GameSquare Holdings, Inc.

Greetings and welcome to the Engine Gaming and Media Fiscal Fourth Quarter and Full Year 2022 Conference Call. Please note that this conference call is being recorded, and if anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Before we begin, I would like to caution listeners that comments made by management during this call may include forward-looking statements within the meaning of applicable securities laws. These statements involve material risks and uncertainties. and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see Engin's financial statements and MD&A for its fiscal fourth quarter and full year 2022, ended August 31st, 2022, available on CDER and EDGAR. Important qualifications regarding forward-looking statements are also contained in Engin's earnings release distributed early this afternoon. and also available on Cedar and Edgar. Furthermore, the content of this conference call contains time-sensitive information, accurate only as of today, November 29, 2022. Engine undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. And I would now like to turn the conference over to Mr. Lou Schwartz, Chief Executive Officer, and Tom Rogers, Executive Chairman of Engine Gaming and Media, Thank you, gentlemen. Please go ahead.

Thank you, Operator, and thanks to everyone for joining us on our fiscal fourth quarter and full year 2022 earnings call. We had very substantial revenue growth when looked at on an annual and sequential basis for the quarter. To begin, total revenue for the full year ended August 31, 2022, increased 25.6% to a record $41.9 million. from 33.3 million in the same year-ago period. Total revenue for the fourth quarter increased 24.4% to 11.5 million from 9.2 million in the fiscal third quarter of 2022. The increases were a function of substantial growth in advertising revenue and an increase in SaaS revenue, the two key revenue streams of our business. For the full year of fiscal 2022, advertising revenue increased 28.6% to $32.7 million from $25.4 million in the prior year. Advertising revenue for the fourth quarter of fiscal 2022 was $9 million, increasing 29.2% from the fiscal third quarter of $7 million. Franklin Media supports this growth by continuously optimizing its 50-plus demand partner network to deliver higher-yielding advertising revenue for its customers. frankly increased both CPMs and RPMs during the 2022 fiscal period as compared to previous fiscal year by 33%, despite increasingly challenging market conditions and algorithmic changes to search methodologies. For the full year, SAS revenue increased 15.9% to $9.2 million from $8 million in the prior year. The increase was primarily due to the full year impact of revenue recognized from the Sidekick acquisition and increased SAS revenue from the Stream Hatchet business. SAS revenue for the fourth quarter was $2.4 million, 9.4% higher sequentially when compared to $2.2 million in the third fiscal quarter of 2022. As a result, we exit Q4 with an annualized SAS run rate of approximately $10 million. When the full year ended August 31, 2022, net loss improved significantly to 14.5 million compared to a net loss of 40.7 million in the full fiscal year 2021, an improvement of 26.2 million. Adjusted EBITDA, including discontinued operations, improved 23.3% sequentially to a loss of 4.3 million when compared to a loss of 5.6 million in the fiscal third quarter of 2022. Exclusive of discontinued operations, adjusted EBITDA was a loss of $4 million for the fourth quarter. When removing accounting estimate charges relating to certain financial assets and liabilities of approximately $400,000, which is the best way to assess our cost reduction efforts relating to operating performance, the revised improvement to adjusted EBITDA is 11.9% when compared to fiscal third quarter 2022 adjusted EBITDA. Evident in our sequential analysis of our adjusted EBITDA is our pathway to profitability and sustainable growth. In line with this trend, our first fiscal quarter of 2023 is seeing further reduced operating expenses leading to ongoing improvement in adjusted EBITDA. Additionally, we are continuing to streamline spending across the company with our stated goal of cash flow break-even on a run rate basis in fiscal 2023 resulting in part from narrowing our focus on our core set of assets. We believe our collection of assets, which Tom will speak to in a moment, provide the company with a continued growth trajectory as evident in our recent client wins and contract extensions. Our platforms immerse in the gaming, social influencer, and creator content spheres continue to benefit from the growing adoption of marketers and product enhancements that enhance their value proposition. These businesses become progressively important to game publishers, agencies, advertisers, and sponsors reaching the increasingly hard to reach younger demographics. I'll now pass the call to our executive chairman, Tom Rogers.

Thanks, Lou. Let me focus in for a minute on our very strategically important gaming and social influencer units. Our results continue to define the company as one that, through our data and analytics platforms, we have the ability to guide companies in marketing to gaming audiences, as well as addressing a broader array of brand sponsors, performance marketers, and media sellers needs. We provide highly valuable tech platforms so that marketers can navigate the gaming and social influencer communities with extremely reliable data and analytics that can result in the most productive marketing programs. As targeting challenges have continued to grow in the advertising market, utilizing social influencers as a targeting approach works to our strength in providing both the workflow tools and more direct communications enablement. As marketing programs look to increasingly use social influencers at great scale, and affiliate marketers look to expand their programs in this realm, these trends play very favorably to product enhancements we have developed. We've begun to see in the gaming world an increasing number of clients beginning to utilize the services of both Stream Hatchet and Sidekick. The combined growth of Stream Hatchet and Sidekick, fourth quarter over quarter, is approximately 27%. demonstrating the particular value of both services to sponsors that want to access gaming audiences. To this point, as outlined in Stream Hatchet's third quarter video game streaming report, the data our platforms are able to capture and collect is extremely actionable for marketers, researchers, and analysts as these platforms develop actionable insights how to best tap into the Gen Z and millennial highly prized 18 to 35 demographic. This is an industry with consistent growth over the last four years, and the insights our assets capture become more valuable as the market continues to expand. The marketing reach of esports continues to be an area that advertisers and sponsors want to have greater exposure to, And this creates significant opportunity for our growing the number of brand clients we serve. Our precise and reliable audience analytics are particularly vital to navigating where gaming and media meet in social influencer communities and our necessary analytics enabling the marketer to determine how best to leverage the ever-expanding creator communities. The traction of our platforms is evident in Stream Hatchet's signed contract extensions with Microsoft, Activision, Ubisoft, while expanding its list of clients with the addition of Monumental Sports, PUBG, FIFA, Logitech, NVIDIA, and Octagon. Employing the platform tools and features from Sidekick's offerings, make it an invaluable partner to the many companies navigating the complex social influencer sphere. Sidekick added Food Panda, Blizzard, Fanatics, and BenQ to its growing list of blue chip companies, leveraging their suite of influencer marketing and social commerce technology. Renewals and extensions included Nike, Universal Music Group, Virgin Voyages, and Riot Games. Turning to the company more broadly, we are executing very well on our plan of focusing on our key strengths in a tough environment, evident in our strong sequential quarter-over-quarter results. The cost reductions have certainly demonstrated, as we have indicated in prior calls, that we could substantially reduce EBITDA losses, a trend that will continue into the first quarter, as Lou mentioned. As we have previously stated, we feel this is an environment that is ripe for discussions with various parties that are also assessing how to create greater scale. We continue to rapidly narrow the focus of our strategic process and are confident that our efforts will result in a significant opportunity for the company to deliver on our stated goals in initiating this process of increasing scale, catalyzing further growth, and finding cost and revenue synergies. We look forward to providing an update as this process progresses. I think we'll now take a few questions. Thank you.

Thank you. We will now be conducting a question and answer session. And if you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove that question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys.

One moment while we poll for questions. Our first question comes from the line of Michael Kupinski with Noble Capital Markets.

Please proceed with your question. Thank you and good afternoon. I have a couple of 64,000 foot view questions and then some other more specific. There's been some recent press out there that provides some conflicting data about the interest in gaming post the pandemic. There originally was some data that suggested that there was an increased interest even following the pandemic, but some recent press indicated that maybe there has been waning interest. And I was just wondering if you can talk about your esports play, which has grown, and how do you explain the difference in view of what's out there in the media and what the data might support? I'm just wondering if you could have some color there.

It's a great question, and this really goes to the heart of what Stream Hatchet, our gaming analytics unit, tracks. And it's evident from their recently released report that esports viewership has really never been higher globally. It reached 40% year-over-year viewership growth in the last year, which is actually an accelerated growth rate in terms of global viewership. And actually, esports viewership is above the third quarter 2020 depths of pandemic time. So for esports to be above what was considered a highly unusual, aberrant point in terms of people locked in and viewing live streaming games, I think speaks very highly to just how much growth there has been there. What we are finding is that the audiences are there. Sponsors are clearly hungry to reach those younger demographics that have become exceptionally difficult to reach in more traditional media. The issue is not if esports is attracting those audiences. The issue that sometimes creates some skepticism about the esports space is about whether brands can attract really successfully connect to those audiences. And to successfully connect to those audiences, they need the tools that give them a better understanding of what those audiences are, help brands find the most authentic ways to activate among those audiences. And what we are finding is our specific tools Our business intelligence suites, our real-time dashboards, our creator discovery tools, our assessment of earned media value, our competitive dashboards, and just the historical trend data that we're able to bring really provide the kinds of tools that help advertisers, sponsors navigate the space and will help mature the space for media purposes so that the vast audience and the amount that brands want to connect that to those audiences can be fully realized. So I hope that connects your trend question to what we're looking to do to exploit that.

Definitely. And TikTok has begun to show broader audiences beyond the youth demographic and the content creation. And I was just wondering your thoughts on your focus on gaming, which obviously has a younger demographic. Will, do you still think that you'll participate in the broader appeal of social influence marketing given your younger demographic focus?

Yeah, that's an important point to clarify because we analyze over 20 social media and live streaming platforms globally. And we measure the content consumption regardless of whether that's gaming content or other content that is found on those various platforms. We obviously have a distinct and very well-known role when it comes to gaming and the focus on platforms like Twitch or YouTube gaming where we provide specific gaming insights. But we think the increased demand by older demographics for TikTok, which has obviously created some huge competitive challenges for traditional media, is actually a great trend for us because we have years of experience discovering and connecting and measuring social influencers, content creators. on that platform. And so the overall rise of TikTok, its greater usage and the fact that it has a broadening demographic that includes older demographics than it used to have is a very positive macro trend for us.

Gotcha. And then just kind of drilling down in the revenues, you put up some nice improvement in revenues in your advertising particularly. And this is, you know, kind of goes against what the industry is seeing in a tough environment. Can you kind of just talk a little bit about what's unique about your advertising revenue growth and how you're able to, you know, kind of buck the trend and the headwinds in the environment out there?

Sure, I'll take that one, Mike. Listen, our advertising team has done a tremendous job in managing our inventory. the delivery yield improvement during a really challenging advertising period, including all the Google algorithmic changes, the search and discovery that we've seen. That said, we've been able to grow our CPMs and our RPMs by 33% between fiscal 2021 to 2022. And we've accomplished that primarily by diversifying our demand network and driving higher CPM values from our supply inventory through our demand partners. I would say more importantly, our network of sites is targeted, they're brand safe, and they've been proven to engage very highly with audiences. So advertisers are willing to sort of pay us a premium for a safe network and for advertising against a safe audience.

Gotcha. And this probably is for you, Lou. Can you talk a little bit about the improvement in adjusted EBITDA and what you're looking for. I know you indicated that you should see further improvement in the fiscal first quarter. Can you talk a little bit about your cost reduction efforts? Are they still ongoing? When are we going to be cycling through most of those cost reduction efforts? And maybe give us just kind of a glimpse of what your thoughts are about how we should look at adjusted EBITDA going into the next fiscal year.

Well, as we stated in our release, we've shown both sort of year over year and sequential sort of improvement in our adjusted EBITDA figures. And that's a result of a combination of things. One, just refocusing sort of the business on our B2B elements. But two, also the cost reductions, as you highlighted, that came from both corporate and non-corporate expense. And, you know, as you know, you know, these take, some time to flow through the P&L. We've seen improvement over the last sort of couple of quarters. I think you'll continue to see improvement into Q1 2023 and in subsequent quarters. This is something that is absolutely top of mind. We've been extremely disciplined about right-sizing the organization and addressing sort of our cash burn rate, and we remain sort of focused on achieving cash flow breakeven in 2023 on a run rate basis.

Great.

That's all I have. Thank you, guys. Thanks, Mike. Thanks, Mike. And our next question comes from the line of Jason Silchen with Canaccord Genuity. Please proceed with your question.

Yep. Great. Thanks for taking the question. Just a quick follow-up first on the advertising business. Obviously, you just talked a lot about the reasons why you saw really strong results. in fiscal Q4. The quarter ended August 31st, so just wondering if you could comment maybe on some of the trends you've seen over the past few months and if some of that strength has held up as you go into sort of a seasonally important quarter for the advertising business.

Yeah, hey, Jason.

I can start, and Tom, if you'd like to augment, feel free. I mean, listen, we've seen continued improvement in our advertising business because we've been really nimble and we've been efficient with the inventory that we've been managing on behalf of our publishing customers. And we've been able to offset some of the headwinds that some of our peers have experienced because we've been able to partner with highly productive demand partners And that's, you know, enabled us to offset some of the traffic patterns that we've seen, particularly as we highlighted from some of the algorithmic changes, you know, from Google. But we're certainly not seeing sort of some, you know, anywhere near what some of the other digital media sort of peers are seeing in terms of the material impact. on CPM and RPM. The demand partners really value the inventory and the safety of our network and have been able to maintain premium values for the supply that we expose to their networks.

Yeah, I think just supplementing that.

upgrade of the exchanges that we offer our inventory through has clearly given us an ability to raise price and the shifts increasingly in inventory to more video oriented inventory has also contributed to that and the combination of those upgrades and shifts have have countered the uh somewhat downdraft in advertising that I think the market is more broadly experiencing. As Lou said, our greater challenge has been Google algorithmic changes, which hit groups of publishers from time to time and making sure that we can adjust to those, which always takes time. a bit of time when algorithms are changed is really the more direct challenge we've seen and are operating in a tough advertising environment and being able to handle those headwinds.

Thanks a lot. That's really helpful. Just two other quick ones. One, when it comes to these blue chip winds that we've seen, sort of the pace of those sort of accelerating over the past few quarters, Is it as simple as just a combination of Stream Hatchet and Sidekick that you've talked about a lot? Is there anything else that's going on in regards to your go-to-market strategy, how you're approaching these brands? Are they coming to you? Maybe you could just touch on the success there.

Well, the brands, certainly we have a very formidable reputation in the gaming space. And what we've been increasingly looking to do is get the gaming sector to understand that the breadth that Sidekick brings in terms of tying the gaming and social media world, where there's fragmentation among gaming influencers that cross over between live streaming and social media, that's a particular area that we've been able to talk to that is significantly differentiating for us. The other thing that I want to point to, since we've talked about brands and we obviously have some really great blue chip clients here that are involved with us, our social influencer platform is really also tailored to having a self-serve solution for small and medium-sized businesses. They, too, are suffering some of the consequences of what's going on in terms of targeting efficiency in the advertising world and being able to allocate their marketing resources increasingly towards social influencer spend is an opportunity. Of course, that social influencer world for a smaller business is not easy to navigate. You really need to be able to really simply and easily have a platform that can discover for you and communicate and provide the payment capability to cut through the friction that would otherwise exist for a small marketing operation. And we have a lot of resource geared toward that. And so I don't want to talk to our success being one that is only focused on brands. That SMB community is a very important part of the building we're doing.

Great. Another very helpful explanation there. One last one, just on the comments around the run rate of cash flow breakeven for fiscal 23, can you maybe just talk to the current cash positioning and just how you feel about the cadence of that, of maybe burn in the first half of the year or improvements throughout the year? Do you think that there's going to be a need to potentially raise additional capital or you think that the trajectory of improving expense reductions and things like that will help reduce that need in fiscal 23.

Yeah. So let me respond to that. So we finished our quarter with $8.6 million of cash. As I mentioned to Mike, some of the adjustments that we've made to OpEx will continue to flow through in future quarters, and I think it'll be more evident how aggressive we've been in terms of right-sizing our cost structure and preserving cash to extend our runway. That said, we're in the middle of a strategic process. That strategic process is intended to create scale and to create growth and opportunity for the company going forward. We expect that through that strategic process, you know, we'll be able to deliver continued sort of growth and the ability to finance the future company on much better terms and remain sort of, you know, shareholder friendly as we've been sort of in the past by reducing sort of any sort of potential dilution in the future. But we remain focused on you know, rationalizing our OpEx and getting to cash flow sort of break even, you know, on a standalone basis in 2023.

Great. Thanks a lot. There are no additional analysts with questions. And at this time, I would like to turn the floor back over to Lou for any closing comments.

Well, thank you, everyone, for your attendance today.

We look forward to keeping you updated as we make further progress. Thank you again very much for attending.

Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.