Thank you again for being here today; the company truly appreciates it.

This brings to a close GameSquare's 2025 Second Quarter Financial Results Conference Call. You may disconnect your lines. Thank you for participating, and have a pleasant day.