Super League Gaming, Inc.

Greetings and welcome to the Super League first quarter 2023 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 statement due to numerous factors. For a description of these risks and uncertainties, please see Super League's financial statements and MD&A for the first quarter 2023, ended March 31st, 2022. Available on SADAR and EDGAR. Important qualifications regarding forward-looking statements are also contained in Super League's earnings release distributed earlier this afternoon and also available on SADAR and EDGAR. Furthermore, the content of this conference call contains time-sensitive information, accurate only as of today, May 15, 2023. Super League undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. I'd now like to turn the conference over to Anne Hand, Chief Executive Officer. Please go ahead.

Thank you very much. And thank you all for joining us today for our first quarter 2023 financial results webinar. The video we just showed was from our IAB Playfronts conference this March, where we presented the power of Super League to top advertisers and agencies. And it really drives home how highly impactful and engaging our products can be. End-to-end immersive marketing programs for brands that deliver off-the-charts ROI, enabling them to meet young audiences right where they are, They're in next generation gaming that is really much more about socialization and creation. And anything they enjoy in their real life, well, younger audiences also crave that virtual twin as well. Never did I imagine when I thought about my career that I would have the opportunity to lead a company with a vision to play a role in the forever changing way the younger generations will gather, collaborate, shop, learn, and play. So let's kick off with some of our first quarter and more recent highlights and detail some of the great strides we've made. First, in terms of first quarter revenues, there are a couple of factors at play here to consider. One, we are coming off historical peak seasonality spend as advertisers put the bulk of their money to work, as we know, in Q4, that holiday spend time. Hence, our record-breaking $7.5 million quarter in Q4. However, Q1 this year was lighter than expected and exacerbated by the continued market headwinds. These are similar results you have seen reflected in countless companies' quarterly filings. We were not singled out. The continued uncertainty related to the federal interest rate policy, potential recession continuing to loom, caused large corporations to delay finalizing 2023 advertising budgets. So Q spend one was light across the board. In terms of Q1 revenues, we reported 3.3 million in line with our historic seasonality distribution. While this appears down relative to the same quarter prior year, on a normalized basis, we were up 17% due to a prior year one-time non-core technology as a service payment from Verizon. Again, this is a payment we received last year in Q1. for, again, a non-core one-off payment that was close to a million dollars. So when you back that out and you just focus on the business model that we're in and the strategy that we have in place, we still managed to perform better than last year, given the continued market headwinds, as I've said. That side Q2 has shown a very good strong start, indicating that advertisers are back. And we've made notable progress over the last month, acquiring Mellon, an immersive experience studio, and materially strengthening our balance sheet. That was critical. Our strategy is working, and we continue to make meaningful strides that dramatically improve our position as we look towards the horizon and our $100 million revenue target in three years. So let's pause for a moment there and come up maybe a level higher on what we see ahead of us at Super League. Led by gaming engines and the advancement in smarter screens, the internet is changing right before our eyes and increasingly becoming a 3D experience, or as we like to call it, the immersive web. The next generation internet, or Web 2, 2.53, has arrived, right? No matter what you call it, whether it's on the chain or off, it's more engaging, it's customizable, it's collaborative, and it's sticky for consumers. We have already proven that our immersive publishing, media, and creator tool engine is valuable and scalable. We currently reach over 100 million monthly unique players generating well over 1 billion monthly impressions, and we're growing. And we're doing this in some of the largest game platforms in the world. We are now applying that technology and capability backbone that we've built to even more virtual world platforms, established platforms like Decentraland, Sandbox, Fortnite, and more. We're becoming a multiverse company. This diversification means more audience reach and the ability to not only meet any brand partner's marketing objectives, but also offer a solution toward their forward web strategy beyond just gaming. Today, people under 30 spend more time on their phones in immersive worlds than any other activity except watching videos. Think about that. And Gen Z specifically spends over seven hours a week hanging out with friends in immersive spaces versus approximately five hours on social media. The headline here is that this is the new dominant form of digital social interaction for younger generations. As brands look to create immersive spaces as an extension of their web presence, Super League is ready to step in with our one-stop shop solution. Brands get acquainted with our powerful immersive engine to reach elusive young audiences and achieve campaign-oriented marketing objectives. But they stay and spend increasingly more with us because they see us having, they see that having a persistent channel in these worlds is a marketing requirement. You know, it's really no different than the need to have a TikTok or YouTube channel. That's really what brands are starting to realize is this is a persistent, permanent marketing channel to reach young gamers and young audiences. Yet that is not the end game for the company. It's not the big prize for Super League and our shareholders. It is really about where our business model is headed and what's happening now as we lend our enterprise solution to transform and modernize brand partners' overall web strategy and presence beyond having a persistent channel inside these existing game platforms. So let's take another moment to pause there. While our roots are in gaming platforms, our future is in building the premier publishing and monetization engine for the immersive web. So now let's look at our operational health. First, our pipeline remains strong and growing as we work with some of the biggest brands in the world across entertainment, fashion, CPG, and more. Brands like Disney, Mattel, L'Oreal, Mars, and Skechers. We served over 100 brands in 2022 with seven customers spending in excess of $1 million through our platform and aggregate with us. We continue to see a high 70% repeat customer rate and currently have 42 six-figure deals in our current pipeline. With 17 deals over 500,000, and six over $1 million, including what will be a record breaking program with Kraft. We have seven direct sellers right now, and we know a top performer can generate three and a half to 4 million a year in revenue when they're optimized. And this is before we talk about the revenue streams that we also have in front of us, such as resellers and direct to consumer. So we're super happy with the effectiveness of our sales force, our internal sales force. And again, those positive trends we continue to see in the pipeline. So that's a good segue to our reseller or global sales network partners. That strategy is working as well. This nascent indirect sales channel that launched last year delivered close to 15% of our total annual revenue in 2022 and represents over 20% of our revenue in Q1 2023 alone. That's up 200% versus the reseller contributions in Q1 2022. Our partners are coming up the learning curve and selling our immersive, very innovative media products. We can see as well that their deal sizes are increasing. And on top of it, they're serving as a feeder to our immersive experience in publishing pipeline. Every time we sell an immersive experience, that comes back into our pipeline controlled by our direct sales team. And so that's a pretty significant feeder system to have out there of international sales partners feeding us those immersive experience opportunities that inevitably tend to be six-figure deals. And as well, resellers are accelerating our awareness with top global brands. Again, this really was a channel that didn't really, wasn't available to brands five years ago. And so this is a big deal. So much of what our challenge right now out there is just education, helping these very smart, excited CMOs start to test the waters in this space and understand again, can't reiterate enough why this needs to be a permanent part of their marketing strategy. And a lot has happened since the quarter has closed as well, namely the Mellon acquisition. M&A and consolidation are becoming predominant right now. You're not surprised, I'm sure, it's a predominant theme in this space, especially when you look at the state of the private and public markets. This makes our multiverse approach to virtual world publishing even more poignant in today's market. To that end, we opportunistically acquired Mellon, a groundbreaking development studio, renowned for creating award-winning, high-profile experiences across an impressive array of global brands, including the likes of the NFL, Chipotle, American Girl, Clark's, and even Dave & Buster's. This isn't just any game development studio. Mellon's an innovator, They're creating valuable partner solutions that drive business objectives for brands. One of the most compelling examples was their Chipotle activation in October 2022, which proved immersive game experiences can drive real-life performance. In this case, download apps and retail like-for-like sales were those types of objectives that Chipotle wanted to see those bottom line results on. Our campaign helped deliver the number two best mobile app food sales day for Chipotle of all time. Again, this is where these younger audiences are. They're very hard to reach. And if you can engage with them in a very deep, meaningful way to build real brand loyalty, you can convert them into real life customers. This acquisition is immediately accretive and intelligently structured in alignment with shareholder interest. with a nominal cash outlay and performance-based earn-out compensation incentives. Furthermore, Mellon's immersive experience capability augments our industry-leading publishing media and measurement and monetization tools, creating a vertically integrated gold standard, a powerhouse, in our opinion, in this fast-growing sector. And the impact's immediate. Not only were we able to fully integrate their talented team within the first week, but we also saw pipeline synergies out of the gate. This is instantly quantifiable to our shareholders. A bigger pipeline, larger deal sizes, and very notably, improved margins. We're controlling the full value chain, and that gives us the opportunity to walk up our margin profile and our march towards profitability. Now, beyond Mellon, we continue to increase our ownership stakes in Roblox games, with now more than 20 in our portfolio. This gives us control of more media inventory, and it's also part of our revenue diversification strategy as we look to expand more meaningfully into direct-to-consumer recurring revenues. Additionally, we announced an exclusive strategic partnership with Landvault, the leading digital construction company in the metaverse, to serve as their partner as we further expand our current efforts in Abu Dhabi to the greater UAE and GCC regions. Just focusing on that region alone and the type of investment they're putting into the metaverse could support our current year revenue ambitions. As we work towards our goal of achieving profitability, capital is the lifeline to any growth stage company. Recently, we significantly bolstered our balance sheet with the successful completion of a 23.8 million capital raise, including 9.9 million subsequent to the end of the first quarter. We applied some of those net proceeds to fully extinguish our debt and pay out, earn out provisions related to some M&A from 2021. Additionally, we have been extremely diligent with our expense reduction plan, cutting approximately 35% of our operating expense on an annualized run rate while continuing to invest in our high growth revenue products and the resources against those product lines. With this lean, agile organization, we've created material operating leverage. What does that mean? Every revenue dollar that comes in now is of greater value. It's more efficient. In our Q4 2022 shareholder letter, I talked about being in the strongest position in our history to execute on our vision. Since then, we've only gotten stronger. Now backed by a more focused operation, a strengthened balance sheet with no debt, more diverse revenue streams with improved marginality, and the premier vertically integrated one-stop shop solution, we have ignited our booster rocket for growth. I talk a lot about our leverage points. There's three, and they remain. The first one is monetizing what we've built, what we have right now. What are the indications of that? A strong and growing pipeline, larger campaign deal sizes, as I've mentioned, continuing on our high repeats, proving that we can take a greater and greater share of advertisers' wallets and become a go-to for their marketing needs. This is driven by improved Salesforce effectiveness. That means higher salesperson throughputs, higher win percentages. And by the way, we're not done expanding our team. Seven strong sellers and growing. And we're excited about the way we're seeing an acceleration and how new sellers come up the curve and getting new deals into the pipeline getting wins over the wall, and really getting confident as they go out and sell, again, these very innovative, progressive media products and experiences. Our second point of leverage, optimizing that global sales partner or reseller network I talk about. This is important because 50% of our eyeballs or our audience are international. I love the idea that we are utilizing our partners' P&Ls and their established media sales teams. They're deep deep brand relationships to sell our international audience inventory and we're already again as i mentioned seeing some great trends there bigger packages it's more consistent now that they're coming in with six-figure media buys and so we're seeing now what does it really look like when a global sales partner is really starting to get optimized and we can use that as a benchmark for the rest of our selling network, and continue to churn that network out, frankly, to high-grade it and ensure we have the best partners out there selling those products for us in markets outside of the U.S. And then there's the third point of leverage, and that's diversifying the nature and shape of our revenue streams. And the important note here is that that's not just an idea or concept. It's happening right now. Moving more into persistent owned and third party annual experiences and media programs, much like what we're doing for Abu Dhabi and Yas Island, where we're running a persistent game world, more than one. Those don't then just look like campaign dollars that land in Q4. Those are annual programs. They're nice, they're smoothed out, they can be forecasted, and they can smooth out some of that inevitable revenue lumpiness that we have when we've had a more heavily dependent ad model. So that's really exciting for us. But it also, if you think about that engine that we've built, that we're applying to run other people's persistent worlds, it means that we can also run them for ourselves. Or when we run them for others, we can participate more in the full economy. So that allows us to move further downstream. So it's not just about smoothing out revenues and having them be more predictable, but it's also moving downstream into high margin direct to consumer, first party data monetization, ways in which we can control a greater share of the digital economy around those persistent worlds or experiences that we create. And again, really changed the business model from one that feels very temporal and very dependent on advertiser dollars to one that's much more about an enterprise solution for brands as they take their valuable brand and IP into this next generation of the internet. We continue to see a clear line of sight towards growing our annual revenues to over 100 million with a gross margin in the high 50s to low 60s. Our gross margin goal will be further supported through the acquisition of Mellon, as I noted. But along with that, we also are continuing to create innovative products, new products out there that are different and also really can achieve that really high attractive margin we love so much, especially in the meta media products space. And there's other internal strategies too. We're not done with leaning out the org and constantly looking for ways to spend every investor dollar as smartly as possible on that path to profitability. This launchpad provides with the ability to build a great business just by monetizing what we have now. Yet really what's in front of us is the opportunity to build something that will be even more material and leading over the next two to three years. So as you've heard me say in different ways already today, we're building an enterprise model for the future of the internet or the immersive web as we call it. As I stated previously, partners seek us out to help them solve their marketing challenges, but they stay with us because we offer them a solution for how to think differently about the Web 2, Web 3 strategy for their brands. And with that, thanks for listening, and I would like to begin the Q&A session. Operator?

Thank you, Anne. We'll now begin the question and answer session with questions from Super Leagues covering analysts. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one if you would like to ask a question at this time. And please hold while we poll for questions. Again, ladies and gentlemen, it's star one if you wish to ask a question at this time. We did have a question come in from Jack van der Aert from Maxim Group. Jack, your line is live.

Okay, great. Hey, guys, I appreciate the update. And great to hear you're still on track to that 100 million revenue target. And it sounds like you've had quite a bit of good action since we last spoke last quarter. So, Maybe start on the direct seller side, Ann. I think I heard you have seven direct sellers and top sellers can generate over three and a half million per year when they're optimized. Can you give us a general context, maybe how many direct sellers you had entering last year or even last quarter, and then just kind of what your future targets are for those direct sellers?

Yeah, it's a great question, Jack. So, you know, right now we still have a few additional open positions that we're recruiting against. So really, in many ways, we have so much available inventory and opportunity, and we're really one of really the only companies out there that can deliver these end-to-end solutions. So we're willing to continue to spin up and bring on more resources. We have three open positions right now. Two of those positions of the seven we have right now are newer hires. but they're people who've already been selling in the kind of immersive media experience space. And so we really like the fact that they can jump up that learning curve faster. And also, frankly, they've already got the pipelines they've established and built in those brand relationships. They can just port right over to us. You know, two of our top performers last year were hitting that kind of three, three and a half million dollar mark. So we know that that is achievable, especially when You look at the fact that our catalog of what we can do for brands has just grown exponentially. And so we feel like that's a very reasonable target. And so, you know, that tells us that if we have 10 sellers up and running, fully optimized, they should be able to deliver 30, 35, 40 million in revenue. And that's before, again, we get into the the indirect resellers. Right. And indirect resellers, just to add to that, they did about 3 million of our 20 million last year was coming through those resale partners, that global sales network. If that's what they can achieve in a year where they are just getting onboarded, And you're, again, talking about sales teams that have never sold these kinds of products before. This is very different from what they sell usually in their day job. There's nothing to say that we couldn't expect another, you know, six, eight, 10 more from them this year as well. And so those are the kinds of chunky building blocks that give us... A lot of confidence, even with Q1 being a bit soft, which again, we weren't singled out there, but it doesn't change our view that we're going to have another step change revenue year.

Okay, fantastic color there. I appreciate that. And then I'll maybe ask one more and then I'll hop back into Q. You mentioned the first quarter being seasonally slower than normal. And yes, I'm seeing that across my other companies in the ad space. But you did say QQ advertisers are back. So can you just give us an idea of maybe what to expect for the second quarter directionally and just what kind of gives you confidence? You touched on that pipeline of 42 six-figure deals. I'm sure that's part of it. And then your direct seller comments as well. But just what gives you confidence that advertisers are back and why are they looking to Super League with those ad budgets?

Yeah, I mean, look, in general, there's probably going to be most companies out there that have a heavy digital advertising dependency that aren't going to say advertisers are back, right? Why do I feel like they're back? They're back because we've always known that our products stand out. They stand out from a performance point of view, but it is actually where the audience is. I think we spoke about this maybe, Jack, on the last call, or maybe it was afterwards when we were catching up, but You know, I have right now big global companies sitting on hundreds of millions of dollars of media. And those global heads of media have said things to me about the fact that traditional digital advertising, that YouTube video, the Facebook ad campaign, the Google ad campaign, it's not performing anymore. They're not getting the performance results, but it's also, it's not where their audience is. As kind of evidence with some of my remarks where I talked about The shift, kids are now in these immersive spaces more than they're even on social media as we know it. I would just call this the next generation of social media. But I think the reason that we're feeling it is because we know that we're kind of a little bit at the top of the stack. We're not kind of some of the throwaway digital marketing that's not doing well. We are the stuff that the CMOs really want to put their dollars into and they're excited by it and the innovation. And again, the fact that they can reach that elusive audience. So what we've seen, and this is just our best measure, is we have a weekly revenue call and our top sales leaders are there and they're telling us about, what came in the pipe that week, the size of the deals. And you can feel that the tempo has shifted over the last, call it 45 days. And so we feel, that's why we feel comfortable that We're still going to have another step change revenue year while we haven't given formal guidance and that it's going to be a good 2Q. So would I like advertisers to be back like with lighter fluid on their advertising dollars? That would be wonderful. But we right now are not feeling any caution about our Q2 performance. Again, we don't formally give that guidance, but we're at a stage where we've already kind of got more than, you know, a good kind of 5 million underpinned. So if we're only kind of, you know, halfway through, we're feeling good.

Okay, great. And I said that was my last question. Maybe just one quick follow-up. Those deals in the pipeline, the 42 six-figure deals, do you just have a sense, do you just remind us how you measure the pipeline and kind of what, um, what the duration of the pipeline is or how much visibility you have into those campaigns being executed. Are those near term? Is that a near term number or is that a general what you've had verbally committed?

Yeah, that's the current pipeline of deals we're chasing. Now, what does make them more forward or forecastable in many ways. And obviously we kind of, we weight that pipeline and measure those deals and probability wise as they advance. So as we're down to maybe there's only one other competitor or we've been given a verbal, we move it to a higher probability in the pipeline. But inevitably, because they're bigger, it often means that they are more about 2Q, 3Q, 4Q spent. So when you're traditionally in a digital media business, a lot of campaigns are real short term. Hey, I've got a new movie release coming out next week. Let me throw 50K at you. And look, we'll take those deals too, and we do. But when people are asking us to run programs that have an immersive experience attached, no different than what we did for Mattel with Barbie's Dreamhouse, recreating a gameplay experience, and they bought our media products, Those things have a little bit longer lead times and they're big and chunky. They're kind of like tent poles for Mattel. And so that means we're getting a line of sight much further out. And so just by the size of deals alone and the fact that they are a combination of experiential and media means that we're able to see kind of a good two quarters out, if not more. Now, once we start running things that are annual-like programs, like what we're doing for Yoss Island and others, again, those are annual contracts. So that even gives us more of that ability to look forward.

Okay, really great color there, Anne. I appreciate the time. We'll hop back in the queue. Thanks.

Thank you. And it looks like we've reached the end of our question and answer session. I would like to turn the floor back over to Anne for any further comments.

Well, I just want to say thank you so much for hanging out with us today. It's always a pleasure to have these touch points and to get to connect with some of our analysts. Be on the lookout for us at upcoming investor conferences. And as well, you'll see more and more of Super League getting out there at key marketing conferences and thought leadership in this space because, again, we're super excited about the leading position that we're building. And just stay tuned for more good news. Like I've said from the beginning of this call, our strategy is working. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. Thank you for your participation.