Earnings Transcript for GAME - Q2 Fiscal Year 2024

Operator: Good afternoon, and thank you for joining us for the GameSquare Holdings 2024 Second Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. [Operator Instructions]. 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, 2024, which will be available on the company's website or with the Securities and Exchange Commission. I would now like to turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead.

Justin Kenna: Thank you, and good afternoon to everyone joining us on today's call. I'm extremely excited to review the progress we're making at GameSquare as we pursue strategic priorities aimed at creating a fast-growing, highly profitable and next-generation media business. Activity across our business is high, and we are making significant progress towards optimizing our business model, investing in our long-term growth and improving profitability. While we still have work to do, we believe our pro forma results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. On a pro forma basis, revenue was $28.6 million for the 2024 second quarter, representing a 24% increase year-over-year and a 22% increase in 2024 first quarter. Strong revenue growth during the second quarter reflects the initial success of the actions we've taken and the strategies we are pursuing to rapidly grow our business. I'm extremely pleased with the significant improvement in profitability and our pro forma adjusted EBITDA loss for the 2024 second quarter improved to $5.4 million from $10 million for the same period last year and $7.9 million for the 2024 first quarter. The $2.5 million improvement in adjusted EBITDA loss over the past 3 months provides us with growing confidence in our efforts to reach profitability by the 2024 fourth quarter as we expect further revenue growth, higher gross margin and additional OpEx reductions to benefit our business in the second half of the year. As you can see, we expect to see the same, if not, greater dollar improvement in adjusted EBITDA in the third and fourth quarters as we approach profitability. Our operating plan for 2024 focuses on 3 main components

Mike Munoz: Thanks, Justin. As a reminder, 2024's financial results include multiple corporate actions, most significantly, the March 7, 2024, acquisition of FaZe Clan and the March 1, 2024, sale of Complexity Gaming, which has been treated as a discontinued operation in our 2024 and 2023 year-to-date results. We also further divested noncore assets during the year on May 31, 2024. As a result, we believe it is best to look at our business on a pro forma basis, which includes a full year-to-date contribution of FaZe Clan. Comparing our 2024 second quarter pro forma results to prior year, total revenue was $28.6 million compared to $23.1 million. The 24% year-over-year increase in revenue was primarily due to growth from FaZe Clan operations and programmatic advertising. Gross margin on a pro forma basis for the 2024 second quarter was $4.2 million or 14.8% of sales compared to $4.6 million or 20.1% of sales for the same period last year. The decline in gross margin for the year reflects a less profitable mix of sales, which temporarily impacted gross margin in the second quarter. We expect gross margin to improve going forward, supported by a more profitable revenue mix in the second half and actions underway to improve gross margin. As Justin mentioned, we have made significant strides in improving our operating cash burn figures over the last 12 months. On a pro forma basis, adjusted EBITDA loss for the 2024 second quarter amounted to $5.4 million compared to a loss of $10 million last year. As a percentage of revenue, our adjusted EBITDA loss improved from 43.5% for the 2023 second quarter to 18.9% for the 2024 second quarter. We believe the integration activities between GameSquare and FaZe Clan will yield annual cost savings of approximately $18 million in 2024 when comparing GameSquare and FaZe Clan pro forma combined results in Q4 '23 to the combined results in Q4 '24. With this overview, I'll turn the call back over to Justin.

Justin Kenna: Thanks, Mike. Before we open the call to questions, I want to review our expectations for the remainder of the year. After a solid first half, we believe we are extremely well positioned to achieve well over $100 million in annual revenue with an annual gross margin to range between 22.5% to 27.5%. We anticipate revenue growth to accelerate in the third and fourth quarters. In addition, we remain committed to pursuing strategies to expand gross margin, reduce SG&A expenses and drive profitability. As we look to the seasonally strong second half of the year, we believe we are well positioned to achieve our guidance and benefit from dramatic improvements in profitability. I believe our strong first half financial and operating performance support our initial success in creating a fast-growing, highly profitable and next-generation media business. I look forward to updating investors on our success on our third quarter conference call in November. So with this, Lou, Mike, and I are happy to take questions. Operator, please open up the line to any questions. Thank you.

Operator: [Operator Instructions]. The first question comes from Sean McGowan with ROTH Capital.

Sean McGowan: I don't know if this is a question for Mike or Justin or Lou or anybody, but can you tell us if there were any unusual items that drove the gross margin to its level in the second quarter? Because it looks like your target for the year implies a pretty steep rebound in the back half of the year. So was there anything in the quarter that was unusual? And what gives you the confidence that you can rebound that much?

Justin Kenna: Yes, I can kick off, and Lou or Mike, feel free to add into this. Sean, the Q2 results had a higher percentage of programmatic revenue within the mix, which is our lowest margin area that kind of drags the blended down. You'll see from some of the recent news, the $3 million that we spoke about and recent sort of brand win, they are from being driven from the agency side of the business, which are much higher in nature. So we do tend to see a fair spike on the agency side and the owned and operated IP side in the back half of the year. So you will see that, seasonally, we are stronger in the back half of the year than the first half of the year, and that tends to come from that higher-margin revenue. So they seem like a bigger jump just based on the numbers, but for each dollar of growth within agency and owned and operated IP, you're going to see a real increase in margins. But we still feel very confident in being able to hit that number. we expect back half of the year margins to be far greater. We still expect revenue to grow, but I think the mix of that revenue will come more from the agency and owned and operated IP areas rather than large sort of growth from programmatic.

Sean McGowan: Okay. And two kind of housekeeping questions. Can you remind us of where on the income statement we would see embedded things like the transaction costs? And is stock-based comp in one line or is that kind of spread around?

Mike Munoz: Yes, I can answer that. So all stock-based comps and general and administrative expense, we don't spread it between the 3 primary operating costs. And sorry, Sean, what was the former question?

Sean McGowan: Yes, where is transaction cost embedded in the P&L?

Mike Munoz: Transaction costs, yes, roll off into other operating expenses.

Sean McGowan: Okay. All right. And then my last question is kind of a general question, I guess, for you, Justin. We're at economic times. We get good news. Some days, we get bad news. We've got election stuff, a lot of moving parts. What's your sense among your advertising partners as to what to expect as we go into the holiday season?

Justin Kenna: Yes. It's certainly been tricky, Sean. I think that there was a lot of discussion earlier in the year that ad and brand spend was back. And we found that our pipeline was really growing, but brands were still quite hesitant to spend that -- we're in a really strong position. I mean we -- that pipeline that we've been working on is starting to really resonate and close and translate into real revenue. Again, we mentioned some of the brands attached to sort of the new $3 million of agency recent wins. I think we mentioned there are a couple of sort of 7-figure deals on the FaZe side that we're in the process of closing out. And there's real pipeline into the back half of the year. So there's definitely mixed stories coming out of ad and brand win. But we're certainly feeling like we're breaking through, and we expect that to continue. So Q3, Q4 is looking really strong for us. We talked about the growth of our events business. There's a lot of events in the back half of the year from a gaming perspective. You have a lot of majors from the esports perspective. There's TwitchCon. We the NFL creator series. So there's a number of real catalysts there, but from -- just from the advertising perspective, yes, we're closing deals right now. And I think that this is certainly a space where we are starting to see those dollars finally kind of flow in. So yes, we feel really good about the back half of the year.

Operator: 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: Thanks, everyone, for joining the call today. We sort of touched on the fact that we're very much looking forward to giving you another update in November, and we are -- this is -- certainly, we've been working tirelessly around the integration of FaZe and the cleanup on that front. I think you've seen some of the benefits in the adjusted EBITDA improvement, but we expect that to really continue in a material way. So we're excited to continue sort of putting runs on the board. And this is sort of our first real combined set of financials, and we're very much looking forward to showing that continued improvement and like we talked about, getting to profitability. And we are very aware that, that is going to be key in these markets. So we're well on track and looking forward to catching up with everyone in November. So thanks for joining, and thanks for the continued support. Cheers.

Operator: This concludes GameSquare's 2024 Second Quarter Financial Results Conference Call. You may disconnect your lines. Thank you for participating, and have a pleasant day.