East Side Games Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the LEAF Mobile 2020 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Darcy Taylor. Thank you. Please go ahead, sir.

Thank you, Daphne, and welcome everyone to LEAF's fourth quarter full year 2020 results call. I'm Darcy Taylor, Chief Executive Officer of LEAF Mobile Inc., and also with me today is Jim McCallum, our Chief Financial Officer. On today's call, I will begin by sharing highlights on our performance from Q4 and full year 2020, in addition to giving an update on our strategy and key events that have taken place since December 31st, 2020. Jim will go into greater detail on our financial results for the period before turning it back to myself for some final remarks before we open it up to analyst questions. Before we get started, please note that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call includes references to non-GAAP measures. Please refer to our fourth quarter press release and MD&A for cautionary statements related to the forward-looking information and reconciliations on non-GAAP measures to GAAP results. If you'd like to request an audio replay of this call, please contact our investor relations team at ir.leafmobile.io to request the audio replay. Let me begin by highlighting LEAF's fourth quarter and full year 2020 results and our strong finish to what was an extremely busy an unprecedented year in 2020. I'm proud of our team at Leaf for executing on our vision even as the world navigated uncharted territory. Leaf remains relentlessly focused on our three pillar strategy of organic growth from games development and publishing via both IP driven franchises and in-house development franchises, distributed growth with our core technology platform IDLE kit and NFT kit and acquired growth through mergers and acquisition as a disciplined buyer looking to increase our competitive advantage scale and unit economics. This strategy has been carrying momentum we built in 2020 into the new year, and we have no plans of slowing down as Canada's leading free-to-play mobile game group. Leaf continues to show solid growth as we report our figures for the last quarter of an eventful and defining year for Leaf. On February 5, 2021, the company acquired Eastside Games, and due to its significance, the majority of my comments will be focused on the combined company of Leaf and Eastside Games. Our financial highlights are as follows for 2020 and Q4. On a combined pro forma basis, Leaf and Eastside Games generated revenue of $80.5 million in 2020. This was a 116% increase over the $37.2 million recorded in 2019. Adjusted EBITDA. was $11.2 million, and 187% increase compared to the $3.9 million delivered in 2019. Our Q4 revenue was $23 million, a record quarter, and an 104% increase versus the $11.3 million delivered in Q4 2019. This was in a transformational year. LEAF doubled revenue, nearly tripled our adjusted EBITDA, and more than doubled our Q4 revenue versus 2019 on a combined basis. As we enter the new year, we are excited about the opportunities ahead. We've had a positive start to the year with strong performance across our game portfolio in 2021. Going forward, we expect continued positive momentum. Since January 1st, 2021, we have already announced that we've closed a public offering of gross proceeds of $23 million, which included the full exercise of the over allotment option. We completed our acquisition of Eastside Games for $150 million, as I had mentioned previously. We graduated to the TSX from the TSX Venture Exchange. We've entered into a non-binding letter of intent to acquire Truly Social Games, a developer and publisher of mobile games headquartered in Vancouver, Canada. We have entered into a multi-year partnership with World of Wonder Productions for the exclusive mobile game rights to an Emmy award-winning competition series, RuPaul's Drag Race. Announced NIDAO applications and also announced IdleKit publishing partnerships with the likes of Night Garden Studios, Bigfoot Gaming, Mighty Kingdom Games, as well as Tiny Rex Games. We have also launched newly developed NFT kit and partnerships with Wax Blockchain to support Leaderly's new NFT game, Butt Farm Nifty Stash. Leaf. is uniquely positioned to continue to grow our business and I look forward to another incredible year for LEAF in 2021 as the recent announcements continue to build on our strong foundational business momentum. Before I turn over the call to LEAF Mobile's new CFO, Jim McCallum, to further discuss LEAF's fourth quarter and full year 2020 financial results, I'd first like to thank Jim for being such a quick study and would like to provide everyone with a brief introduction to Jim's background. Jim has more than 20 years of international financial and operational executive experience with multinational public companies and big four accounting firms, as well as extensive capital markets, acquisitions, financial reporting experience in Canada, the US and Europe. We are excited to have Jim. on the Leaf team, where we feel he complements our strong performance-oriented culture, and we believe his impressive reputation for execution and achieving results makes him the right choice to lead our finance function. Now, I'd like to hand over to Jim McCallum.

Thank you, Darcy, for the welcoming introduction. I am pleased to join Leaf Mobile, one of the largest mobile gaming companies in North America. at this exciting time for the company. The acquisition of Eastside Games is pivotal for Leaf Mobile, giving it scale and profitability as it recently graduated to the Toronto Stock Exchange, and the acquisition was a compelling reason for me to join the company. In our MD&A and our press release that we filed today, we have provided detailed breakdowns of revenue, net income, and adjusted EBITDA for Leaf as reported under IFRS, which in the MD&A we refer to as our Schedule 1s, LEAF pro forma, which includes financial results for Leaderly, assuming that the Leaderly acquisition occurred on January 1, 2020, which we refer to as our Schedule 2s, and on a combined basis with LEAF pro forma plus e-cite gains, which we refer to as our Schedule 3s. We believe that the most relevant way to analyze our go-forward business and future results is on a combined basis, and like Darcy, I too will speak to these Schedule III results. Individual company performance is also provided in our press release and MD&A for interested readers. The completion of the Eastside Games acquisition in February effectively doubles lease revenues and just as importantly, significantly improves our profitability. While the Leaderly Studio publishes four games, on a combined basis, our two studios together now publish 10 games with several new games in the pipeline to be introduced later this year. Recently, we have announced a number of IP, publishing, and idle kit agreements, which we expect to drive future revenue growth in addition to our in-house initiatives. We are also working towards entering a definitive agreement for the acquisition of Truly Social. As Darcy mentioned, we delivered record revenue performance for Q4 on a combined LEAF and Eastside Games basis. On a combined basis, revenue more than doubled to $23 million this quarter versus Q4 last year of $11.3 million, and with a slight increase over the $22.8 million generated in Q3 2020. For the full year of 2020, revenue increased 116% to $80.5 million, increasing by $43 million as compared to revenue for 2019 of $37 million. A revenue mix was 79% in-app purchases and 21% from advertising revenue in 2020, which was consistent with the 2019 mix. Approximately 80% of our revenue is derived from North American users, with the remaining 20% from the rest of the world. The combined company recorded significant increases in net income and adjusted EBITDA during 2020 as compared to 2019. The increase is primarily driven by the 116% revenue growth during the year. Proforma adjusted EBITDA for the combined company was $11.2 million for 2020 as compared to $3.9 million in 2019. Key profitability and efficiency metrics that we will continue to report on are gross profit margin, which was 62% in 2020, and adjusted EBITDA margin, which was 14% in 2020, up from 10.5% in 2019. This EBITDA margin provides us with the growth capital to continue to invest in our business. From a balance sheet perspective, at December 31st, 2020, LEAF had $7 million in cash and no debt. We will provide additional cash flow information for the combined company at our upcoming first quarter 2021 earnings call, which is in just over two weeks. It has been a pleasure meeting with some of you during my short time with LEAF Mobile. And I look forward to connecting with many more investors and analysts in the weeks to come. I will now turn it back to Darcy for some closing remarks before Q&A.

Thanks, Jim. Before we open it up to our analyst Q&A, I wanted to close by highlighting a few macro factors highly relevant to our business. I would like to start by underlining how proud we are of the entire team who have transitioned to work from home on a full-time basis. These are incredibly challenging times, and we really appreciate the time, energy, and care that you put in on a day-to-day basis. I'd also like to formally welcome Jason Bailey, Founder of Eastside Games to the LEAF Mobile Group as the new Chief Revenue Officer and Board Member. I'd also like to welcome the entire Eastside Games team and thank them for their belief in our shared vision and their tremendous passion that they have displayed to date. We're truly excited about having the largest independent studio in Canada, a part of the Leaf family. Thank you for joining us, and we'll open the floor for questions and answers with analysts.

Thank you.

At this time, For analysts and institutional investors, if you would like to ask a question, press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster.

Looks good, right?

we have our first question from neil gomer of haywood securities your line is open yeah good afternoon darcy and jim thanks for taking my questions um maybe i'm just wondering if you can provide a little commentary on what you're sort of seeing in 2021 so far and you know with respect to that What sort of considerations should we as an analyst or investors be expecting on any potential seasonality in the business? Obviously, you covered off the strong year-on-year growth you had in 2020. So just wondering any sort of perspective you have on the impacts of COVID on 2020, what you're sort of seeing in 2021, what sort of quarterly or sequential growth rates we might sort of expect or whether we're expecting... you know, sort of the timing of the growth over the course of this year. Is there any sort of color you can provide on that without providing, I understand, any formal guidance?

Yeah, thanks, Neil. It's Darcy. If we want to talk about the two elements on seasonality and forward-looking growth, I think if we look at our organic growth across the business, we can say that it's heavily weighted towards the second half of the year. as the majority of our pipeline comes into market with game launches at that time. That will also build further as we've entered into at least six new partnerships with idle kit partners of which those games as they enter the market will be also late 2021, early 2022. In respect to COVID or as far as seasonality and the market in general, we noticed exiting 2020 a fair amount of turbulence within the marketing area for UA spend leading up to the US election. That pushed seasonality a little later into the year, so we saw the sort of return to normalcy coming in more so into Q1. In reflection to COVID or pandemic, we've seen the acceleration of installs start to normalize, but we would like to highlight that the behavior of those players hasn't trended any differently than what we would see in normal player behavior.

Okay. Well, thank you for that, Darcy. Maybe my follow-up would be on the margin profile, the 14% EBITDA margin you achieved in 2020 was higher than my expectations. I'm wondering as you invest in the business and are working towards the deployment of obviously a number of titles through the balance of this year, Um, you know, what should our perspective on the margins be? Should we see a slight dip in those as you invest in the business or you're, you're able to sort of sustain those levels? Um, even as you, uh, bring on new titles to market.

Yeah. Thanks, Neil. Good question. I mean, obviously, the company at its current state is in a high investment, high growth mode. We've been investing significantly in the future across all of our key growth pillars. Specifically, I'll highlight our idle kit platform, which we feel has tremendous amount of blue sky in the future. So if I would look at EBITDA margins, I think we had a very strong year this year, but our focus is to continue invest in the future and growth initiatives, and to keep within a range with, I'll say, progressive improvement on margins, but always with a look at the long-term investment side.

Yeah, and I guess if I sneak one more in there, I guess with those idle kit partnerships that you've announced, my understanding would be that those are quite high, at least gross margin investments. um you know sort of partnerships agreements and so forth and so uh i would think that sort of maybe in 2022 you start to see a little bit more of an uptick in margins and that's sort of the correct uh interpretation of those idle kit partnerships yeah i think you've interpreted that correctly neil i um obviously understanding that that that recognition of margin and revenue doesn't come into play into the um until the products uh come into market so

it will be timed with those launches.

Yeah, that's perfect. All right, thanks very much, guys. I appreciate it.

You're welcome, Neil.

And your next question is from Susan Sukumar of Age Capital. Your line is open.

Good afternoon, gents, and congrats on your first earnings call.

Thank you, Susan.

Guys, I wanted to touch on some of the performance you're seeing in your core gaming portfolio today. I think you guys touched on a more challenging spending environment for UA. Can you talk about how some of your monthly actives and monetization trends have kind of fared on a year-over-year basis and how the trends look like heading into Q1 so far in some of your core franchises?

Yeah, thanks, Suzanne. If we talk about our core portfolio, we're seeing strong underlying fundamentals on all of our key measures. I will highlight that we will be introducing an additional battery of KPIs in our Q1 reporting to help provide further clarity on that. But just in the general sense, We do see strong underlying organic growth within the portfolio. We have obviously still early on in the growth stage with Archer Danger Phone, and we're confident in the future perspectives of that current portfolio. I would highlight also that If you look at our organic growth within our games and publishing, by the end of 2021, we will have almost doubled the portfolio size by entering an additional seven plus games. Obviously, understanding that that will be late in the year, but that will continue to support the ongoing growth of our portfolio.

Okay, great. And kind of just looking ahead this year, how are you thinking about your investments in UA when considering the IDSA changes on the iOS platform kind of this year?

Yeah, super good question. We look at it in a different lens as far as how we invest in UA. Obviously, we stay within a window of return on investment of 180 days, and as we see that return occurring, we will continue to invest in a growth and a growth phase. We are very, very, I'll say, disciplined with our return on investment in UA spend and use a tremendous amount of data on a continuous basis to ensure that we are seeing that growth. So as long as we can ensure we are trending on that revenue, we will continue to invest in the market regardless of the trend. introduction of IDFA and others.

Okay, that's helpful. And just looking at your game portfolio, so your game pipeline ahead, it's obviously a large pipeline. What are your expectations for some of these new game launches this year? Kind of thinking about RuPaul, how impactful might that be relative to some of your top franchises today?

Yeah, fantastic question. I mean, obviously, we have huge expectations of any games that we enter into the market as we are very selective and choosy on who we partner with and the games that we develop. Obviously, RuPaul, global icon, multi-geography franchise with Drag Race. We have strong expectations of for that game, understanding that it will enter late into the year, so the revenue recognition will not be fully annualized. If we look at it comparatively to other tremendously successful games in our portfolio on a scale of awareness of RuPaul and the franchise, it would be significantly larger than any of the IP that we've secured to date.

Okay. Okay. Great. Great. And I just had a question here on the Idlekit platform, perspective customers, that you guys have been pretty active signing new deals recently, and it looks like they've been a mix of both established and newer studios, how should we think about the typical profile of customers that you'd be looking to add to the platform? And how are you going about securing these studios? How much of that is inbound versus business development?

Good view on that. Let me dissect it a bit. When we look at returning partners on the AutoKit platform, we use that to determine sort of, I'll say, retention and customer approval rate of what they're doing or the benefits that they're seeing from the platform. So I can say confidently right now, we have 100% return on all of our customers and very happy with the benefit of that they're seeing from the Idlekit platform. I can speak confidently from ourselves as legally our first acquisition was an Idlekit user and benefited greatly from that platform, so much so that it led us to wanting to bring eSide games into the fold because of that blue sky opportunity with Idlekit. If we look at... New partners going forward bringing onto the Idlekit platform, we've seen obviously an increase in inbound, which we've been quite selective with who we bring into the fold to utilize the kit. I think two of those would be highlighted by Mighty Kingdom as well as Bigfoot. Both were tremendously well-known in the space, have very good pedigree in two distinct geographies that opens up our Idlekit or Idlekit platform awareness into new areas, which we highly value. As well as we've, as we said earlier, we've been investing heavily into the Idlekit platform, and that's not only from a tech stack basis, but also from from an outbound sales team and they have been working diligently to identify additional partners that we want to work with on the platform that either allow us to stretch into new themes within IDLE or also provide us future opportunities. We've had a nice balanced mix, and it's proved to be very successful to date with our six new partnerships announced in the first half of this year alone.

Okay, great. That's helpful, Darcy. My last question, I guess, is on the NFT strategy. I recognize this is still quite early days. But how does this kind of fit into your broader game portfolio? And what are some of the kind of specific KPIs that you're looking to track to measure the success of this initiative?

Yeah, I think you highlighted it with early days. Right now, we looked at IDLE kit or NFT kit. as an opportunity to leverage probably one of the most well-known pioneers in the space, Max Lavelle, formerly from Dapper Labs and CryptoKitties, who currently is working in a senior level at Eastside Games. We are taking, I would say, a measured approach as we've entered into the space. We think that The potential future economics of NFT for generating new revenue streams within the free-to-play space has some strong upside, but also we look at it as a layer of engagement to ensure players are enjoying our games online and offline of our usual player abilities. So at this point, the measures have been purely users coming onto the marketplace, and we are encouraged with what we're seeing early and will continue, we believe, to lean in into the space in the future as we believe it opens up new areas of revenue for us.

Right. Okay. Great. That's it from me, guys. I'll pass the line. Thank you for taking my question. Thank you, Stan.

And there are no questions. Thank you, presenters. Do you have any closing remarks?

No, I think that we'd like to close and thank everyone for attending. Obviously, it was a tremendously transformational year for us in 2020. As we've highlighted, we've doubled our revenue almost more than tripled our EBITDA on adjusted basis and more than doubled our Q4 revenue versus 2019. So we're tremendously excited about the momentum going into 2021, and we'll continue to look to invest our growth capital into future initiatives across our core three pillars of growth. So thank you very much, and we look forward to talking to you mid-May when we report on our Q1.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.