FaZe Holdings Inc.

Good afternoon. My name is Joanne, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fays Holdings Incorporated second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. I will now turn the call over to Calvin Broadus, board member. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us. With me today is Lee Trink, our chief executive officer. Following our prepared remarks, we'll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal security laws. These include statements on Faye's holdings, financial outlook, and the company's plans and timing for product development and sales. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. For discussion of risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent SEC filings, which are available on our website at phaseplan.com. The content of this conference call contains time-sensitive information, accurate only as of the date of this live broadcast, except as required by law. Faze Holdings undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. With that, it is my pleasure to turn the call over to CEO Lee.

Thank you, Snoop, and hello, everyone. Appreciate you joining us for our first quarterly call as a public company. We're thrilled to have completed the journey into the public markets. A Gen Z native brand going public is a landmark event for our entire community. We're looking forward to leading the charge as gaming and youth culture take to the world stage. I think a reintroduction to our business is warranted for our first call. But before I do that, I want to highlight the release of our numbers for the second quarter of 2022. Our revenue totaled $18.8 million, an increase of 22% year over year, and a 19% increase quarter over quarter. We continue to be on pace with the projections from our filings. I should note that historically we have shown stronger revenue in the second half of the year compared to the first half. Additionally, we plan on announcing formal guidance in March of 2023 when we release our 2022 full year results. Our transition to a public company is already enabling us to unlock value. First and foremost, along with our cash infusion, we are taking a close look at our cost structure. We believe we have identified ways to operate as a leaner and more efficient organization and that operating more nimbly will help us to spur growth in both new and existing verticals. Today, I'd like to focus my remarks on why phase matters and how we plan to build and scale our business. I will speak to our second quarter financial results, the highlights of which were in a press release distributed prior to this call. We're filing our 2022 financials today. We'll also respond to a few questions that investors have submitted. For the very few who don't know us, FaZe Clan was started more than a decade ago by a group of friends who met online playing video games. They began posting gaming highlight clips online and rapidly built an audience and fan base. Today, FaZe Clan is a leading lifestyle, content, and gaming media platform, followed by more than 500 million social media accounts across its members. We are a unique conduit for reaching the global Gen Z audience. Gen Z is just coming into its own, and by the end of the decade, it's forecasted that they will control $33 trillion in global spending power. With that spending power, Gen Z is a coveted generation to advertisers and consumer product companies. But because Gen Z consumes its content differently than prior generations, they are the hardest to reach through traditional media outlets. Whereas prior youth generations consume content via cable and broadcast outlets, Gen Z spends the vast majority of its time on user-generated content platforms like Twitch, YouTube, and TikTok. Creating and capturing user engagement within these social platforms requires an understanding and brand relevance that very few traditional companies have. We believe we are uniquely positioned to solve the problem of reaching this audience. FaZe is at the intersection of how Gen Z consumes content as well as how they transact and engage with that content. Additionally, the business we built on top of the pioneering brand of FaZe Clan has positioned us at the forefront of the new creator economy. One of the important byproducts of completing the journey of becoming a public company is that it has cemented our leadership position within the creator community. Today, we believe FaZe has become a cultural phenomenon. I'll note a few examples. We've been recognized as a cultural lightning rod by some of the most significant and longstanding culturally impactful brands. Those partnerships have included the likes of the NFL, Manchester City, James Bond, Batman and DC Comics, the artist Takashi Murakami, and Disney. We're also seeing widespread mainstream media coverage, such as being the first gaming organization to grace the cover of Sports Illustrated and a recent high-profile feature in GQ. Our partnership with brands like McDonald's where they changed their social handle to Faze McDonald's, which is the digital equivalent of changing their buildings to, say, Faze McDonald's. Our celebrity members who are passionate about being in Faze, including Snoop Dogg, who sits on our board of directors and sometimes, like today, reminds us of our legal obligations. Plus Kyler Murray, Bronnie James, Lil Yachty, and Offset, who all fly the flag for FaZe Clan as members. And lastly, our esports division, which just last month won its 35th championship. The power of our brand and platform enables us to monetize across four verticals presently and gives us the opportunity to scale into something much larger. Our verticals are sponsorship, content, merchandise, and esports. Currently, sponsorship makes up roughly half of our revenue, It's highly cash generative and a high margin line of business. It's been a banner year so far, renewing and adding clients including McDonald's, DoorDash, Ghost, Respawn, and Current. In our content vertical, we are evolving from a digital publisher into an IP engine leveraging a variety of formats across multiple platforms. A prime example is our recent phase one live stream competition show, where we teamed up with A-list sponsors to recruit a new creator for our talent network. 65,000 entrants from around the world competed for one spot on the Faze roster and a million dollar signing bonus. In consumer products, we're evolving from a merchant apparel business to a broad consumer product business in many categories, including food and electronics. As these new product business lines come to life, we'll keep you up to date. You'll also see us expand breadth and depth across mass retail. Our first successful retail launch was in the toy category with Zuru. So far in 2022, we've sold over $8 million of that product, led by retail partners like Target. Esports is important to our brand identity. And it provides an organic opportunity to expand internationally, as well as tap into new gaming sub communities. We've competed professionally for more than 10 years, won 35 championships, and recently have expanded into new games like Valorant and Rocket League. These are the revenue streams you'll see us report on today. And as you've seen from our release, they've generated solid quarter on quarter revenue growth in Q2. But it's important to understand that as we scale, we expect the opportunity in new verticals to be larger than our current verticals. As an example, let's start with the category of ghost kitchens. Most recently, we announced a new brand called Phase Subs in partnership with DoorDash. Our Phase Subs virtual dining concept capitalizes on what does and doesn't matter to Gen Z. The sandwiches are real. but the brand exists only digitally. There are no brick and mortar costs, and we leverage excess bandwidth from an existing national restaurant chain to fulfill orders. This allows us to scale quickly and economically without all of the typical costs of a traditional food business. One of our most significant opportunities exists in Web3 and the metaverse, where we're currently building foundational partnerships with industry leaders like Moonpay, Ledger, and Artifact, which was recently acquired by Nike. Big tech has clearly recognized the economic juggernaut that Web3 and the metaverse present, and investors are making significant bets on who the winners will be. We think about that opportunity a little different. FaZe has a large and engaged audience that can enable us to participate with whomever the winners of the metaverse will be. And because we don't require massive capex to participate, we aim to usher our audience in and out of these metaverse environments. We're having incredible conversations with industry leaders about the role phase might play and how we potentially create robust and scalable revenue. We're paying attention to two important aspects of the Web3 opportunity. Gaming will be foundational to metaverse environments. and Web3 tools will enable creators to greater monetize and expand their communities. Numerous companies building metaverse environments cite gaming as foundational to the experiences they are building. Even before the metaverse became a buzzword, we started to see gamification take hold in many new environments, including platforms like Tinder, who gamified dating, and Robinhood, who gamified investing. We believe a central premise of the future of technology will be the gamification of nearly everything in an effort to create sticky environments and experiences. Who better to lead audiences to a gamified world than FaZe Clan, the leading gaming lifestyle brand in the world. Now I'm going to walk through the highlights of our Q2 financials. And keep in mind that we closed the transaction with B. Riley and became the public company FaZe Holdings in mid-July. So we were not public as of the end of the second quarter on June 30th, 2022. So I'll share summary info today and we can expect to share more when we report our Q3 in mid-November. FaZe Clan's Q2 financial highlights include revenue of $18.8 million, up 22% from $15.4 million in the second quarter of 2021, and up 19% from 15.8 million in the first quarter of 2022. Revenue growth was led by our sponsorship and esports verticals. Our adjusted EBITDA loss improved to 4.1 million from 6.2 million in the year-ago second quarter. Adjusted EBITDA results reflect investments in building the company's leadership personnel and marketing to drive our growth strategy. I mentioned earlier that we feel good about our revenue progression for the year, as historically, phases revenue tends to build as the year progresses. This is not intended to give guidance on upcoming quarters, and we do want to be clear that revenue can be lumpy quarter to quarter based on the timing of deal signings and revenue recognition. Finally, a quick note on our balance sheet. Pro forma for the IPO completed on July 19th We had $61 million in cash on our balance sheet and no long-term debt. We raised approximately $58 million in net proceeds from the business combination transaction with B. Riley Principal 150 Merger Corp. We believe the company is well capitalized to execute on its plans near term, and I'd offer two insights on that front. First, the company operates a capital light business model. Other than potential M&A, we anticipate that we will not have significant capital investment needs to build the business. And second, while our operating expenses are elevated relative to current revenue, we believe our model is scalable as we generate momentum in the existing and emerging revenue streams. Okay, to wrap up today's call, we'd like to take a minute to respond to a few questions that we've been getting. I've asked our head of comms, Chelsea Northern, to do the honors and moderate this part of the discussion.

Thanks, Lee. We have three questions today. Our first is, how do competitive esports fit into PhaseClan's business strategy?

So esports is certainly foundational to Phase and an integral part of Gen Z culture. We are absolutely proud of our 35 championships, and we develop our rosters and believe that we're going to continue racking up trophies. From a business perspective, esports serves as a primary channel for expanding our reach into both new gaming communities and new territories around the world. Esports will always continue to be an important part of our business. But over time, our current and our emerging revenue streams will start to play a much bigger role in our financial growth in esports. And as a result, the esports revenue will be a shrinking part of that pie, even as it continues to grow.

Thank you. Our next question is, why does Faze call itself a platform company and what do you mean by that?

So we're a platform company because we monetize that one single brand across multiple revenue streams. And that platform at the moment monetizes through esports, sponsorships, consumer products and content as I've described. But thinking beyond that, we can continue to add new revenue streams to that platform. I'd say the best and latest example of that is Phase Subs. It's a brand new revenue stream that leverages the platform of our brand and our business. And across this one brand, we continue and will continue to add new monetization categories that both excite our community and expand our business.

Okay, thanks. Final question. We've gotten a lot of inquiries about M&A. Is M&A a part of Phase Plan's future and how do you think about it?

We are definitely looking at M&A as an opportunity to expand our business. We believe FaZe is positioned to be a natural consolidator in the gaming space, but also in the overall creator space. It's important to understand that while gaming is central to who we are, we look at our opportunity in the creator economy much more broadly by adding more non-gaming talent to our ecosystem and continuing to leverage the platform that exists.

Thanks, Lee. That concludes our question and answer session. I'd like to return the call to you for closing remarks.

Thank you, Chelsea, and thank you, everyone, for joining us today. We look forward to providing further updates on our next quarterly call. Finally, I would like to thank our fans and our employees for making everything that we do possible. Phase up.

This concludes today's conference call. You may now disconnect.