GameSquare Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 14, 2024

There are 4 speakers on the call.

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, Game Square's CEO Lou Schwartz, President and Mike Munoz, CFO. During the call, all participants are in listen only mode. 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 in 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 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 Game Square'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 Game Square 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 form a results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. On a pro form a basis, revenue was $28,600,000 for the 2024 Q2, representing a 24% increase year over year and a 22% increase in 20 24 Q1.

Speaker 1

Strong revenue growth during the Q2 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 as our pro form a adjusted EBITDA loss of the 2024 Second Quarter improved to $5,400,000 from $10,000,000 for the same period last year and $7,900,000 for the 2024 Q1. The $2,500,000 improvement in adjusted EBITDA loss over the past 3 months provides us with growing confidence in our efforts to reach profitability by the 2024 Q4 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 3rd and 4th quarters as we approach profitability. Our operating plan for 2024 focuses on 3 main components.

Speaker 1

1st, to complete the integration of the FaZe Clan acquisition and significantly reduce our cost structure. 2nd, to strengthen our balance sheet and divest non core assets. And 3rd, to leverage our platform of owned and operated IP, agency and media and SaaS technology assets to drive profitable growth. I'm pleased with the progress we have made executing our plan during the first half of the year, which I believe will result in accelerating revenue growth and significantly enhanced profitability in the second half of the year. I'll use the rest of my time today to provide a business update before turning the call over to Mike, who will review our Q2 results in more detail.

Speaker 1

As a reminder, in March of 2024, we completed the acquisition of FaZe Clan, an all stock transaction valued at $14,000,000 FaZe Clan is comprised of 2 assets, FaZe Esports, which is one of the world's best and most recognized Esports organizations and Faze Media, which is one of the largest followed gaming brands in the world. As part of our strategy for the Faze Clan acquisition, we understood that in order for Faze Media to be successful, Faze's founders and creators must be at the helm, have an ownership stake in the organization and be empowered with the creative direction. As a result, we've completed 2 important transactions at Faze Media to align Game Square, FaZe's founders and other key stakeholders around plans to return the brand back to its roots and reboot FaZe Media for success in 2024 and beyond. 1st in May, we called FaZe Media as a separate standalone entity that combines the FaZe creative talent roster and non Esports assets into a creator led IP and Internet media company under the leadership of CEO FaZe Banks and original FaZe Founder. We simultaneously closed $11,000,000 investment in FaZe Media from Matt Kalish, a founder of DraftKings who now serves on the Board of FaZe Media.

Speaker 1

2nd, in June, we agreed to sell a 25.5 percent interest in FaZe Media to an entity controlled by FaZe's CEO FaZe Banks, and value Phase Media at $14,000,000 Under the terms of the transaction, Gamesfair retained voting control of the transferred shares for a period of 2 years during which Phase Media will continue to be consolidated into Gamesquare's financial statements. We believe these transactions create the proper infrastructure for FaZe Media to be successful. FaZe Media now truly is a creator led IP and media company supported by the leadership and expertise of Matt Kalish and full resources of Game Square. When we acquired FaZe Clan, the brand was suffering from significant losses, declining community engagement and no clear strategic direction. We're extremely proud of our efforts to turn around base level performance and bring the brand back to life.

Speaker 1

This is a direct result of the FAZE founders and the leadership of CEO of FAZE Bank, the strength of GamesQuest platform, our history with and knowledge of the brand and most importantly, our belief that if managed correctly, Bays can reengage with an extremely committed community and lead to monetization opportunities in the coming months and quarters. I'd like to use this opportunity to thank everyone at Gamesquare and Faze for their hard work and dedication over the past 2 quarters. In Faze Media's reboot in April of 2024, the reengagement of the community has been fantastic. A couple of highlights include 4 of Phase's talent roster were in the top 50 most watched streamers worldwide in July. Fazer's creator roster has gained 4,500,000 new followers since May and now has 173,000,000 followers in total.

Speaker 1

Fazer's roster garnered over 1,200,000,000 total views in Q2, 2024, a 28% increase in 3 months. And finally, from April to July, BaseClan's weekly viewership has increased from 1,500,000 hours watched to a peak of 4,800,000 hours watched. The impressive 3x increase in just 4 months since the brand's reboot. Driving engagement with Fazer's community is an important indicator of future growth opportunities for Gamesquare as engagement helps support a robust pipeline of brand deals and future monetization opportunities. In fact, we have multiple 7 figure deals that we expect to convert to partnerships in the coming months.

Speaker 1

In addition to Game Square's ownership and voting control and face media, we continue to own 100% of paid eSports. As one of the top eSports organizations in the world, we believe there is an enormous opportunity to profitably grow paid eSports. Following a similar strategy that successfully grew our former Esports team by over 2 20% in just 2 years. Supporting FaZe's brand overall is important for FaZe Esports too. We're currently working on several opportunities to begin monetizing FaZe Esports with a new multi year sponsorship and partnership deal opportunities.

Speaker 1

As you can see in just a short period of time, we are quickly rebuilding PhaseClan, creating a proper foundation and developing new monetization opportunities that we believe will support multi year high margin revenue opportunities for Game Square. We are also focused on driving efficiencies and reducing costs at FaZe Media and FaZe Esports. When comparing the Q2 2024 and 2023 results at base land, we have removed approximately $18,000,000 of annualized costs and believe there are opportunities to remove additional costs throughout the remainder of 2034. With a more efficient operating model and a more disciplined management structure, we believe there is a lot of opportunity to drive profitable growth at FaZe Media and FaZe Esports especially as each business scales. Our 2nd quarter improvement in adjusted EBITDA reflects the initial benefits of our integration strategy.

Speaker 1

We expect additional enhancements to our cost structure in the coming quarters. We are extremely excited by the opportunities the BaseClan acquisition represents and how the brand fits into the Gamescore ecosystem. As part of our plan throughout 2024, we have sold non core business assets optimize our business and strengthen our balance sheet. Year to date, Gates Credit raised over $36,000,000 of non diluted capital, raised over $16,500,000 of new capital through a private placement and a prepaid advance agreement and paid off the principal balance of our senior secured notes. As a result, we have significantly strengthened our balance sheet and capital position and have the financial resources in place to support the growth strategies we are pursuing to take advantage of growing demand trends currently underway across our global markets.

Speaker 1

Final component of our plan in 2024, I want to review today is the opportunities we are pursuing across our owned and operated IP, agency and media and SaaS technology assets to profitable growth and improved profitability. Since our Q1 call, we made progress going our owned and operated IP, agency media and SaaS technology assets. Starting with owned and operated IP. As I mentioned previously on today's call, Faze Media's highly successful reboot and new talent roster is driving engagement within the community, which is supporting our deal pipeline and beginning to contribute to Gamesco's revenue growth. In addition, during the Q2, we launched a Phase Plant co branded product line of SteelSeries to retailers globally.

Speaker 1

And we recently announced a partnership with the NFL to launch a new traveling creator series called NFL for the fans live. This innovative series blends the excitement of NFL fandom on game day with interactive gaming and credit driven content accessible for an in person and online audience during the 2024 NFL season. We are also starting to see growing revenue contribution from our newly created events business. So games where direct to brand experiences with partners such as Epic, owned IP such as the recently announced NSR partnership in the creative series, programming partner opportunities such as our CECON partnership in Las Vegas and large scale Esports production with the 8 Halo Championship Major. In fact, events in the 2nd quarter contributed over 5% of consolidated revenue.

Speaker 1

We are continuing to develop this area of the business with more partnerships and announcements which we expect to come in the second half that will showcase its continued revenue growth and our growing expertise. Looking towards the growth in our media and agency businesses, we continue to pursue opportunities to expand our publisher relationships with major players like Epic Games and leverage the rapid success of our UESN world building business. Just last week, we announced $3,000,000 of total new brand partnerships with renowned brands including PopGolf, 5 Hour Energy and Dairy Max as well as multiple soon to be announced projects with leading global sports, media and entertainment companies. Our pipeline continues to grow and we expect to announce additional new partnerships as we enter the seasonally strong second half of the year. Finally, on the SaaS and technology side of our business, we continue to combine our data and insights capabilities with our creative management and activation platform to deliver a more comprehensive solution that's game publishers and brands looking to drive targeted audiences and improve revenue performance.

Speaker 1

In addition, we have developed an innovative AI supported solution that leverages our data and technology stack to uncover influencers and creators based on unique search criteria. By utilizing our platform for data analysis and audience insights, companies can identify the most influential creators to partner with for their marketing efforts. We believe that this data driven approach ensures that campaigns are effectively targeted and yield high performing ROI and performance based returns. Our new AI solution is set to launch in the coming weeks with a customer that operates one of the largest online mobile games. We plan to make this capability available to other customers as part of our broader rollout plan throughout the quarter.

Speaker 1

Additionally, we are excited to announce the expansion of our managed services to include even more tailored solutions for our clients. This will include end to end campaign management, content creation and performance optimization. By offering these comprehensive services, we can now provide a one stop shop for companies looking to enhance their marketing efforts through creator and influencer led partnerships. As we look to the back half of the year, we are excited by the direction we are headed. We believe we will start to see the benefits of the investments we made in the first and second quarters throughout the second half of twenty twenty four.

Speaker 1

In addition, we are already seeing positive momentum underway across several of our markets as our refined platform resonates with global brands. While 2024 has already been a busy and transformative year for Game Square, we believe we are just getting started. And I'm optimistic about reporting on our continued success for future calls. So with this overview, I'd like to turn the call over to Mike to review our Q2 financial results.

Speaker 2

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 20242023 year to date results. We also further divested non core assets during the year on May 31, 2024. As a result, we believe it is best to look at our business on a pro form a basis, which includes a full year to date contribution of FaZe Clan.

Speaker 2

Comparing our 2024 second quarter pro form a results to prior year, total revenue was $28,600,000 compared to $23,100,000 The 24% year over year increase in revenue was primarily due to growth from phased client operations and programmatic advertising. Gross margin on a pro form a basis for the 2024 Q2 was $4,200,000 or 14.8 percent of sales compared to $4,600,000 or 20.1 percent of sales for the same period last year. Decline in gross margin for the year reflects a less profitable mix of sales, which temporarily impacted gross margin in the 2nd 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.

Speaker 2

On a pro form a basis, adjusted EBITDA loss for the 2024 Q2 amounted to $5,400,000 compared to a loss of $10,000,000 last year. As a percentage of revenue, our adjusted EBITDA loss improved from 43.5 percent for the 2023 second quarter to 18.9% for the 2024 Q2. We believe the integration activities between Gamescore and FaceTime will yield annual cost savings of approximately $18,000,000 in 2024 when comparing Gamescore and FaZe Clan pro form a combined results in Q4 'twenty three to the combined results in Q4 'twenty four. With this overview, I'll turn the call back over to Dustin.

Speaker 1

Thanks, Mike. Before we open the call up 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 $100,000,000 in annual revenue with an annual gross margin to range between 22.5% to 27.5%. We anticipate revenue growth to accelerate in the 3rd and 4th quarters. In addition, we remain committed to pursuing strategies to expand gross margin, reduce SG and A expenses and drive profitability.

Speaker 1

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 supports 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 Q3 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.

Speaker 1

Thank you.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Sean McGahn with Roth Capital. Please go ahead.

Speaker 3

Thank you. Thanks a lot for the time. 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 it

Speaker 1

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 $3,000,000 that we spoke about in recent sort of brand wins there 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 of 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 may seem like a big 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.

Speaker 1

So we still feel very confident 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.

Speaker 3

Okay. Thank you. And 2 kind of housekeeping questions. Can you remind us of where on the income statement we would see embedded things like the transaction costs and stock based comp in one line or is that kind of spread around?

Speaker 2

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

Speaker 3

Yes. Where is transaction cost embedded in the P and L?

Speaker 2

Transaction cost, yes, roll up into other operating expenses.

Speaker 3

Okay. All right. Thank you. And then my last question is kind of a general question, I guess for you, Justin. We're in a weird economic times.

Speaker 3

We get good news. Some days we get bad news. We 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?

Speaker 1

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. But 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.

Speaker 1

Again, we mentioned some of the brands attached to sort of the new $3,000,000 of agency recent wins. I think we mentioned there are a couple of sort of 7 figure deals on the phase 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 Adan Brandwell, but we're certainly feeling like we're breaking through, and we expect that to continue. So Q3 and Q4 is looking really strong for us. We talked about the growth of our events business.

Speaker 1

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 have 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.

Speaker 1

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.

Speaker 3

Okay. Thank you.

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.

Speaker 1

Thanks everyone for joining the call today. We touched on the fact that we're very much looking forward to giving another update in November and we are. This is certainly, we've been working tirelessly around the integration of Phase 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.

Speaker 1

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 Game Square's 20 24 second quarter financial results conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Key Takeaways

  • On a pro forma basis, Q2 revenue was $28.6 million (up 24% YoY) and adjusted EBITDA loss improved to $5.4 million, with full-year revenue guidance above $100 million and a target to reach profitability by Q4 2024.
  • Game Square completed the March acquisition of FaZe Clan, spun out FaZe Media as a standalone, creator-led IP business, secured an $11 million investment from Matt Kalish, and sold a 25.5% stake to FaZe Banks.
  • Since FaZe Media’s April reboot, the creator roster added 4.5 million followers, generated 1.2 billion views (up 28%), and tripled weekly watch hours to 4.8 million, signaling strong community re-engagement.
  • The company bolstered its balance sheet by raising over $36 million of non-dilutive capital, securing $16.5 million in new funding, paying off senior secured notes, and targeting $18 million in annualized cost savings from integration efforts.
  • Growth initiatives include co-branded product lines (SteelSeries), an NFL creator series, partnerships with Epic Games, PopGolf and 5 Hour Energy, and the imminent launch of an AI-driven influencer identification platform.
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