Super League Enterprise, Inc.

Greetings and welcome to the Super League second quarter 2024 conference call. Please note this conference is being recorded. Before we begin, I'd 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 statements due to numerous factors. For a description of these risks and uncertainties, please see Super League's financial statements and MD&A for the second quarter 2024 and to June 30th, 2024, available on EDGAR. Important qualifications regarding forward-looking statements were also contained in Super League's earnings release distributed earlier this afternoon and also available on EDGAR. Furthermore, the content of this conference call contains time-sensitive information, accurate only as of today, August 14th, 2024. Super League undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. I'll now play a short video before I turn the conference over to Ann Hand, Chief Executive Officer.

Well, good afternoon, everyone. I'm delighted to report on Super League's second quarter financial results and provide an update on our company's continued operational progress. During the quarter, we continued on our mission to redefine the gaming industry as a media channel for global brands through our innovative technology, capabilities, and products. Our leadership position earned through the work we have done today allows us to further grow our competitive moat with extensive barriers to entry. Through a variety of collaborations with major global brands, IP owners, and talent, we launched multiple captivating immersive experiences with tremendous results that verify our ongoing momentum in driving 3D engagement on platforms where the massive Generation Z and Alpha audiences already live. We continue to believe in the unstoppable secular shift in digital advertising towards 3D immersion. Immersive engagement allows brands to speak to young consumers in a highly customized and personalized way, and it performs, offering a 252% higher engagement rate and a 40% higher conversion rate. This is a transformational time that we're all living in, in the way that content is created and consumed. And it requires a new imperative for the C-suite to think differently about how they engage with the next generation. While it is new terrain, it offers an exciting opportunity for brands to create deeper affinity and ultimately conversion for a greater share of consumers' wallets. As you've heard me say before, the average Roblox user spends an astounding 156 minutes a day on the platform as compared to 95 average daily minutes on TikTok. These young consumers expect to meet brands first in digital environments and feel as strongly about their digital identity as they do their physical identity. Currently, 75% of Gen Z spend money on virtual in-game items. And some in the industry believe that by 2030, this next generation will have 30% of their total wardrobe be in the shape of digital clothing for their digital selves. Being in a nascent, rapidly changing industry, it is a requirement that we learn and iterate quickly as we continue to evolve the trajectory of the company. This is our offense. and makes us stronger against competition and stickier with our customers. And it speaks to our creative, collaborative, and competitive spirit that is really at Super League's core. Super League is first and foremost a product and technology company with currently more than 10,000 experiences in our Roblox network alone that currently reach approximately 160 million monthly unique players. Now that's real scale. This is what separates us from the pack. We are not merely an ad agency or a game development studio. Our approach to productization is how we scale our pipeline and grow our margin profile. When we build an immersive experience, we create a 3D model of key building blocks. These reusable elements collapse our development timelines. They lower the cost of entry for new brands looking to enter these pioneering marketing channels. and they do allow us again to improve our margin profile. Super League pop-ups, repeatable drag and drop elements of our custom experiences, which are deployed throughout our software, are officially in market and can be easily reskinned for a wide berth of brands and IP owners. This leads to faster brand adoption and depth in key verticals like music, fashion, QSR, automotive, and more. As well, we create beautiful experiences, and are increasingly being asked to build dedicated worlds that are more persistent in nature. So what did you think about the opening Olympics video? Pretty amazing, right? Since our acquisition of Mellon Studios last year, we've seen our dedicated build revenues increase by three times. And with a product mindset, we can build vast, exciting, dedicated worlds faster as well. And we don't stop there. As we have proven success at driving real-life commerce on behalf of our brand partners, That's a leading edge for us. We think about our brand's P&L, not just trying to grab a portion of their in-year marketing spend. As we transition now to Q2 results, we've seen some macroeconomic factors continue to provide an overhang, namely prolonged inflation resulting in softening of consumer spend and some ad sales. We were thrilled to see the positive inflation news this morning, and we hope this is an entry point for interest rate reductions and an opportunity for small cap stocks to begin to have their moment once again, a moment we've all been patiently waiting for, as have all of you on the call. While our top line revenues were flat sequentially, we did see approximately 1.8 million in expected revenues that were deferred due to delayed advertiser launch dates. And we continue to win big signature programs, some of which offering recurring revenues beyond the immersive experience build and launch. Going back to our productization approach, we are starting to see the impact on our forward margins. Currently, we have an internal target of 45 to 50% margins on most programs, with lower margin proposals accepted by exception only when they're offering a greater longer-term strategic benefit to the company, such as subsequent repeat business, or perhaps a proof point for a new vertical that we're chasing. The more repeatable products we sell, the more the margins climb. making pop-ups and other product innovation essential. We continue to apply a laser focus on our P&L as we aim to achieve our first profitable quarter in Q4 of this year. And we continue to positively test the capacity of the organization as a core lever to profitability and scale. We currently operate with approximately 15% less in headcount than we had last year, which has contributed to a 25% and 23% decrease in our Q2 pro forma operating expenses and operating losses respectively. Again, to reiterate, a 25% decrease in our Q2 pro forma operating expenses relative to same quarter prior year and a 23% decrease in our operating losses relative to same quarter prior year. We are off to a strong start for Q3 and expect to be able to deliver a large amount of revenues in the second half of the year and do that inside of our current cost structure. Second quarter 2024 top line highlights included revenues associated with immersive experiences for global brands such as the International Olympic Committee, Visa, Maybelline, Klairs, Skechers, Google, and Universal Pictures. A fun one to highlight is the work we've kicked off with Google. Experiences to help youth learn more about internet literacy and digital privacy. That's right, gamified education. And this program speaks to another important signal. With our proven expertise in the space, we were able to pitch and win this business within a 24-hour period. Chasing six- and seven-figure deals has become our new normal. We continue to see strong repeat opportunities with the likes of Kraft, iHeart, Samsung, Sony, Universal, Ubisoft, and the FDA, as well as seeing new brands enter the space. The FDA program is a fun one to highlight because it's another signature opportunity to really do good beyond just gameplay. That specific campaign is raising anti-vaping awareness amongst youth. If we look at our current pipeline, it features 51 repeat customers and 68 new brand entrants. As we anticipate the larger deal trend to continue, we can quickly scale our revenue with fewer brand partners that are committed to the larger and longer-term engagements. Our strategy begins with creating a brand's short-term experience, and then we leverage that engagement into more persistent programs, offering them a way to enter into this new immersive marketing channel. This is a well-recognized persistent strategy used already by brands today on traditional social media channels like Instagram and Facebook. They don't pop in here and there for a month or a week at a time. They have a consistent strategy. And that's the corner that we're starting to turn with more and more of these repeat brands that we've been engaging with. We expect larger deal sizes with more predictable longer-term revenue that over time should offer stable cash flow for the company and ultimately drive shareholder value. As we grow and deliver on these larger programs, it verifies our unique position as a one-stop shop and enterprise solution capable of driving commerce across a variety of existing immersive platforms and ultimately back to a brand's own immersive website and commerce experiences. We see evidence of this with retailers who increasingly realize the value in hosting their own virtual worlds to create brand awareness, highlight trendy products, drive community among customers, and now to even recruit young workers. Recent moves from various major retailers, such as Walmart's rollout of Realm and Ikea's Virtual Universe, confirm this trend. With our leadership position and relationships with a host of major global brands across various verticals, the opportunity in front of us remains enticing. SuperLeague has the strategic and creative capabilities that when coupled with our suite of proprietary products and measurement tools, guide brands to appropriately position in this new 3D chapter of brand marketing, digital advertising, and e-commerce. And this new chapter is one that can truly transform business models. So now let's move on to some operational highlights. First focusing on dedicated worlds we build, there was no better example of the excitement and breadth in our offering than the work we launched in partnership with Visa. The Olympics Games in Paris provided a great opportunity to showcase the growth of immersive engagement and allowed Super League to shine through collaborations that showcased our innovation. In June, leading up to the games, we launched a first of its kind event featuring a Post Malone hybrid concert. So there was a live concert and then a live stream virtual concert as well. That was hosted at the iconic Louvre Museum and streamed live into a Roblox event that we created, reaching over 170 countries worldwide. In addition to the concert, players were able to explore the virtual Louvre Museum experience we built to learn and interact with a collection of curated artwork such as the Mona Lisa. This was followed by the launch of Olympic World, a global experience to unite Olympic fans that was brought in partnership with Visa and the IOC. As shown in the opening video, the historic first features Olympic and Paralympic intellectual property, offering players the virtual space to explore the Olympic spirit through various games, activities, quests, and events, including Olympic-expired minigames and access to virtual products in the Olympic shop. As well, we continue to gain traction with retailers, such as with Skechers, where we created the first immersive Skechers store within Roblox's Lifetopia mall. The Skechers shop was designed to build community and engage young consumers in a world that brings Skechers brand to life. As a visitor, you could participate in a treasure hunt to win exclusive Skechers digital items, as well as create stylish looks inspired by select Skechers products. The results were compelling with 3.4 million visits to the store, 4 million try-ons, and nearly 45 million impressions generated in five weeks. And we're seeing more retailers getting in the mix. Go check out our recently launched Old Navy store, developed through our pop-up store product, offering players the opportunity to shop for digital twin fashions of current in real life clothing that is in stores now for the back to school shopping season. Additionally, during the quarter, we continue to demonstrate further product innovation with the debut of Sounds, a new scalable immersive music offering inclusive of many of the elements that make for a great concert experience, including listening parties, dance moves, and digital merchandise. Sounds launched with a bang with Bebe Rexha. Her custom-built avatar sang, danced, and engaged with fans through games, gave players the ability to try on and purchase virtual gear, and offered other rewards, all while debuting Bebe Rexha's newest singles. In conjunction with our unlockables product module that offers unique player rewards the experience was launched in three mini games inside of our vast network delivering over 2 million visits 230,000 dance party completions and 43,000 visitors to our reward Center. key to our strategy, as well as diversification across existing gate platforms. That again, with the vision of the company leading to ownable, dedicated worlds for brands and IP owners, as well as for ourselves. So again, controlling more of that end fully ownable.com experience. Our recent announcement of a strategic partnership with MetaStadiums is precisely in that lane. Together, we offer a unified solution to build and leverage immersion with audiences on today's dominant gamified platforms, such as Roblox, Fortnite, Creative, Sandbox, Decentraland, and more, and ultimately drive people to a brand's owned and operated set of digital and physical experiences. MetaStadiums is a cutting-edge platform to build, customize, and manage dedicated, ownable virtual stadiums in the metaverse that coupled with our products and capability can deliver metaverse world design and game development, live virtual events, avatar item collections, digital to physical engagement systems, as well as comprehensive marketing, promotional, and content execution. The combined capabilities offer cross-platform immersive experiences and events. By leveraging our tech and expertise in creating captivating experiences coupled with Meta Stadium's incredible portfolio of top-tier sports and entertainment IP with proven commercialization and monetization capabilities, we create a compelling offering that we believe could be the beginning of our foray into new recurring revenue streams in the areas of consumer monetization and data. Finally, as we've mentioned, the company has never been more agile and proactive. Historical data has shown that a top seller in our organization can generate $4 million or more in annual bookings. As we strive to achieve annual bookings precedence, in Q2, we restructured our sales team inclusive of a top-down reorganization, overhaul of our East Coast sales team, and the recruitment of an experienced new East Coast leader who's already contributing large programs to the pipeline. Like margin growth and cost control, Salesforce effectiveness is an essential component for scale and profitability. So with that, operator, let's move to Q&A.

Thanks, Anne. We'll now be conducting a question and answer session for our covering analysts. If you'd like to be placed into question Q via the phone, please press star 1 on your telephone keypad. Over the webcast, please use your raise your hand feature. One moment, please, while we poll for questions. Our first question today is coming from Scott Buck from HT Wayne. Right, your line is now live.