Super League Enterprise, Inc. (SLE) Q3 2020 Earnings Call Transcript

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Super League Gaming's Financial Results for the Third Quarter Ended September 30th, 2020. Joining us today are Super League's President and CEO, Ann Hand; and CFO, Clayton Haynes. Following their remarks, we'll open up the call for your questions. Before we go further, please take note of the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. This statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and to the company's reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ. I would like to remind everyone that this call will be available for replay through November 18th, 2020, starting at 8:00 P.M. Eastern Standard Time tonight. A webcast replay will also be available via the link provided in today's press release as well as the company's website at www.superleague.com. Now, I would like to turn the call over to the President and CEO of Super League Gaming, Ann Hand. Ann?

Good afternoon and thank you for joining us. So, let's get started. Here we are further along in what continues to be a strange and challenging year for everyone personally and professionally. The world is not only still dealing with the pandemic and a possible resurgence, but also a great deal of ambiguity in a significant election year. We continue to hope for an end to the pandemic and a return to calm and some degree of normalcy for everyone. And yet gaming continues to be one of the brightest sectors in the economy. Sales and downloads of console video games are about to enjoy a big sales boom with the new PlayStation and Xbox consoles. And with even wider reach, we continue to see a surge in the very accessible mobile gaming segment, which represents 30% of all mobile downloads and 10% of the time spent on mobile devices. On average, millennials in North America spend $111.54 on games per month, marking them up to be the first generation of lifelong gamers. And the advent of 5G and more edge of cloud gaming means less lag, lower latency, which will enhance gamers’ experience and stickiness to the games they enjoy grow more. These are all good things for Super League by further democratizing competitive gaming for the masses. And Esports, the most heightened form of competitive video gaming, continues to grow in terms of participation, both in players and audience. Investors and journalists often ask me if this outpouring of engagement in gaming and the consumption of gaming-related content will ebb when there is a cure for the pandemic. And my reply is always the same: gaming continues to solidify its position as a dominant form of entertainment, bigger than TV, much larger than the global film box office, and with fan bases and communities larger than most other professional sports leagues; and that was already set in motion prior to COVID. So, now let's turn to our third quarter. We told you when we reported our 2Q results that we had seen a surge of engagement on our platform, further powered by sheltering in place. Gaming is an exceptional way to stay connected to friends and family even when you are not in the same home or town. Hence, in 3Q, it should be of no surprise that we continue to see strong growth in the leading key performance indicators or KPIs. The first KPI is registered players, and by the end of September, we reached close to 2.5 million users on our platform, almost three times our year-end 2019 user base, and the year isn't done yet. Additionally, we have pushed nearly 50 million hours of gameplay through our platform in the first nine months of the year versus 15 million hours for the full year of 2019. And the most critical KPI is audience. That's the top of the funnel. It was our rallying cry last year to grow the audience from virtually zero at the start of 2019. Last year, we materially exceeded our target and hit 120 million views by the end of 2019. In the first nine months of 2020, we have once again blown past our target, hitting 1.4 billion views through September, 15 times the prior year level. And even more importantly, we are making progress on monetizing this engagement. COVID took its toll on all of us. No one was exempt, and advertising froze for a bit. We repositioned quickly, and we are pleased to show strong revenue growth in our third quarter, especially considering the ongoing caution of advertisers amidst the pandemic. That itself is worth a pause. While so many companies have taken an obvious hit to revenues in 3Q, ours more than doubled quarter-over-quarter as well as year-over-year, aided by many positive indicators in our sales pipeline, including a signature deal with Netflix. So, given sponsorship and advertising is our largest revenue stream today, let's dig into this. We have been laying the foundation this year, augmenting our sales team, improving our sales efficiency, building our audience, and increasing the amount of premium high-CPM advertising inventory on our platform. Aside from the obvious improvement in recognized revenue, we see some other positive trends. First, the overall size of our active opportunity pipeline, as of today, has grown to $5.4 million. That is double the size from last year — from last quarter, with an average deal size of approximately $70,000. That doesn't mean we will win all of these deals, but it is a good sign to see our opportunity set growing, and this is a dynamic number. This translates to roughly 80 identified opportunities, but even more exciting, we see a nice trend on repeat advertisers that now represent 37% of the value of our active pipeline, over $2 million of that $5.4 million. In addition, the size of repeat customer opportunities has grown from $37,000 for an average deal in 2Q to $71,000 for an average opportunity or deal in 3Q. This reinforces that advertisers find our audience immensely valuable and are coming back to give us more advertising dollars. And I am pleased to say that we have stepped more into premium programmatic advertising inventory since our last call. We have made investments in video ad units, and the initial pilot is showing CPMs in the $10 to $15 range. We have plans to grow that capacity so we can further monetize more and more of our valuable impressions without adding additional costs of sales. Finally, on the advertising front, we are just scratching the surface in how we further monetize derivative content from our platform for more advertising and content licensing dollars. Today, we have created 123 original episodes for Snapchat alone. That is a social channel, where right now, we have approximately 1.5 million followers, including the number one ranked show related to the Game of Minecraft. This is a nice new revenue source for us, an advertising stream that generates recurring revenue through our advertising revenue-sharing arrangement with Snap. The key here is that we are seeing exciting progress in our direct sales efficiency and move toward premium programmatic. So, we have significant upside as we continue to grow our network capacity and mature our ad products and sales force capability. And I would be remiss to not add that we continue to explore use cases for our patented fully remote live stream broadcast technology beyond the application of gaming. This as well might generate new sources of revenue for the firm going forward. Now to our second revenue stream, while nascent, we see good promise in our ability to monetize the gaming consumer on our platform as well. In the early days, as we were building our community, very similar to other social platforms, we focused on low-friction user acquisition, which really meant free-to-play and watch entertainment. That was allowing us to gain critical mass with our player and audience base. Starting in late 2Q this year, we began testing a microtransaction marketplace, and I reported on our last call some promising early signs. While a very small percentage of our players are spending, the average basket size of paying customers was around $10 per month, and on a monthly active user basis, we were seeing a revenue per user in the $0.04 per month range. Over the last few months, we have grown the average basket to $11.33 per month for the paying user, and we've seen a 30% jump on a monthly basis to about $0.055 revenue per user. Later this month, we will be expanding our alpha marketplace with new products that we expect will speak to a wider segment of our player base and see more conversion in the funnel. It's still relatively small, but we see real potential to monetize our strong base of over 2 million players and make this a more meaningful part of our revenue story in 2021 and beyond. And even as we continue to expand our advertising inventory, improve our sales efficiency, and grow our direct-to-consumer monetization, we are still controlling our operating costs, allowing us to see revenues grow faster than expenses. We have managed to not only redirect more of our expenditure to be revenue-facing, but also absorb the additional operational effort that comes with more audience, more users, and more advertisers, while holding our costs relatively flat versus the prior year. At this point, I will turn the call over to our CFO, Clayton Haynes, who will provide an overview of the third quarter financial results, after which I will come back on with some closing remarks. Clayton?

Thank you, Ann, and good afternoon to everyone, and thank you for joining us for today's third quarter 2020 earnings conference call. In summary, our Q3 2020 highlights included a 105% increase in total revenues, reflecting a significant increase in advertising and content sales revenues relative to the comparable prior year quarter. Our cost of revenue increased 70% from the prior year quarter, which was less than the 105% increase in total revenues, resulting in average margins of 54% in the third quarter of 2020 compared to 45% in the prior year quarter, as we continued leaning into our largely digital and online offers. Excluding non-cash stock compensation charges, our operating costs for the third quarter of 2020 rose a modest 10% compared to the prior year quarter, reflecting an increase in cost related to the build-out of our direct sales force, as we continued to invest in the monetization of our ad inventory and an increase in platform infrastructure costs, driven by the surge in engagement during 2020. During the third quarter of 2020, we continued to be focused on increasing monetization and cost reductions where possible. Diving into the details, from a revenue perspective, as summarized in our earnings release earlier today, third quarter 2020 revenue increased 105% to $718,000, the highest revenue quarter in the company's history, compared to $350,000 for the third quarter of 2019. The increase was primarily due to a significant increase in advertising and content sales revenue relative to the prior year quarter, reflecting the positive impact of the build-out of our direct sales force earlier this year and our continued focus on accelerating the monetization of our growing advertising inventory and surge in engagement. Turning to the third quarter of 2020, consistent with what we have done historically, we demonstrated the ability to win significant advertising deals with top-tier media companies, and we look forward to our salesforce securing these types of deals in future periods, though timing will vary. As with all advertising-based business models, COVID-19 has had an impact on the timing and distribution of advertising revenue, but we feel we are recovering well. We have made substantial progress in building our views and impressions over the first three quarters of 2020 and expect our advertising inventory to continue to grow so that as advertisers and brands continue to rebound, we are ready to take advantage of the monetization opportunities. We continue to categorize our revenues into two main segments, those being sponsorship and advertising revenues and direct-to-consumer revenues. Sponsorship and advertising revenues, including brand sponsorships, increased by 98% to $677,000 compared to $342,000 in the third quarter of 2019, and comprised approximately 94% of revenues for the third quarter of 2020 as compared to 98% of revenues in the third quarter of 2019. Direct-to-consumer revenues, primarily comprised of the sale of digital goods related to our Minehut digital property, accounted for approximately 6% of revenues for the third quarter of 2020, up from 2% in the third quarter of 2019, reflecting, in part, the surge in engagement across all of our digital properties since the first quarter of 2020. We continue to emphasize free-to-play offers, consistent with our focus on increasing the volume of new gamers and spectators engaging with our proprietary technology platform and esports brand. We continue to focus on ramping up overall direct-to-consumer monetization, including sales of digital goods through our microtransaction marketplace, as Ann mentioned. Third quarter 2020 cost of revenue increased 70% to $327,000 compared to $192,000 in the comparable prior year quarter, a 33% lower percentage increase than we saw in revenue for the same period. The significantly lower increase in cost of revenue on a relative basis was driven by lower costs associated with the increase in advertising and content sales revenue and our largely digital and online revenue-generating activities in the third quarter of 2020. Cost of revenues fluctuate period to period based on the specific programs and revenue streams contributing to revenues each period, and the related cost profile of our advertising and content sales activities and digital, online, and/or physical, in-person offers occurring each period. Third quarter 2020 GAAP operating expenses were $4.7 million, slightly higher than the comparable prior year quarter. Non-cash stock compensation expenses decreased by $267,000 to $470,000 as compared to $737,000 in the third quarter of 2019. This decrease was offset by an increase in sales and marketing personnel costs related to the build-out and investment in our direct sales force earlier this year and an increase in technology platform infrastructure costs, primarily driven by cloud services, consistent with the surge in engagement we've experienced during 2020, and lastly, the impact of higher insurance-related costs relative to the prior year. On a GAAP basis, which includes the impact of non-cash charges, net loss for the third quarter of 2020 was $4.3 million or $0.36 per share compared to a net loss of $4.4 million or $0.52 per share in the comparable prior year quarter. Excluding non-cash stock compensation charges, our pro forma net loss for the third quarter of 2020 was $3.8 million or $0.32 per share compared to $3.7 million or $0.43 per share in the comparable prior year quarter. The weighted average number of shares outstanding for both GAAP and non-GAAP earnings per share was approximately 12 million shares in the third quarter of 2020 compared to approximately 8.5 million shares in the prior year quarter. As described in our release today, pro forma net income or loss is a non-GAAP measure that we believe investors can use to compare and evaluate our financial results, along with other applicable KPIs and metrics discussed by Ann earlier. Please note that our earnings release contains a more detailed description of our calculation of pro forma net loss as well as a reconciliation of pro forma net loss with the most directly comparable financial measures prepared in accordance with GAAP. From a balance sheet perspective, as of September 30, 2020, we had $10.3 million in cash, approximately $11.8 million in working capital and total shareholders' equity of $15.2 million. This includes approximately $8.4 million in net proceeds from the sale of 4.98 million shares of common stock pursuant to an underwritten public offering during the third quarter, as previously reported. As of September 30, 2020, we had 15.48 million shares outstanding. Our current monthly net cash burn rate continues to be in the $1.2 million to $1.3 million range. We continue to be focused on reductions of our cost structure and are continuing to work with our functional leaders within the organization to identify additional cost-saving areas. As previously reported, we vacated approximately 75% of our office space in Santa Monica, resulting in significant rent and facilities cost savings going forward, and we continue to work with existing and new platform and infrastructure service providers to reduce those costs going forward as well. In summary, in Q3 2020, we saw the highest revenue quarter in the company's history, driven by the significant increase in our advertising and content sales revenues relative to the prior year quarter and favorable average margins, reflecting our largely online and digital activities in the quarter, all while identifying areas for cost reduction in future periods. This was balanced with our focus on the acceleration of monetization of our rapidly growing advertising inventory and investment in our growth initiatives in response to the overall surge in engagement during the period. With that, I will turn the call back over to Ann for some additional remarks.

Thanks, Clayton. I want to express how pleased I am with the progress we're making. Seizing the opportunity in front of us, this gaining of critical mass, to begin to monetize our growing audience, the company is right now at a high level of productivity and commitment to grow shareholder value. I can see it in the energy in every meeting, especially in our weekly sales pipeline and revenue review session, where the hunger to win more and bigger deals is high. We are only just beginning to show off how our end-to-end technology, enabling mass participation, competitive gaming, and viewing entertainment can be leveraged. I continue to believe that one of our most unique distinctions is that while we are small in size, and early in our revenue story, we punch above our weight with partners, advertisers, and the gamers themselves. So what should you expect of us in the coming months as we try to further develop the network effect that is growing between our community of players, viewers, partners, and content? We'll continue to grow our audience and engagement, increase our monetizable advertising inventory and sales force effectiveness, increase our consumer revenue per user, bring more players into our monetization funnel, we'll continue to grow our addressable market with more game titles and expanded offers, and we'll continue to progress material strategic partner conversations that provide us commercial scale, but also a potential source of growth capital. Our goal is clear, to continue to build our large, diverse, and young community of gamers through engaging content and entertainment that will enable us to capture a growing share of the advertiser's wallet and our consumers' wallet. I want to close by being crystal clear with our investors and analysts that we are playing for high stakes here. I consider my day job to deliver transformative moves that can create real leverage and scale for the company. So with that, you have our full commitment. And we are now happy to take any questions that you might have. Thank you.

Our first question comes from Brian Kinstlinger of Alliance Global. Your line is open.

Hi. Good evening, guys. Thanks for taking my question. Can you talk about the two large ad campaigns or the two separate large brands? I think, one, you announced Netflix now. And the second, I think you intimated at least as much, I believe it was the LD conference that you had a second. So did both of these campaigns go off? And how do they perform in the customers' eyes? And have you received follow-on campaign from these customers as well?

Yes, absolutely. So, I thought it was important in the call that we emphasize how well we're doing on the repeat side of the pipeline. Certainly, we do provide full performance reports to all of our advertisers, and we are seeing that we're outperforming on all metrics. And that's, hence, why we're starting to see that repeat business. More importantly, it's not just the repeat business, it's the fact that the size of the deals are nearly double. So these advertisers are willing to put more dollars to work because of our outperformance. We are seeing pretty consistently new business starting to flow through with media-related companies, like Netflix or Disney+, people who are every week releasing new content on their streaming platforms and they are looking for ways to reach those desired audiences and drive them to those platforms. So we do continue to see repeat business with them. We also just ran a very successful campaign with a toy company, Monster Toys, where as well, we overdelivered on performance. The agency and the company were very thrilled, and so we're now getting excited talking to them about additional toy releases that are appropriate for our different younger audiences. So, we're seeing it as pretty consistent that we are outperforming, and that's leading to repeat.

Great. And then can you give us some details for the first time, I think, on the pipeline of 80 deals? Can you talk about how many are larger than, say, $200,000 like your first two large pilots? And then when you talk about the pipeline, is that addressable campaigns that are going to happen in the next few weeks, in the next few months, in the next few quarters? Can you just help characterize the duration?

Yes. No, it's a good question. I mean, look — we have been doing a good job of starting to see as we've been able to kind of reposition and get out in front of advertisers as we've seen advertisers start to loosen up a bit and start putting money to work again, kind of, in the wake of everyone kind of freezing a bit with COVID. We are seeing our sales cycles start to be faster, but we're already selling against spring break, kind of, New Year's campaigns. So I would say, it's not several years but it's not just several weeks either. It's more in the kind of 6-month range is how we are selling. Now that doesn't mean the sales cycle is that long. We certainly are starting to see deals flow through and close in a 20-day to 30-day sales cycle. That's kind of at the top tier of performance. And then your question about deal size. As I mentioned, right now, the average deal size is a little over $70,000 in the pipeline, but that's up from about $37,000 just in the prior quarter. So we like that trend. Certainly, we are — because we have more reach, we can start going in with bigger numbers on our proposals. So we are seeing that we're putting in more pitches in that kind of six-figure range. That doesn't mean that the advertiser will select all the options we put in front of them. But the power in having all that reach is now we can be a larger part of their spend. And a lot of times in the advertising world, when you have small reach, even if they love what you do, it's just — they just can't manage 10 different vendors or advertisers they struggle to route through. It's always a good sign that if we can take down more and more of a higher percent of a campaign's dollars that we will tend to be a go-to place for them to put more money to work in the future.

Great. Last question, just two parts or separate. First, can you tell us you talked about your investment in the direct sales force? How many people do you have today versus the beginning of the year? And then it's early in your business model, but do you see the fourth quarter generally being a seasonally strong one given the holiday season and the need to push advertising to kids and things like that?

I mean we're certainly working hard to convert deals faster, deals of bigger size. I mean we don't give guidance on 4Q. But as I alluded to in the call, the energy is high on our weekly pipeline reviews. And there's a lot of excitement as we are seeing more and more new deals coming in with shorter fuses on them as far as conversion. So we continue to be very bullish on the progress that we're seeing that we started to make in 3Q and how that will go forward. As far as the sales team goes, we started the year with about 3 people in the sales team, and we've grown that to about 7. A couple of those FTEs are partial FTEs because they have kind of broader roles. But with that, we do have a much higher percent of people in the firm who are now revenue-facing. I think the other important thing is, we've always been so proud of our very high quality, high-CPM model. We've always resisted cheap programmatic because we don't want to bring down the value of this high-end inventory that we're creating. But equally, we know that every time we add a premium ad unit, we don't want to always be adding a body against it. What we've started to do is work with a few different companies that have effectively marketplaces for video ad units of high-quality programmatic. When I referenced starting to put some of that inventory to work in these programmatic marketplaces where we can still get a $10 to $15 CPM, we think that is a really nice complement to our direct sales team.

Hey, guys. Good afternoon.

Hey.

So I have two questions. One is there was a report today that ESPN was getting out of e-gaming, and I'm wondering what the effect that could have in a positive way on the company? And the second part is cash on hand. So I know there are people that have been concerned that the company is going to run out of cash in the next year or so, and maybe you guys would need to do a money raise. Can you address that, please?

Yes. So, what you see ESPN doing is very similar to where you saw a couple of years ago, Turner tried to make a bet and invest in content for e-sports at the professional level. That speaks to about 10,000 to 15,000 professionals around the world. That's a very specific type of content. It's high cost because you're bringing people into Madison Square Garden or Staples Center. It's big production, no different than an NFL game. Certainly, in the wake of a pandemic, all types of big live event entertainment is on hold. We're operating at a very different part of the e-sports pyramid. We're about the mid-tier players and creators of content. When I talk about the tens of millions of gameplay hours running through our platform, that's gameplay that we have exclusive access to. By facilitating those tournaments, we can repackage and distribute that content in a lot of different ways to monetize it. One of the ways I explained is, we have a set of social channels, some of the largest social channels on Instagram and TikTok in the gaming category. This is where everyday gamers upload their own user-generated highlight reel. It doesn't cost us anything. They upload it to us for free. We take that piece of content. We now own it, and we can both post it on those social channels to drive up our following and audience there for ad revenues. But then we can also repackage it and distribute it elsewhere. When I mentioned that we've sold the 123 episodes to Snapchat, that's us repackaging that content and using it for other ways. In fact, we have a leading position, really a dominant position when it comes to amateur e-sports highlights. That's very different from watching a professional tournament. Anyone can consume that content. It's short-form. It speaks to where millennials and Gen Z spend their time. They don't just need to see super-elite content. They are cord-cutters, and they consume short-form content, and they like that it's highly quick, digestible, and entertaining. That's really our sweet spot on content, a very different place than what some of the big media companies were trying to do at the professional level. As far as cash on hand goes, I mean, we talked about this the other day, Carter, when we were having a chat. I believe the company has proven that it can attract strategic investment. That strategic investment wouldn't just be growth capital. It would come with commercial hooks opportunities for us to transform the company on the back of someone else's leverage and scale. We've done a really good job, I think, organically growing the company. I wanted to be extremely candid about the fact that it's time now for us to take this critical mass that we've built; it is now interesting to some pretty big, powerful companies out there. What we produce, both in the community and the audience we have, is interesting to them. The content we have is interesting and a use of theirs. That's where my focus really is, on big commercial partnerships that would bring that growth capital and ability to scale the company now in a bigger and organic way. It's time to take that kind of bolder next step for Super League and pull us out of microcap. That's where our focus is. We think that's the most shareholder-friendly source of capital.

That's perfect answer. Alright. So, one follow-up. Over the last two calls, I've now heard you mention Netflix and Snapchat. I'd like to know, do you think, as time goes on, and considering that you're so small and no one really knows the company that well, as the relationship grows with big companies like Netflix or Snapchat, when you come out with press releases, do you think they will, in time, allow you to put their names in the release?

I know. It would be wonderful if they did. Right now, you guys had asked earlier about bigger deals that we have. We do now have five deals that are over kind of $200,000. We have many deals in the pipeline over $100,000. We like the direction, and a lot of them are with these repeat customers, these big media companies. The reality is, is that we're still a drop in the bucket for their annual spend when you look at it collectively from a content point of view. When I talk about the bigger strategic explorations I'm having with strategic partners, it's about more than just 'Let us be an advertising platform for you.' I think about what’s happening with telcos right now. Telcos are either formally buying up media companies or they're creating pretty strategic partnerships with them. Why? Because content is king. If they can get that content onto their devices, it creates more stickiness to their consumer offerings. We're sitting on a massive amount of not just gaming-related content but gaming tools and gaming tournaments — things that really speak to this younger audience of gamers want to spend their time. I think there's a lot of ways that we could show our value to some big strategic partners in a really different way. Whether that be media companies or companies chasing this audience, we believe what we have is valuable. Thank you. We'd like to thank everyone for listening to today's call. We look forward to speaking with you at upcoming conferences, and when we report our fourth-quarter results early next year. Most importantly, we wish you all a very happy and safe fourth quarter and holiday season. Take care.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.