Earnings Call Transcript - GAME Q1 2025

Operator, Operator

Good afternoon and thank you for joining us for the GameSquare Holdings 2025 First Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. During the call, all participants are in listen-only mode. During the presentation, we will conduct a question-and-answer session. 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 refer to our 10-Q for the year ended March 31st, 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.

Justin Kenna, CEO

Thank you, and good afternoon to everyone joining us on today's call. Our first quarter results reflect steady progress as we continue to optimize our platform with the goal of achieving profitability and positive cash flow in 2025. Results were in line with expectations and were shaped by seasonal trends, low programmatic advertising revenue and the final quarter of FaZe Media's inclusion in our financials. As a reminder, on April 1, 2025, we completed the divestiture of FaZe Media selling our remaining 25.5% stake back to its founders. The transaction valued FaZe Media alone at over $39 million compared to our original $14 million stock-based acquisition of both FaZe Esports and FaZe Media. Beginning in Q2 2025, FaZe Media will no longer be reflected in our financial results, a change we expect to significantly enhance profitability. In Q1, we incurred approximately $2.3 million in operating expenses related to FaZe Media and FaZe Media had an adjusted EBITDA loss of $2.3 million. In addition, GameSquare's gross margin would have been nearly 23% if we excluded FaZe Media revenue in Q1. The divestiture also strengthened our balance sheet, eliminating approximately $10 million of debt as of April 1, 2025. Today, our only remaining debt includes a $2.8 million line of credit and a $1.6 million convertible note held by one of our directors. With improved profitability and a leaner capital structure, we are well positioned to pursue initiatives that can further reduce our cost of capital. This strategic shift also simplifies our business model and lowers our working capital needs. GameSquare now operates across four core areas: SaaS and managed services, agency and media, owned and operated IP, and, of course, FaZe Clan Esports. We have built a differentiated platform that enables deep partnerships with top game publishers and global brands. Our platform is uniquely designed to reach valuable gaming and Gen Z audiences at scale. As brands look to gain market share in a challenging economic environment, we are confident in our ability to grow organically, a view supported by recent partnerships, a robust sales pipeline, and strong momentum heading into Q2. As shared in our last call, our 2025 strategy focuses on expanding managed services, scaling our agency and media business, accelerating growth in FaZe Esports while really prioritizing profitability. Our core SaaS business is off to a great start. Earlier this year, Stream Hatchet signed its largest contract to date with Capcom to support the launch of Monster Hunter Wilds. In the second quarter, we expect to announce a new strategic partnership with another leading game publisher. These collaborations reflect the growing strength of our platform and Stream Hatchet's evolution from a data analytics provider to a full-service marketing engine capable of delivering value to customers on a global scale. The addition of managed services has opened the door to multiple seven-figure opportunities in our pipeline. We anticipate strong growth in this area throughout 2025 and beyond. Furthermore, these engagements are expected to serve as a foundation for long-term SaaS and integrated marketing relationships with major game publishers. Turning to our agency and media segment, our creative agency, Zoned continues to thrive with in-game world building campaigns and by delivering strategic marketing and activation solutions to top-tier brands. As announced today, we signed a new license agreement with Paramount Game Studios to develop a Spongebob SquarePants themed game within Fortnite. This strategic partnership deepens our relationship with Paramount and reflects the success of our previous collaborations. Zoned is also seeing momentum in multiyear partnerships. During the quarter, we renewed our agreement with Jack in the Box, extending the partnership into its third year. This renewal highlights the effectiveness of our strategy and underscores our capability to bridge gaming and pop culture through high-impact digital marketing. Our agency business is also expanding beyond gaming. They are increasingly recognized as go-to experts in digital and youth culture, enabling collaborations with mainstream brands, community-driven initiatives, and new use cases for GameSquare's proprietary technology assets. We continue to make progress growing our owned and operated IP segment after adding proven team members and resources to our platform over the past 12 months. We are advancing long-term initiatives, including our recently announced partnership with GGTech to bring the global esports festival GAMERGY to Dallas in March of 2026. Since its founding in 2016, GAMERGY has hosted over 20 events worldwide in countries, including Spain, Argentina, Egypt, Panama, El Salvador, and Mexico. GameSquare will provide full platform support including event strategy, design, talent, marketing, and operations. We're currently in Phase 1 of planning for GAMERGY Dallas focusing on strategy development, programming, and US market positioning. Phase 2 will begin in June and will emphasize partnership and sales. I'm pleased to report that we've already had a strong pipeline and a lot of strong interests from brands and publishers on this front. As part of our partnership with GGTech, we are launching a collegiate esports initiative to foster community engagement across US campuses. GGTech's University Esports Program, one of the largest in the world has reached over 2,000 universities, 9,000 teams, and 100,000 participants globally. We see this as a high potential avenue to deepen our presence in the collegiate gaming space. Turning to our FaZe Clan Esports business. FaZe Esports had a really strong first quarter, which included $1 million in prize money from winning the February 2025 Rainbow Six Invitational. We are actively pursuing opportunities that leverage the strength of FaZe Esports and continue to monetize the brand. In the coming months, we plan to announce a new naming rights deal for our headquarters at the Star in Frisco, Texas, transforming it into a performance hub and official home of FaZe Clan Esports. This is part of a broader strategy to elevate FaZe Clan Esports as a premier esports asset and drive long-term value. Overall, I'm encouraged by the direction we're heading. In Q1, we made substantial improvements to adjusted EBITDA compared to pro forma results last year. These gains reflect improved gross margin and reduced operating expenses. We are continuing to implement cost efficiency initiatives to further strengthen profitability. With a streamlined structure, a robust pipeline, and positive momentum across key business units, we believe that we're on track to grow revenue and improve profitability organically in 2025. So with this overview, I'd like to turn the call over to Mike to review our 2025 first quarter financial results. Mike?

Michael Munoz, CFO

Thanks, Justin. We believe it's best to compare our reported Q1 2025 financial results to our Q1 2024 pro forma results, which removes complexity from GameSquare's financial statements and includes a full quarter contribution of FaZe Clan for the three months ended March 31, 2024. Comparing our 2025 first quarter reported results to the prior year, total revenue was $21.1 million compared to pro forma revenue of $23.5 million. The 10% year-over-year decrease 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 first quarter was $3.3 million or 15.8% of sales compared to $3.7 million or 15.7% of pro forma sales for the same period last year. Excluding FaZe Media revenue, our gross margin for the 2025 first quarter would have been 22.8%. 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 first quarter was $3.4 million compared to a pro forma loss of $7.9 million last year, an improvement of $4.5 million. We expect the EBITDA trend will continue to improve throughout 2025, with positive EBITDA and cash flow in the second half of 2025 as Justin will outline. So with this overview, I'll turn the call back over to Justin to review our guidance in more detail.

Justin Kenna, CEO

Thanks, Mike. Our first quarter financial results were in line with expectations and we remain confident in our 2025 outlook. We continue to project pro forma annual revenue of at least $100 million in 2025. Achieving profitability remains an essential focus of our 2025 strategy. We continue to target full year gross margin of approximately 20% to 25% and operating expenses around $20 million. Our first quarter results clearly demonstrate the operational progress we're making and we are actively pursuing opportunities to accelerate our path to profitability. As we've noted previously, our business typically sees approximately 60% of annual sales in the second half of the year. As such, we expect seasonality to influence both revenue and profitability in the coming quarters. That said, we are already seeing sequential trends in Q2 to improve further. Based on our current trajectory, we expect to achieve positive cash flow and adjusted EBITDA in the second half of 2025. Two critical milestones in our transformation. We look forward to keeping you updated on our continued progress throughout the year. So with this overview, Lou, Mike, and I are happy to take your questions. Operator, please open the call to questions. Thank you.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Greg Gibas with Northland Securities. Please go ahead.

Greg Gibas, Analyst

Hey, good afternoon, Justin, Lou, Mike. Thanks for taking the questions. Congrats on the quarter and congrats on the expanded relationship with Paramount. Wondering if you could maybe elaborate on the development plan with Spongebob and kind of the general structure of that arrangement?

Justin Kenna, CEO

Yes, I can start here. We're really excited. Our agency team met with Paramount in New York this week, and they had a great dinner altogether last night, which has boosted our enthusiasm for our collaboration. We've been working with Paramount for a while now, previously assisting them with the marketing and growth of Teenage Mutant Ninja Turtles in Fortnite last year, which was an amazing experience. We've also worked on various games with them, including Spongebob. This marks the next phase of our partnership. We have transitioned from being merely compensated for building and marketing to actually co-owning and generating revenue together. The new agreement is for two years, ensuring a minimum of three games each year. We're actively developing one for this summer, which will be hitting the market soon, and we are eager to maximize profitability on that. It's likely that we'll launch it on Fortnite Mobile, which is very exciting. So, the contract spans two years with the potential for three games, and we have the option to expand to eight games annually, with several already in development. You can expect the first game launch in the upcoming months.

Greg Gibas, Analyst

Great. That's helpful, Justin. And if I could follow up, I think you mentioned sequential trends improving in Q2. Just wondering if you could maybe provide some color on what business units you're seeing positive momentum with?

Justin Kenna, CEO

Yes, we expect the most improvement in the third and fourth quarters. Typically, there's a significant increase in activity in the latter half of the year. Our pipeline is strong, with deals closing that should be more visible in the second quarter, especially with full effects in the third and fourth quarters, which we are excited about. In the early part of the third quarter, we also have exciting developments with the Esports World Cup, featuring $60 million in prize money and several teams competing in Riyadh. We anticipate continued margin improvement in the second quarter, having noted that the first quarter was the last time FaZe Media would be included in our numbers. Expect to see substantial margin improvements along with ongoing reductions in operating expenses, which we are focusing on. We expect these operating expense improvements to extend into the second and third quarters. From a revenue perspective, we’ve discussed ongoing growth in our SaaS and managed services segment. We also mentioned an exciting deal with a major game publisher that we plan to announce soon, making significant growth in the SaaS managed services business very encouraging. Our agency business, Zoned, had a slight decline in the first quarter but is highly profitable. We’ve been renewing other client relationships, including with Jack in the Box, and we continue to collaborate with companies like Converse and ESPN. We anticipate improvements in both the second and third quarters for Zoned, as it typically experiences a soft first quarter before ramping up. Therefore, we expect revenue growth in these areas, and our GameSquare experiential business is also seeing increased activity. Overall, we are looking forward to ongoing reductions in operating expenses and margin improvements as we increase revenue, and we are on track to achieve positive EBITDA and cash flow in the latter half of the year.

Greg Gibas, Analyst

Hey, that's great to hear and really helpful. I'll pass it on.

Operator, Operator

Since there are no more questions, 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.

Justin Kenna, CEO

Thanks so much. We tried to keep today a little shorter and more to the point, given that we obviously had our year-end and Q4 earnings call less than a couple of weeks ago. So good to connect again. Thank you, everybody, for making the time. We're certainly pleased with our progress. There's work still to be done and we make no secret out of the fact that getting to profitability is our goal and we have a really clear plan to get there. So we're on track for that in the latter half of the year, and we certainly expect to get a sort of rerating here in the market with that continued improvement. So we're looking to drive value for shareholders and we're very appreciative of the continued support. So thanks for dialing in and certainly looking forward to catching up and giving everyone updates into Q2 and how we're tracking on profitability in the back half of the year. Thanks all.

Operator, Operator

This concludes GameSquare's 2025 First Quarter Financial Results Conference Call. You may disconnect your lines. Thank you for participating and have a pleasant day.