Engine Gaming and Media, Inc. (GAME) Q1 2023 Earnings Call Transcript

Engine Gaming and Media, Inc. (NASDAQ:GAME) Q1 2023 Results Earnings Conference Call January 17, 2023 8:45 AM ET

Company Participants

Lou Schwartz – Chief Executive Officer

Tom Rogers – Executive Chairman

Conference Call Participants

Jason Tilchen – Canaccord Genuity Capital Markets

Michael Kupinski – Noble Financial Capital Markets

Operator

Greetings. And welcome to the Engine Gaming and Media Fiscal First Quarter 2023 Conference Call. Please note this conference call is being recorded.

Before we begin, I would like to caution listeners that comments made by management during this call may include forward-looking statements within the meaning of applicable securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see Engine’s fiscal financial statements and MD&A for the fiscal first quarter 2023 ended November 30, 2022 available on SEDAR and EDGAR.

Important qualifications regarding forward-looking statements are also contained in Engine’s earnings release distributed early this afternoon and also available on SEDAR and in EDGAR. Furthermore, the content of this conference call contains time-sensitive information accurate only as of today, January 17, 2023. Engine undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of 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.

Lou Schwartz

Thank you, operator. And thanks to everyone for joining us on our fiscal first quarter 2023 earnings call.

To begin, total revenue for the fiscal first quarter of 2023 was $10.3 million compared to $11.5 million in the fiscal fourth quarter of 2022. The decrease in total revenue was largely due to short-term headwinds impacting our advertising segment of the business driven by Google algorithm changes, which affected traffic to our largest legacy media client and was not a function of overall advertiser demand. We anticipate these headwinds to be short term and expect to gradually improve in the coming quarters.

Despite these short term advertising headwinds, we continue to see heightened demand for our influencer marketing platform and data insights offerings for game publishers, agencies, and brands looking to drive revenue through targeted audiences, while managing influencer relationships at scale.

For the fiscal first quarter of 2023, SaaS revenue remained relatively flat at $2.4 million due to the declines in legacy content management related SaaS revenues. Importantly, revenues from our influencer and data technology SaaS businesses are up 35% year-over-year, driven by the demand I just mentioned. This is a welcoming trend, heading into our merger with GameSquare, further supporting our merger transaction thesis of driving expanded revenue for game publishers and brands looking to reach youth audiences with a comprehensive set of creative capabilities that leverage our software platforms.

We’re also very excited by the recent accomplishments of our product and software development teams, delivering feature enhancements across all of our platforms that enable customers to efficiently analyze, bind, activate, monetize, and report against hard to reach audiences.

Whether it’s managing communications and workflows with influencers at scale, analyzing billions of live streaming data records, or tracking and managing affiliate performance marketing payouts, our platforms continue to evolve to meet the needs of complex brand marketers and game publishers.

During the quarter, we continued to make notable improvement in our near term goals of achieving a cash flow positive position. Importantly, adjusted EBITDA improved 32% sequentially to negative $2.7 million when compared to negative $4.8 million in the fiscal fourth quarter of 2022. When compared to the year ago quarter, adjusted EBITDA improved 17%. Evident in our sequential analysis of our adjusted EBITDA is our pathway to profitability and sustainable growth.

Additionally, net loss improved by nearly $10 million to a net loss of $5.4 million compared to a net loss of $15.2 million in the fiscal fourth quarter of 2023 despite the restructuring charges related to discontinued operations.

We believe in the company’s growth trajectory and look forward to completing the recently announced merger with GameSquare, which Tom will speak to in a moment. Our platforms that are immersed in the gaming, social influencer and creator content spheres continue to benefit from the growing demand among marketers for the data and analytics we provide to enable marketers to better navigate those spaces. These businesses have become increasingly important to advertisers and sponsors desiring to reach younger demographics and are extremely complementary to the GameSquare offerings.

I’ll now pass the call to our Executive Chairman, Tom Rogers.

Tom Rogers

Thanks, Lou. We indicated in our last earnings call six weeks ago that we have high confidence our strategic process would conclude with a great opportunity for the company. That certainly did occur in entering into a definitive merger agreement between Engine and GameSquare. Our stated goals of finding a strategic solution which would increase scale, catalyze further growth, and unleash both cost and revenue synergies are all realized through this transaction.

We believe this merger provides strong potential returns for our shareholders by allowing Engine stockholders to participate in the value creation of the combined company. Since the transactions announcement, our stock price in fact has risen about 120%.

The central thesis of the merger is that traditional media companies are no longer able to deliver millennial and Gen Z audiences at anywhere near the scale that they used to. Moreover, digital media companies are increasingly inhibited in their ability to target audiences because of the new privacy restrictions of the major tech platforms. This has had a particularly adverse consequence when it comes to targeting gaming audiences.

The combined company can provide solutions to both of these major marketing problems. Moreover, the combined assets of the two companies not only will provide a solution, but one that has enormous audience scale behind it.

Beyond the scale it will provide, the fact that the combined company operating an end-to-end one-stop shop approach to satisfying the needs of sponsors who want to reach youth audiences at scale, the company will provide a very efficient path to doing so that takes a great deal of friction out of the process where today’s sponsors need to deal with multiple smaller companies.

The ability for the combined company to engage a brand by what GameSquare brings to the table, one, providing an overall young audience focused campaign strategy; and two, providing content development and production capability; and three, being able to activate advertising, both through a publisher network and broad influencer channel and the substantial reach of a major esports team. Then add number four, that that reach can be amplified by the tech platforms that Engine brings to the table, in Stream Hatchet, Sideqik and Frankly, each of which uses data and analytics to enable navigating distribution more broadly across various live streaming gaming and content platforms and social media content creator sites and programmatic advertising network.

And then lastly, five. The measurement and assessment analytics of the Engine assets enable further refinement and optimization of marketing campaigns to continually increase efficiency for advertisers and sponsors.

Put all that together with the historical top line growth of each company and the progress each has made in moving toward cash breakeven this year and the combined company creates a powerful new entrant into a highly sought-after media sector, especially with the revenue and cost synergies to be realized.

Moreover, taking the current combined market cap for the two companies, the two companies in our mind are priced now at deep discount to both marketing and gaming peers.

We expect to close the deal during the first quarter of the calendar year. We appreciate investor support while we move toward closing the deal.

Thank you and we’ll now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today is coming from Jason Tilchen from Canaccord Genuity.

Jason Tilchen

Congrats on the successful completion of the strategic review process. Just a question on that deal. GameSquare and their eSports franchise complexity, were both previously clients of Stream Hatchet and Sidekiq. I’m curious outside of those relationships, how much overlap there’s historically been between the client bases, the two companies and how much opportunity is there for cross selling of the product bases of the respective companies to the other client bases? I guess this is a way of saying it.

Tom Rogers

Well, there is not great overlap. But we’ve had enough experience with mutual clients to have a clear sense that many, many of the clients of each company are going to be able to take advantage of the offerings of both companies. So that, one, there isn’t a great deal of overlap, which is great opportunity, but enough overlap to give us great confidence that the advertisers and sponsors of both companies will be able to take advantage of what the combined company has to offer.

Jason Tilchen

On the same topic, obviously, you’ve talked a lot about in the prepared remarks the top line sort of strategic rationale for the move. There’s also the benefit of scale, with two public companies coming into one public company. Is there anything maybe not quantitative or qualitatively you can talk about the cost synergies you expect to realize once the deal is closed? And also, what are some of the steps necessary before the transaction is actually officially closed?

Tom Rogers

I’ll pick the latter part of that and, Lou, you could address the cost issue. In terms of the steps to close here, which, as I said, we hope to accomplish during the first calendar quarter, we need to get approval of the Toronto Venture Exchange. NASDAQ needs to approve the listing of the combined company where we’ll need, of course, approval of both the Engine’s and GameSquare’s shareholders. And then, ultimately, there is final court approval, the Canadian court that ultimately puts the final stamp on the so-called plan of arrangement, which is what the term is for the merger agreement. There’s some iterative steps in there as well, but for the most part, that’s what needs to be accomplished before the deal closes.

Lou Schwartz

On the cost side, as we indicated at the time of the announcement, there’s a number of different areas where we realized a cost efficiency. The most obvious, when you bring two public companies together, is the public company costs, the professional service fees, the listing fees, the audit fees, those are corporate costs that we are able to remove from one side of the ledger as we combine into one.

Then the other is, as we bring these two businesses together, there’s minimal overlap, as we indicated. Many of the GameSquare’s sort of businesses are focused on creative services and agency-related services, whereas the Engine gaming sort of businesses are much more sort of technical and software sort of related. So, there’s not a ton of efficiency there. But we are continuing to focus on integrating the various sort of business units where it’s natural and obvious and we can realize additional sort of cost synergies. The area where we really get leverage is really on the top line where there’s obvious commercial synergies that we realize by providing sort of brands on both sides, GameSquare and Engine with a much more sort of comprehensive set of capabilities.

Operator

The next question today is coming from Michael Kupinski from Noble Capital Markets.

Michael Kupinski

Congratulations on your upcoming merger. I was wondering if you can provide some more color on GameSquare. You say that it’s an end-to-end solution. And I was just wondering if you can explain that a little bit. And then can you provide more details on what’s unique about it relative to everything else that’s out there?

Tom Rogers

Well, in delivering an end-to-end solution, I outlined a number of those elements in my remarks. But the combined company’s ability to be able to offer brands a strategic evaluation, content development and production, live experiences that are another way of bringing about connectivity to youth audiences, creator activations, amplification of that through a very broad influencer and advertising set of networks, combine that with the technology platforms that we provide in terms of analytics and optimization tools, and you really have the ability to bring a brand or sponsor from strategic development all the way through to activations within the very scaled reach that GameSquare already has and through our technology platforms, be able to navigate through other distribution paths to further enhance the connection to youth audiences at scale. So, that’s one major way to look at how unique that is.

Then you look at the areas where the combined company would touch on gaming, sports, music, various forms, other forms of media and youth culture and you get a wide range of content areas that youth audiences can be connected through. And then think further in terms of authenticity, which is obviously critical in terms of the value of the engagements that you’re getting from those audience and just think about the headquarters of the combined company being embedded with the Dallas Cowboys’ players facilities, which is also the home of the Complicity esports team owned by the combined company. And you get that sports/eSports authenticity, I think, coming through by virtue of the company cultures.

And the two companies, as indicated before, are already working with a wide range of premium advertising brands, across many categories, across gaming, across consumer packaged goods, across the media world, the food and beverage sector, the apparel sector, the hardware sector, and other industries, in connecting younger audiences at scale. So there’s already deep experience across a broad range of sponsors, with the kind of needs that they have in being able to bring their messaging to a youth audience. So, you put all that together and we just don’t see another peer company with a group that you and other analysts often point to when comparing companies that come close to being able to offer what we see the combined company being able to offer.

Michael Kupinski

You mentioned are creating a scale play to reach the and engage these young audiences. And I was wondering if you can just talk a little bit more about how you look at the eSports in terms of its scaled reach. And as you mentioned, traditional media outlets are challenged in delivering the millennials and Gen Z audiences. What are you seeing in terms of eSports that make it a valuable substitute?

Tom Rogers

Well, I’m glad you touched on that because some think, to some extent, at least, that the bloom has come off the rose with respect to certain elements of the eSports world. And I think, in really assessing the value of eSports to the combined company, you need to define how you’re looking to monetize eSports.

Very important to point out, this isn’t about consumer facing eSports tournaments and contests where the goal is to drive revenue through some kind of consumer fee payment. That isn’t what the goals of this merger is about. We spent a lot of time measuring eSports. Obviously, GameSquare has an esports team that’s highly noteworthy. This is about using the extensive reach of eSports as a vehicle for marketers to connect to younger audience. In the context of a marketing and advertising reach orientation, where as you say, it can easily be looked at as a substitute for what legacy media can no longer deliver in the way that it used to. And in that sense, eSports is also a way to attract more creator content and look at as a basis for catalyzing even more influencer connectivity, where the influencers of those world have terrific ability to connect and drive the consumption patterns of younger audiences. In that sense, it’s a very important component of a youth marketing vehicle. It is one, though, I should say, of many other components of the entire combined merger enterprise that will be at work here.

And just to give you some sense of the growth of eSports. Stream Hatchet, obviously, chronicles this all the time. And for the third quarter of 2022 compared to the third quarter of 2021 – the third quarter of 2022 being the latest report that Stream Hatchet put out, there was a growth from 480 million hours watched globally of eSports across various platforms. And that grew in the third quarter of 2022 to 673 million hours watched, a 40% increase in eSports hours watched globally. That just gives you some sense of what the magnitude is of the potential for using eSports as a vehicle, part of the overall assets that we have to connect youth audiences.

Michael Kupinski

Just one last question. You point to the progress you’re making towards your expense reduction efforts. And I was just wondering if you can give us an update on your cost reduction improvements.

Lou Schwartz

I can take that one. As you know, this has been sort of a work in progress for us that began almost a year ago. And we’re really proud of the progress that we’ve made. As you recall, our initial focus for expense reduction was the elimination of our B2C businesses in favor of our more predictable B2B SaaS businesses. And that cost cutting sort of mindset expanded to include corporate overhead and then greater focus on operational efficiencies across our business segments, which will continue to contribute to our goal of achieving profitability later this year, along with top line revenue growth. But as we announced our expenses in the fiscal quarter were $15.8 million, and that was an improvement of $6 million when compared to $21.8 million for last quarter. But the actual cash reduction was about $1.3 million quarter-over-quarter. So we’re continuing to make good progress and remain confident in our ability to get to profitability later this year.

Michael Kupinski

Congratulations on your merger.

Operator

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Tom for any further or closing comments.

Tom Rogers

Thank you very much. Thanks, everybody, for joining us this morning. And as I said, we appreciate the investor support while we move towards closing the merger agreement. Thanks again for joining us.

Operator

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.