FaZe Stock: Making Progress; Must Prove Itself (NASDAQ:FAZE)

FaZe Holdings Inc. (NASDAQ:FAZE), a company focusing on Gen Z in the creative economy, has been primarily known as an esports brand, but in reality the main drivers of its revenue at this time come from brand sponsorships and content.

Management asserts its core competency is the understanding it has of the younger talent in the Gen Z demographic and its ability to strike deals with them.

Before recently going public, the company had been around about 12 years, which during that time built up a fan base of somewhere close to 500 million across a variety of social platforms.

In this article we’ll look at some of the initiatives the company is taking to trigger growth, numbers from the latest earnings report, and how 2023 could play out for them.

Some of the numbers

Revenue in the third quarter was $14 million, up 12 percent from the $12.5 million in revenue generated in the third quarter of 2021. Revenue in the first nine months of 2022 was $48.6 million, up approximately 29 percent from the $37.8 million in revenue generated in the first nine months of 2021.

Gross profit in the third quarter of 2022 was $3.5 million, up from the $1.1 million in gross profit in the third quarter of 2021. Gross profit in the first nine months of 2022 was $34.6 million, up approximately $2.3 million from the gross profit of $32.3 million in the first nine months of 2021.

Gross margins in the quarter were 25 percent, up from 9 percent last year in the same reporting period, and 29 percent for the first nine months of calendar 2022.

Loss from operations in the reporting period was $(14.9) million, compared to the loss from operations of $(8.4) million in the third quarter of 2021.

Net loss in the third quarter of 2022 was $(130.6) million or $(2.39) per share, compared to a net loss of $(9.955) million or $(0.50) per share in the third quarter of 2021. Of that, $115 million of the loss in the third quarter of 2022 was associated with the extinguishment of debt.

Net loss in the first nine months of 2022 was $(149) million, or $(4.65) per share, compared to a net loss of $(23.3) million in the first nine months of 2021.

At the end of the third quarter of 2022 the had cash of $43.9 million, compared to $17 million at the end of calendar 2021. It held no debt at the end of the reporting period.

Breaking down revenue by segment

Brand Sponsorships

Revenue from Brand Sponsorships in the third quarter of 2022 was $7.1 million, compared to $6.4 million in the third quarter of 2021, a gain of 8 percent year-over-year. Revenue from Brand Sponsorships in the first nine months of 2022 was $28 million, compared to $17.1 million in the first nine months of 2021.

Content

Revenue from Content was $4.1 million in the third quarter of 2022, compared to revenue of $3.4 million in the third quarter of 2021, up approximately 20 percent year-over-year. Revenue in the first nine months of 2022 was $10.6 million, compared to revenue of $13.8 million in the first nine months of 2021.

While Content revenue was up 20 percent in the third quarter of 2022, much of that came from the sale of an exclusive license in the reporting period. That was offset by the company moving away from “previously greenlit higher-cost content products in favor of lower-cost, smaller content releases.”

With the company saying it is centering its content strategy around next generation digital creators, it appears it’s moving away from more established content creators that command higher prices.

Consumer Products

Revenue from Consumer Products in the third quarter of 2022 was $471,000, compared to $1.8 million in revenue from the third quarter of 2021. Revenue in the first nine months of 2022 was $2.3 million, compared to revenue of $4 million in the first nine months of 2021.

Esports

Revenue from Esports in the third quarter of 2022 was $2.3 million, compared to revenue of $837,000 in the third quarter of 2021, up 177 percent year-over-year. Revenue in the first nine months of 2022 was $7.3 million, compared to revenue of $2.7 million in the first nine months of 2021.

Growth strategy

There’s no doubt one of the strengths of FaZe is its large customer base of over 520 million. I would assume it’s the major reason the company has attracted large partners like McDonald’s and Comcast’s Xfinity broadband service, as well as lesser known players like The Sandbox, which is associated with the metaverse.

As for its core competency, the company is looking at creating and acquiring business lines that have the potential to drive significant and profitable revenue growth over the long term; it sees this as the opportunity it offers investors.

Management said it’s seeing an acceleration in “conversations” or negotiations concerning talent that has an interest in working with the company, as well as opportunities for M&A or joint ventures. Expectations are these negotiations will bear fruit sometime in early 2023. Overall, the company is positioning itself to be an incubator of talent, attracting them by providing a platform the offers resources and tools that empower them to expand their reach and build their own profitable businesses.

Again, the targeted demographic is Gen Z, and partnerships and/or M&A should be aligned with successfully reaching them.

Based upon segment revenue and management commentary, it appears Faze will get most of its revenue in the near term from brand sponsorships and esports. Content revenue is likely to lag for now because of the transition to smaller content releases.

As the company scales it sees itself generating more revenue from “sponsorships and talent-related initiatives.” In regard to esports, expectations are that segment should increase revenue as a result of live events producing larger number in the post-COVID environment.

Conclusion

There are a couple of things I like about what FaZe is doing. First, it wasn’t stubborn when facing the reality that higher-cost, larger deals weren’t realistic with where the company financially stood, so adapted and is now going with smaller deals.

I like that, not only because of the cost savings, but if the company proves it is very good at identifying talent that have a lot of future growth potential, it could be a way of generating revenue with more favorable margin.

That decision, along with other cost-cutting measures, has already resulted in $7 million in annual savings.

The company did enjoy significant growth in its user accounts from 358 million last year to approximately 526 million as of the end of the third quarter of 2022. Much of that growth came from adding the network of Snoop Dogg to its talent portfolio.

It also increased the aggregate number of YouTube subscribers from 115 million in the third quarter of 2021 to 137 million as of the end of the third quarter of 2022. Taken together with its focus on lowering costs while thoughtfully growing its user base, and continuing to develop and improve tools to empower talent to build successful online businesses, FaZe does appear to have a business model that could work if it remains disciplined in its strategy.

I think FaZe has potential for sustainable growth from its growing user base and attracting major players to partner with, but I think we need to see at least a couple more quarters to get a feel for what its growth trajectory really looks like and how its managing its cost structure.