GameSquare Q1 2024 Earnings Call Transcript

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May 20, 2024

There are 4 speakers on the call.

Operator

Good afternoon and thank you for joining us for the Gamesquare Holdings 2024 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. And following the presentation, we will conduct a question and answer session. Before management discusses the results, I'd like to remind everyone that certain statements on this call may be forward looking in nature.

Operator

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 March 31, 2024, which is 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.

Speaker 1

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 next generation media business. Activity across our business is extremely high and we're making significant progress optimizing our business model, investing in long term growth and improving profitability. While we still have work to do, we believe our pro form a results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. With all the action we've taken over the past year and a half or to use time today to review our recent M and A activities, our vision for Phase Clan, the progress we are making reducing costs and the go forward strategies that we're pursuing to drive profitable growth.

Speaker 1

I'll then turn the call over to Mike who will review our Q1 results in more detail. As a reminder, in December of 2023, we completed the $3,400,000 sale of Frankly's non core radio business assets. In March 2024, we completed the $10,400,000 sale of Complexity Gaming and also in March of 2024, we completed the all stock acquisition of FaZe Clan that was valued at approximately $14,000,000 In addition, we recently sold 49% of Fave Media for $11,000,000 allowing us to retain voting control and continue consolidating Faze Media's results in our financial statements. The vast majority of Faze Claims historic burn has been associated with the profitability in the coming quarters. To summarize these recent actions, we brought in $25,000,000 of new capital and acquired the largest eSports organization in the world for $14,000,000 in stock.

Speaker 1

As a result, we believe that we have significantly enhanced our business with best in class assets. Replacing complexity with base plans is an important component of our growth strategy. Under Gamesco's ownership, complexity increased sales by over 2 20% from 2021 to 2023, reflecting our success rapidly growing sales of an esports organization. Since I joined Gamesquare as CEO at the start of 2021, our strategy has been focused on developing a broader platform to pursue large market opportunities that produce greater value for Gamesquare as well as our brand partners. We believe Phase Plan allows us to quickly benefit from a broader business model as Phase Plan already has established esports and media assets.

Speaker 1

FaZe Clan across its owned and operated social accounts adds over 35,000,000 direct followers compared to approximately 1,000,000 at Complexity. With a significantly larger direct following, BasePlans is better positioned to add new brands and partners to the Gamescore ecosystem, which supports our interconnected strategy and accelerates our path to reaching scale. The Phase Plan acquisition also adds 1 of the world's best and most recognized eSports organizations, which includes the number 1 globally ranked Counter Strike team. In addition, BasePlans was one of the select number of eSports teams invited to participate in this summer's eSports World Cup. This is the premier Esports tournament featuring 1 of the largest prize pool in the history of professional Esports.

Speaker 1

While FaceTime has a leading eSports organization, as a standalone business, they lacked the experience monetizing the teams and did not have dedicated assets to optimize their revenue. Games growth platform on the other hand has experienced developing revenue opportunities just like our success at Complexity. As a result over the coming quarters, we are going to leverage our experience and resources to accelerate the growth of FAITH Esports. It concludes a dedicated sales infrastructure to the Esports industry that is focused on monetizing direct partnerships, sponsorships, developing events and creating new merchandising opportunities. As you can see, we have significantly upgraded our platform with the addition of Phase Esports and we expect to see accelerating revenue growth from this business segment in the coming quarters as we leverage our proven monetization strategies.

Speaker 1

The next topic I want to review today is last week's announcement of the formation of FaZe Media and the strategic investment for Matt Talish, the Founder of Draft6. I'm extremely excited to welcome Matt to Game Square and FaZe Media. As a strategic investor, Matt has a proven track record, incredible networks. He understands the creator economy and media businesses as well as anyone. His $11,000,000 investment is for a 49% interest in Faze Media.

Speaker 1

With a controlling interest gain to a 51% ownership means that Faves Media's financials will be consolidating our financial results. In addition, Gamesco owns 100% of Faves Esports. Most importantly, Matt's investment in Fate Media reflects his confidence in the leadership and creative talent of Fate Banks as well as that of the Fate founders and creative roster. It also reflects his confidence in Game Square's leading capabilities and the platform that we are creating. Face Media includes revenue from content creation, talent management and brand licensing that in 2023 represented approximately $30,000,000 of FaceTime's overall revenue.

Speaker 1

While FaceMedia has an established base of revenue, we believe the business was previously impacted by a broken cost structure, underinvestment and ineffective strategies that didn't properly understand the appeal of the brand and are fixing to the evolving gaming community. As a result, the vast majority of FaZe Clan's historic burn was from FaZe Media. Over the near term, there are 3 important strategies we are pursuing that we believe will improve Faves Media's performance and create the proper infrastructure to drive its long term success. Our first strategy is to control and eliminate costs to quickly reduce FaZe Media's cash burn. Even before we completed the acquisition in March, Faze was reducing headcount and working on initiatives to control costs.

Speaker 1

Under Gainsco's ownership, we believe that there are $80,000,000 of annual cost synergies as a result of the Phase acquisition and expect the majority of these savings to be realized during the 2024 second and third quarters. Over the near term, we expect to benefit from removing expenses associated with redundant corporate overhead, headcount reductions and optimizing vendor agreements. With Matt's $11,000,000 investment in Faves Media, we have brought in a strategic investor to fully fund the business, invest in its growth and get Faves Media on a clear path to profitability. We are also leveraging Game Square's experience to provide the proper structure and leadership to effectively manage FaZe's talent and ensure that every dollar we spend generates a return. Our second priority is focused on creating a proper platform to maximize FaZe Media's revenue opportunity.

Speaker 1

A critical component to our strategy was returning FaZe's founders back to the brand that they created to not only reengage with their existing fan base, but to reestablish the brand's authenticity and increase their community engagement. As a result, Faze Media has welcomed back Faze Banks as CEO, Faze Apex as COO and Faze Semper as President. Matt and I will also serve on the Board of Faze Media, providing another level of oversight and guidance for Faze Media. On April 27, 2024, FaZe rebooted its brand and I'm thrilled to report that the re launch experience unprecedented engagement across social media platforms and was the number one trending topic on X or be known as Twitter in the U. S.

Speaker 1

And this also should be noted, beat out the NFL drafts going on at the same time. In addition, face plant search interest was the strongest the brand has experienced on YouTube since May of 2020 and on Google since May of 2019 and was estimated to have over 350,000,000 social media impressions. The internet and gaming community is excited by FaZe Banks' return and the steps he has taken to relaunch the brand and refresh the talent roster. As you can see, the Faze brand continues to captivate audiences and drive engagement. In fact, Faze Clan has over 230,000,000 aggregate followers across Faze and Talent socials, which includes the 35,000,000 direct that we mentioned before.

Speaker 1

Final priority we are pursuing at FaZe Media is leveraging FaZe Clan's industry leading following to drive significant revenue opportunities. Core to this plan is a newly minted content strategy to take advantage of Faze's proven content approach that resonates with gaming and youth audiences. Initiatives include New Face houses in Miami and LA for creators to produce continual consistent content. In addition, we'll be developing creator led shows, podcast, live streaming events, short and long form content that will all be monetizable. We are following a defined content strategy that leverages the resources of Game Square and our established 4 Frank Studios production asset.

Speaker 1

It's important to note that the Internet and gaming communities will not see any difference in the Faze brand from a fandom standpoint. The formation of Faze Media only adjust the ownership structure and with Gamesquare maintaining its controlling interests, Fave Media's financials will continue to be consolidated in Gamesquare's results. Looking at our improved cost structure and the platform we are creating in more detail. I'm extremely proud of the hard work and dedication of our global team members. After last year's successful integration of engine gaming, we are quickly replicating our efforts to successfully integrate Playfair.

Speaker 1

Over the past year, we have removed approximately $8,000,000 of annualized costs associated with the Engine Gaming transaction. While FASE has already begun eliminating costs prior to the acquisition, we are quickly removing additional redundant corporate expenses and we are focused on aligning Phase Cleans cost structure with expected revenue. As a result, we anticipate removing around $18,000,000 of annualized operating costs with the majority of these costs coming out during the 2024 second and third quarters. As we focus on reaching profitability in the coming quarters, we continue to pursue opportunities to add additional capital to our balance sheet. During the Q1, we successfully raised $10,000,000 of new capital in a private placement.

Speaker 1

The recent asset sales of Franklin and Complexity in a gain square total of $14,000,000 including a $9,500,000 promissory note on our balance sheet. We believe MAP's $11,000,000 investment in FaZe Media will fully fund that business as we optimize its cost structure and begin to drive revenue growth. Finally, we are working on additional non core asset sales and other opportunities to improve our capitalization and support our growth opportunities. Today, Gamesnet platform comprises owned and operated IP, including content creation, paid media and our esports teams. We have full service creative agencies that leverage our experience and connection to youth and gaming audiences that provide global brands with content campaign management, media strategy and placement services.

Speaker 1

And finally, we have best in class SaaS based offerings including live streaming data, influencer marketing and managed services capabilities. On a pro form a basis, we generated $23,500,000 in revenue in the Q1, a slight decrease from pro form a revenue for the same quarter of last year. More importantly, I'm pleased to report that our adjusted EBITDA on a pro form a basis improved by $6,400,000 a loss of $14,300,000 for 2023 Q1 to a loss of 7.9 dollars for 2024. This dramatic improvement in adjusted EBITDA during the Q1 reflects the efforts we have been pursuing to eliminate costs and drive profitability. As a result, we believe we have a clear path to profitability in the coming quarters and expect to see the majority of the expected $18,000,000 of cost synergies being removed in the 2024 second and third quarters.

Speaker 1

As you can see, we've created a strong go forward platform and the final strategy that we'll review today are the actions we are taking to drive revenue growth in 2024 and beyond across Sangster's ecosystem. Starting with our own and operated IP, key growth priorities include leveraging Face Media's content through a successful reboot and new talent roster, driving growth within our emerging events business and growing our reach and influence to launch new content initiatives, lifestyle brands and more. Looking at growth opportunities in our media and agency businesses in 2024, we are focused on expanding publisher relationships with major players like Epic Games, leveraging the success of our rapidly growing worldbuilding business, increasing our relationships with retainer clients and growing our live stream as a service business. Finally, on the SaaS and technology side of our business, growth priorities include combining our data and insights capabilities with our creative management and activation platform to deliver a more comprehensive solution set for game publishers and brands looking to drive targeted audiences and improve revenue performance. Leveraging our platform for data driven creative campaigns that yield high performing ROI and performance based returns and expanding our managed services offerings.

Speaker 1

We have developed a strong, innovative and differentiated platform that supports significant growth opportunities within the game publishing category. Our unique advantage within this category is being recognized by some of the largest game publishers in the world. We're just getting started and I'm excited to report on our success on future calls. So with this overview, I'd like to turn the call over to Mike to review our Q1 financials.

Speaker 2

Thanks, Justin. Before we look at our 2024 Q1 financial results in more detail, it's important to note that our GAAP financial statements include 24 days of FaZe Clan's results. In addition, Complexity, which was sold in March 2024, has been treated as a discontinued operation, and Complexity's results have been reclassed into discontinued operations in our 20 2420 23 Q1 financial statements. As a result, we believe it's best to look at our business on a non GAAP pro form a basis, which removes complexity from our financial statements, includes a full quarter contribution of FaZe Clan in the 2024 period and includes a full quarter contribution of Enjin and FaZe Clan in the 2023 period. Comparing our 2024 first quarter pro form a results to prior year, total revenue was $23,500,000 compared to $24,100,000 The slight year over year decline in revenue was primarily due to a $4,200,000 reduction in phased client revenue, partially offset by a $3,600,000 increase in Gamescore and Engine Gaming revenue.

Speaker 2

Gross margin on a pro form a basis for the 2024 Q1 was $3,700,000 or 15.7 percent of sales, compared to $4,000,000 or 16.5 percent 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 Q1. As Justin mentioned, we have made significant strides in improving our operating cash burn figures over the past 12 months. On a pro form a basis, adjusted EBITDA loss for the 2024 Q1 amounted to $7,900,000 dollars compared to a loss of $14,300,000 last year. As a percentage of revenue, our adjusted EBITDA improved from 59.2 percent for the 2023 Q1 to 33.7 percent for the 2024 Q1.

Speaker 2

We believe the integration activities between Game Square and Faze Clan will yield annual cost savings of approximately $18,000,000 in 2024 when comparing Gamesquare and Faze Clan pro form a combined results in Q4 2023 to results in Q4 2024. With this overview, I'll turn the call back over to Justin.

Speaker 1

Thanks, Mike. Before we open the call to questions, I want to review our expectations for the remainder of the year. After a solid Q1, we believe we are extremely well positioned to achieve well over $100,000,000 revenue annually with an annual gross margin to range between 22.5% to 27.5%. It should be noted that Q1 is our seasonally lowest quarter and with $23,500,000 pro form a where we're well and fully on track. We anticipate revenue growth to accelerate in the 3rd and 4th quarters.

Speaker 1

In addition, we remain committed to pursuing strategies that expand gross margin, reduce SG and A expenses and ultimately drive profitability. As we look to the seasonally strong second half of the year, we believe we are very well our initial our initial success in creating a fast growing, highly profitable next generation media business. I look forward to updating investors on our success on our 2nd quarter call in August. So with this overview, Lou, Mike and I are happy to take any questions. I'll throw it over to you, operator.

Operator

Thank you. We will now begin the question and answer session. Our first question is from Sean McGowan with ROTH Capital Partners. Please go ahead.

Speaker 3

Thank you. Good afternoon, guys. I have a couple of questions, if I may. Can you be a little bit more specific about what is in the FaZe Media that and what is not relative to everything that you acquired when you took on FaZe? So what's in it and what's not in it?

Speaker 1

Yes, absolutely, Sean. So Faze Media is really the talent and media business and Faze Esports is the Esports business. So one lives in Faze Media is the Faze brand IP, the active talent roster, which we have obviously made some recent cuts and some recent additions and we've really tightened up that roster. So it's around 15 of the active talent. And in some ways, Sean, the easiest way to think about it is probably in the opposite as into what lives in Phase Esports, because everything else effectively moving forward will live in Phase Media.

Speaker 1

And we kind of touched on that being quite a bit of burn that obviously we're getting under control, but this transaction really does help fund that burn as we get to growth. So on the Esports side, it is the active team rosters that we have and the active professional talent, the brand and sponsorship deals directly associated to those teams and the competitive eSports play, anything outside of that lives within Face Media.

Speaker 3

Okay. So in terms of that burn that you referred to and the income statement impact, so if I hear you correctly, you'd still expect FaZe Media as a standalone entity to have a negative profit. So you'll be backing out losses in effect then, right? So you'll be showing the fully consolidated revenue and other expenses, but you'll be backing out the minority investors portion of the losses. Is that right?

Speaker 2

Yes, I can take that one. Yes, that's right. Yes, 49% of FaZe Media will be owned by minority interest and it will be an adjustment on the P and L. If there are losses, it will be a reduction to that loss from a Gamescore shareholder perspective.

Speaker 3

Okay. All right. Thank you. And

Speaker 1

Sean, to add to that, just to be clear, I think it's been pretty sort of widely publicized, the burn that existed at Phase. I think that this transaction sort of really derisks that from our perspective. And I would say that very similarly phased meter in the way that we view phased as a whole. We are on a very aggressive path to get towards profitability, but there's no doubt that in the near term there is a loss position. I think if you look at comparatively kind of year on year Q1, we showed a roughly 6 point $5,000,000 improvement on that adjusted EBITDA line and that's really before taking out a lot of costs.

Speaker 1

So just to be clear that there is current burn, but we have very aggressive plans to get base media to profitability.

Speaker 3

Right. Thank you. I did assume that. And then to drill down a little bit more, is the $18,000,000 in cost and I probably have asked you this before, it's just like more of an update. The $18,000,000 in cost reductions, is that net of any other growth spending that you might see in other parts of the business other than where you're cutting here?

Speaker 3

Is that net of any additions you're making somewhere else?

Speaker 1

Yes. So I think the biggest upside of this transaction has been the fact that because there are so many heads on the Gamesquare side that have experienced 1 in the endemic Esports space, but 2 more specifically within the Faze Clan ecosystem that we've been able to plug in really seamlessly. So the need for, I guess, growth spending to this point has not been required. We've been obviously more on the cost reduction path. Now look, we're obviously going to have these strategic opportunities in the future where we continue to invest in growth.

Speaker 1

But I think a really good example is our content studio and with 4 Frame, Seni Okusanya, who runs that, was the Head of Content at FaZe Clan originally and really helped drive a lot of engagement and audience into FaZe early days. So his team are working tirelessly around the new content strategy and getting a podcast network stood up and really consistent a lot of content that's going to come out into market. So the $18,000,000 of costs is really, I guess it is net, Sean, in what we expect to be able to pull out. And we very much believe that we have the current resources required to be able to get baseband really in shape and to get to profitability.

Speaker 3

Right. Okay. That's helpful. And then last question kind of along the same lines. Do you think that cost reduction and revenue growth opportunities will be enough for the company?

Speaker 3

I mean, you didn't say this and I don't want to read into it what I shouldn't be reading into it. But do you think this will be enough to get EBITDA positive by the Q4 of this year?

Speaker 1

Yes, we do. I think that we've been pretty transparent about some of the macro issues that we endured obviously in the back part of 2022 and into 2023. We're starting see that shift and we are starting to see the return of real spend in the space, which is really promising. We're very confident in our revenue targets. And obviously, we're being very aggressive on the cost front.

Speaker 1

So we do obviously, we need to execute and hit our revenue numbers for that to take place. But we are obviously controlling the controllables right now and reducing and pulling out costs and we will continue to get efficient. And all signs indicate that yes, we will be able to get there and it is somewhat revenue dependent, but again, the costs are coming out. We feel really good about the pipeline. So we're definitely on track.

Speaker 3

Very good. Thank you very much. Appreciate it.

Operator

This concludes the question and answer session and brings to a

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Key Takeaways

  • In Q1 2024, Gamesquare sold Frankly’s non-core radio and Complexity Gaming assets for $3.4M and $10.4M respectively, and completed a $14M all-stock acquisition of FaZe Clan, bringing in $25M of new capital and the world’s largest esports organization.
  • The FaZe Clan acquisition, with over 35M direct social followers and the #1 global Counter-Strike team, replaces Complexity and is expected to rapidly accelerate revenue growth and brand partnerships.
  • Gamesquare formed FaZe Media with an $11M strategic investment from DraftKings founder Matt Talish, retaining 51% control to consolidate its ~$30M 2023 revenue while implementing cost controls and a refreshed leadership team to drive near-term profitability.
  • Management identified ~$80M in annual cost synergies from the FaZe acquisition, including $18M of operating cost cuts expected by Q3 2024, helping narrow the pro forma adjusted EBITDA loss by $6.4M year-over-year in Q1.
  • On a pro forma basis, Q1 revenue was $23.5M and adjusted EBITDA loss shrank to $7.9M, with guidance targeting >$100M in annual revenue, 22.5%–27.5% gross margin, and full profitability by late 2024.
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