East Side Games Group Inc.

Good day and thank you for standing by. Welcome to the Eastside Games Group Q2 earnings call. All lines have been placed on mute to prevent any background noise. Should you require any assistance, please press star zero on your telephone keypad and an operator will assist you. During today's call, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. I will now turn the conference over to Jason Bailey, CEO. Please go ahead.

Thank you, Operator. Welcome everyone to Eastside Games Group's second quarter 2022 results call. On the call today with me is Jim McCallum, our Chief Financial Officer. I will begin by sharing highlights from the second quarter ended June 30th, 2022. I will also be giving an update on our business strategy and key events that have taken place since we last reported on May 12th, 2022. Jim will go into greater detail on our financial results commentary for the period, before I turn it back to myself for some final remarks before we open it up to analyst questions. On May 17th, we officially changed our name to Eastside Games Group Incorporated at our annual general meeting. I'd like to remind you 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 second quarter press release in MD&A for cautionary statements relating to the forward-looking information and reconciliations of non-GAAP measures to GAAP results. References to all figures are in Canadian dollars on an IFRS basis unless otherwise noted. Additional materials may be found at the investor section of our website at eastsidegamesgroup.com under the financial information section and an audio replay of this call will also be available on our website. Q2 was another solid quarter. We generated $29.7 million in growth revenue, a 32% increase over Q2 2021. EBITDA was also positive at $0.6 million. We continue to focus on revenue growth, increasing our cash reserves and developing new products. In that pursuit, total revenue for 2022 to date was 65.3 million, a 44% year over year. Our cash from operations in Q2 alone was $10 million. We're sitting on $9.3 million in cash and only $0.3 million in debt. And we have secured access to an additional $10 million in available debt facilities should the opportunity to use it arise. This nets us two notes for $10 million and one for up to $7 million. It's no secret that growth stocks have taken a beating in the first half of 2022. With recession locked in, rampant inflation concerns, the war in Ukraine, and the lingering effects of the pandemic, uncertainty is high. With that came a significant reduction in consumer spend in mobile games. Estimates put that reduction at 15% across the industry. Eastside Games Group is not immune to this. and we have seen this in many of our legacy titles. Fortunately, this is offset by the growth in new titles such as RuPaul's Drag Race and The Office Somehow We Manage. We overcame these 15% headwinds and still managed to put up a 44% year-over-year growth, a testament to the strength and ingenuity of our team, as well as ongoing validation of our business model. Daily active users were up to 347K, up 43% year-over-year. We did this while maintaining only a 7% drop in ARPDAU, which has been very stable over the past year. MAU was up 69% year-over-year to 1.35 million. Our mission at Eastside Games Group is not just to build games into like players. We aim to fundamentally change the way games are built and published. We are investing heavily in our software platform. We are building a publishing infrastructure. We are building best practices playbooks. We are building deep relationships and trust with every major IP holder. We are building talent density across all of our teams. We are building a multi-billion dollar business with a concrete foundation. We are leading $200 billion a year game industry on an innovative new path. These are our two additional super marquee titles for 2022. Star Trek Lower Decks continues to refine in soft launch. Our development partners at Mighty Kingdom continue to demonstrate their world-class talents. Our IP partners at Paramount have been exceptional in their support of this brand, unquestionably one of the world's greatest brands with over $10 billion in revenue generated to date. Star Trek has released 12 television series and over 14 feature films since originally airing in 1966. Doctor Who will be our final big release of 2022. It is currently in the early stages of soft launch and showing good promise. Doctor Who is another massive franchise with 870 episodes since its original launch in 1963. Go to the App Store now and play Bud Farm Munchie Match. It is soft launched in Canada and it is showing unprecedented retention rates and a level of polish that we are extremely proud of. If you don't love this game, then you don't love games. The first one on this call to send me a screenshot of them on level 150 gets a free Eastside Games hoodie. Also watch out for Trailer Park Boys Get Merged coming this year, which is a soft launch in some geos but not Canada yet. We continue to sign new development partners as well as new IP partners as we aim to launch 20 games in 2023, maybe more. Milk Farm Idle Typhoon is a fresh new take on our Idlekit framework. This game launches in September worldwide and is a take that we're super excited about. People need to reiterate the fact that our games and this business prints money, and we are aggressively reinvesting that cash into growth and building an industry-defining platform. If we only ran our games, didn't invest in new titles, didn't build out our software platform, then this is what our business would look like. This is excluding growth titles such as RuPaul in the office, But it does include all the overhead, operating costs, marketing costs, feature development. This isn't cherry picked like the bud farm example I gave last quarter. This is work and all. We put up 20% plus margins all day long. The contingent compensation. This has been written down as we are currently on a $130 million run rate. This doesn't mean we don't make it. I can assure you I will be doing everything we possibly can to make or beat this number. But we've been giving the advice to knock it down. And so this is resulting in a large bump in net profit, but it is adjusted out of EBITDA. We also announced our NCIB today. We believe our stock is the best in fed in town and will act accordingly. Despite the ongoing strength of our business, Our stock is down 50% year-to-date. We have issued our NCRB and officially shown our attempt to buy back as many as 4 million of our own shares. You can also see that insiders have been purchasing stock lately, specifically Mike Edwards, Jonathan Bixby, Jim McCallum, and myself. We expect this to continue.

And now over to Jim for some comments.

Thank you, Jason. As Jason noted, in Q2 we delivered quarterly revenue of $29.7 million, and revenue for the six months ended June 30, 2022 was $65.3 million, up 44% over the prior year period. Adjusted EBITDA in Q2 was $0.6 million, and for the six months ended June 30, 2022 was $3.6 million. Our mature titles, such as Trailer Park Boys, Greasy Money, Bud Farm, Idle Tycoon, and others, continued to drive EBITDA, which allows us to grow aggressively while still being cash flow positive. We remain committed to our goal of maximizing growth while maintaining a strong balance sheet. Cash on hand at June 30th was $9.3 million, and our debt was $0.3 million. In Q1, we fully paid the contingent compensation resulting from the achievement of hitting over $100 million in revenue in our first year as a TSX listed company. Our current revenue run rate is unlikely to achieve the year two earn-out target of $150 million, and as a result, we reversed the contingent liability into income during this quarter. We've had strong operating cash flow of $10 million for the six months ended June 30, 2022. We have minimal debt with access to financing if required. We continue to grow our business while remaining profitable. These factors lead us to believe that our share price does not reflect its value And as announced earlier today, we are commencing a share buyback next week. Given our strong balance sheet, we are fully funded to achieve significant organic growth in 2022 and beyond with existing liquidity available to the company and without access to equity capital markets. With that, I'll turn it back to Jason.

Thanks, Jim.

So in summary, We're focused on launching new titles. The Office Somehow We Manage and RuPaul's Drag Race being our two marquee titles that we've already launched this year. Doctor Who and Star Trek Lower Decks coming as well as some other titles like Munchie Match, Milk Farm Tycoon, Trailer Park Boys, Merge. There's many new titles coming. We continue to expand our team and while other peers such as Jam City and Unity are laying off staff, We continue to grow. We continue to improve our talent density, and we are now 220 full-time employees with another 250 contract partners working full-time on our games through our various partnerships. We're being patient in our pipeline. We are not pushing out titles because we need to make numbers for the quarter. We are pushing out titles when they're ready, when they're in the best possible condition for success, and in partnership with our development partners and our IT partners, to assure these games have the best long-term chance of success. We're also adding new features to our GameKit platform and new genres, as well as tools to make publishing and game development easier, faster, cheaper, and with a higher chance of success. Thank you for all your time today, and we'll now open it up to questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you would like to remove yourself from the queue, you may press star one again. Your first question comes from the line of David McFadden, McFadgen, sorry, with Cormark Securities. Please go ahead.

Oh yeah, hi. A couple of questions. Maybe I'll just first start off with maybe you could comment on Google and Apple and what they're doing in their their play stores and any changes they're making on interstitial ads and other ads.

Sure. Thanks David. That's a really important changes that are coming on the platform. Both Google and Apple continue to wall in their gardens. They don't want everybody and anybody on their platform publishing trash to be fair onto it. So Google announced last week that they're going to be effectively banning interstitial ads. These are the ads that pop up during gameplay. If you've ever downloaded one of these hyper casual games that are really simple, quick games that you usually get bored of in two or three days and are constantly throwing ads in your faces, these are the games that Google are trying to I wouldn't necessarily say get rid of, but definitely tampered down because it's a bad user experience and Google doesn't make any significant revenue from them. It's all ad revenue driven. So we do make 25, 35% of our revenue from ads, but we only do that with rewarded video ads. We don't do any interstitial ads. So this won't affect us at all. In fact, we think it's going to end up being a net positive for us because By cleaning a lot of these low-quality games out of the queue, discoverability will become better for us. As well, a lot of these hyper-casual games are a source of poor traffic for us. They actually eat up some of our ad budget and we're constantly blacklisting them from our games because the quality of traffic you get from them is poor. It will save us money and What we spend on acquiring users, it will remove clutter from the store, which will improve our visitability, as well as just generally make the app experience for users better. So it spells doom for a lot of companies. Any company that's hyper-focused on these hyper-casual games, platforms like AppLev and IronSource both have app businesses that that's their primary focus. But it shouldn't affect us except in positive ways. So are there any changes that would be negative for you guys? Well, the IDFA changes that Apple made last year we know have been detrimental to the entire industry and making it incredibly difficult to track your ads. Google is also going to be introducing its own slightly different variations and not as severe. variations on their IDFA, privacy, user tracking methodology. So we expect that to also continue to make it more difficult. It's really walling in that garden. The battle to only process payments through their platforms, as we've seen with the Apple versus Epic, Apple very much won that case. And so there's concern if they, if they continue down that path, that we won't have the ability to open up and sell things privately and directly, which we think we're going to be able to do soon. And we hope we're going to be able to do soon and that will increase our margins. But, uh, Google and Apple are both fighting tooth and nail to prevent that from happening.

Okay. Um, great. Thank you. So just a question. David, you're breaking up on us. I can't hear you. Can you repeat the question? I think we lost David.

Sarah, are you there? Yes, I'll move on to the next question.

Sure.

Your next question comes from the line of Neil Gilmer with Haywood Securities. Please go ahead.

Yeah, thanks very much. Good afternoon. Maybe just wanted to dig a little bit further on some of your prepared remarks, Jason. You know, obviously you commented about, you know, the 15% down across the industry. You know, what are you sort of seeing in the back half of this year? And I guess sort of a two-part question about the sort of the timing of some of the new titles that you've got coming to market. And then also, you know, your investment in sales and marketing for the user acquisition, etc., How do you philosophically look at how much you want to spend on that given some challenging industry trends that you're seeing?

Yes, we're being very smart with our user acquisition spend and it was lower this quarter than we had budgeted for, which isn't necessarily a good thing. It means that we weren't able to find the places to be able to spend effectively and measure effectively I'd love to spend $100 million a quarter on advertising because we only spend money on advertising when we know we're going to make more than that. If I could spend $100 million, it would be because I know I'm going to make $120 million. That entire marketplace continues to be challenging. We're always working with new partners. We have some new SDKs coming into our software and updating things to use new methods and tips and tricks, so to speak, to better do that. But we do anticipate that entire space becoming more challenging over the next six months and years as, like we say, Google is going to introduce its own restrictions. We're hoping that Apple's going to loosen up a little bit, but we'll see how it plays out. But we're trying to be smart. And so the real opportunity for growth is new titles, shoring up our existing titles. We saw a little bit of a drawback, not even as much in users as users spend, as I think a lot of people are worried about the recession and inflation and are just spending less as a result, plus the Uh, the free paychecks from the government have dried up. So, uh, that free money isn't flowing into our system anymore. So it's really tight out there, like tighter than we expected it would be. And now looking forward, the solution to that is more titles. You know, we've been able to keep our art out relatively strong. So we know, you know, it's down a little bit, 70% or whatever it was. Um, so it's all about new titles and, and we are being patient with those new titles. So we'll keep plugging away and get them out there, but not get them out there until we know they're going to be perfect.

Great. Okay. Thanks for that. You talked also in your prepared remarks about, you know, investing in the GameKit platform and so forth. And I'd be curious on your thoughts on, you know, the Unity, IronSource, AppLovin sort of triangle that has developed over the course of the past little bit. and sort of what your thoughts are with that investment you're making on the game kit side of things.

Yeah, that is a bizarre love triangle with all kinds of drama going on. It's clear from JR's comments at the beginning of the Unity earnings call that this was fairly unsolicited from Adleven's part. I know if I was starting a partnership with somebody and they sent out a press release out of the blue like that on the morning of my earnings call, I'd be pretty pissed. That's not how to start a good relationship. But here we are. So I think it was unsolicited. It's meant to sink out the iron source. bid or at least put some stress onto that acquisition. Because if Unity does ultimately acquire IronSource, it's going to make life very difficult for App11. And those are the two 800-pound gorillas in the buying space. And so we rely on these guys not only for where we spend a majority of our money when trying to acquire users, but they are also... our largest sources of income on the ad revenue side. So these are very important partners to both of us. It's important to us, honestly, that there is competition in the space. If IronSource and Apple have more to get together, that's less competition. That's bad for us. But it also shows that these guys are struggling. I think their margins need to come down. They're taking too much of a cut. And we're going to see that as well as platforms like Unity. We've seen their valuations drop 80, 90% over the last six months. It's astounding. And as we build ourselves into a platform, we think we've solved for revenue generation as a platform. So the space is opening up and there's an opportunity for us to step in and become that new platform. And so, you know, we're watching that space closely. We're seeing the big guys shutter a little bit, and we think that's an opportunity for us to come in and become the next big guy.

Okay, thanks. Last one for me, and maybe just sort of a follow up to my earlier question there on the user acquisition, but you know, when you, when you're making that decision on where and what to spend, how are you sort of evaluating the competitive landscape and who you feel that you're competing with in trying to bring, um, um, you know, users on board, um, for your games.

Sure. Thanks. That's a great question. Uh, the, so there's kind of two aspects to that. There there's who we're competing with for, you know, developers and IPS, and that's very much, you know, the jam cities and scope leads of the world. who are both struggling to scale up. Both of them had IPO plans, SPAC plans, but unfortunately they missed their window when the market was hot. We were able to land the plane and do our IPO and our RTO, however we want to frame it, and here we are. Those guys still want to do that, need to do that at some point. And in order to do that, they need strong development partners and strong IP partners. And when we're competing for either of these, it's usually Jam City or Scopely that we're up against. So that's who I look at there. And Jam City just announced huge layoffs. So we know they're struggling, whereas we're continuing to grow and increase talent density. And then on the other end, when we're buying ads, who we're generally competing for for that space is these hyper casual games. September 30th is when these new Google rules kick in. And it's not going to completely destroy the hyper-casual space that will still exist, but essentially 50% of the revenue that they make is going to go away overnight. And so there, which means they're not going to buy a large chunk of the available inventory. Probably, I don't know, I'm guessing, this is a number out of my, but 70% plus of the ads you see on any given site are for hypercasual games. So if that inventory goes away, then it's inventory available to us to buy.

Okay. Thanks for taking my questions. I'll pass it on. Yeah, thanks, Neil.

Your next question comes from the line of Adir Kadve with eight capitals. Please go ahead.

Great. Thanks for taking my questions here. First, I would like to ask about the two super marquee titles set to release later this year, just Doctor Who and Star Trek. Can you just give us a sense of the timeline of the worldwide releases for those? I know you said H2, but is it more one in Q3, one in Q4, both in Q4? And then I have a follow-up after that.

I can't answer that specifically here, unfortunately, because that is we're launching those games in partnerships with these IP holders. uh the actual exact dates need to be approved by and with them you know we do have exact dates approved by them but we haven't put out the press releases we haven't announced those dates and i can't do it here sorry bud got it um all good i'll look forward to those then um just something maybe i wanted to ask about rupaul in the office

Those games have rolled out. They've been out for quite a while now. Can you take anything from those rollouts and kind of apply them to Doctor Who and Star Trek and kind of make those rollouts better?

For sure, for sure. Every time we do a rollout, we learn from it. We make mistakes and get better as a result. I always say we learn more from our mistakes than when we do things right. You know, there were lots of things that went right with both the RuPaul and the Office rollouts, but there were also things that We're less than perfect. So one of those big takeaways, honestly, is we need to give these games all the time in the world during soft launch to be absolutely ready before we launch it. So, you know, I will tell you that the original worldwide launch date for Star Trek has come and gone. But we're not letting that game out, not because it isn't good. It's very good. But we're not going to let it out until it's excellent. Both the other games they were they were good, but they weren't Imperfect isn't the word we're looking for but you know, we've discussed in the past some of the challenges that we've had technically around those those Big scale launches because to be fair these are you know, both are two of the biggest titles that we've ever launched They are the two biggest titles we've ever launched and both Doctor Who and Star Trek. These are you know, these are 50 year old franchises with massive following. So we want to get it right. And it's more important to me to get it right than to get it quick. So that amongst other things is, you know, one of the reasons why we didn't make those Q2 numbers quite as hot as we wanted them to be. You know, Q3 is coming together and we're already halfway through it. And we have not yet launched either of those big marquee titles. So that gives you a little insight too. I'm going to wait till it's right. I'm a patient man. My wife won't agree with that statement, but I'm going to say it anyway.

Fair enough. Okay, then second, just on the Netflix partnership, you know, there was some news out this week that only 1% of Netflix users kind of play their games. Can you give us a sense of what that means for Dragon Up and your partnership with Netflix?

Well, I'm an optimistic fellow, so I look at that and go, oh, 99% of players are yet to play Netflix's games. What an incredible opportunity. The, so, you know, Netflix is in super early days of its roll up, but we know it's continuing to commit to it. Uh, you know, we know it's, it's, it's a big talk. We would be there that that team, you know, last year, while like last year, this time, honestly, I think that team was about eight or 10 people. And now that team is probably 75 or a hundred people. Uh, that's not even including the, the development partners in, in night school and, uh, next games that they acquired. They're growing this aggressively. So they only have 25, 30 games on their platform right now. I think they want to get to 50 by the end of the year. And they're mostly games like, let's be fair, the game that we have with them, Dragon Up, it's a great little game. But it's just a little game that we had already mostly built and isn't a blockbuster title. Whereas I'm sure I know they're working on some blockbuster titles. And when those come out next year, that's the ones that they're really gonna get big push on. And I don't know if it's gonna be 5% or 95% of the users that end up playing games, but we do know that something like 60% of the people in the world play games on their phones. So I would imagine the Netflix audience is that much or stronger. Gotcha.

And then maybe one last one, and then I'll pass the line. And maybe you can answer it, but maybe to the extent you can, you mentioned in the press release that you've signed a couple of additional super marquee titles, but haven't really announced them yet. What I'm kind of looking for is, can you give us on a high level how those kind of stack up broadly against the four big titles that you guys do currently have announced to the extent you can answer them?

Sure, I can tell you that one of them is also a multi-decade IP with billions in revenue. That is something from your childhood that you will be happy to see you again and that continues to be in the news and make content to this day. big blockbuster content uh the other one you'll also remember from your childhood and is a it is a it is a a brand that's changed many times over the years but it's also got a massive massive following and it is a space that we're not in at all and it is both of them are spaces with ardent fanatic fans and and those are the two two two two really big ones like really big ones And there's a couple others that are not quite as big, but definitely still really solid, healthy swings, as well as us continuing to, like we mentioned already, that we signed a deal to launch multiple games with Trailer Park Boys. We're negotiating the same with all of our successful IP partners. If it works once, we want to do it five times.

Got you.

Thanks. Thanks, Jason. Thanks, Jim. I'll pass it on. Appreciate it.

Your next question comes from the line of Scott Buck with HC Wainwright. Please go ahead.

Hi. Good afternoon, guys. Thanks for taking my questions. Jason, the first one, could you talk a little bit about what the pipeline for additional GameKit partners looks like? And how many partners do you have today?

So today, and good to hear from you, Scott, today we have approximately 15 development partners actively working on titles with us. We have many more in the pipeline that we're talking to and vetting. Our platform is fairly high-touch still. We continue to develop it and make it better. We're working on a product that we're calling Starter Kit. that is supposed to be ready at the end of this month, which means it'll be ready next month. And that is going to dramatically open up those channels and make us able to sign, support, and scale this business more quickly because it will be a more full-featured toolkit with which people can start the building of the game on. So right now, for instance, if we talk to 50 different game studios, 10 out of those 50 are going to pass our vetting process. Studios that have strong engineering, design, art, production leadership, you need to have all of these things and be really strong in order to make it as one of our partners today. We reject way more people than we accept into our program. With Starter Kit, that's going to allow us to lower that bar a little bit. Not saying we'd lower it in the sense of we let trash in, but Instead of only the extremely good, we'll also be able to let in the very good and ultimately the good. And that's how we'll continue to expand our pipeline of developers over the years. We've built an incredible account management team, you know, led by Wally and Lisa and others, like just really, really strong people. And we've just added six weeks ago, Kirk Scott, who comes to us from Nintendo and is doing our developer outreach and building our pipeline of developers to work with. And the reason we brought him on is we finally feel like we're in a position to begin to really build up our volume and do more outreach and start accepting inbound request to use our platform as well. So the team is getting built out and we're ready to really start scaling this thing over the next six months.

That's really helpful, Culler. Did you guys see it as an either or in investing in GameKit versus, you know, acquisitions or can you kind of manage both? And would you?

In us making acquisitions? Yeah. Yeah. So We found that this model is better for us. This model of working with a partner, seeing how that goes, and building up a pipeline of potential acquisitions of studios that we know. This is how we date. We work with these companies. We work very, very closely with these companies. And those that we love, we go to the next step with. Mighty Kingdom is a great example. Solid group of developers out of Australia have been working on a lot of different games for many, many years. We started building one game with them, Star Trek Lower Decks. They've done a fantastic job. And so now, you know, we signed a deal to do many, many games with them. And if the conditions are right, you know, it's like saying a domain name on the air. You don't want people to scoop it up from under you. But these guys are fantastic. Those are the types of targets we're going after, and you only really get to know that by working closely with them for a year, doing a diligence process and coming into their studios. You don't get to see the warts as clearly that way. We think our path is the best path to acquisition, but it also scales in publishing partners. We don't need to acquire all of our publishing partners. We need to have as many publishing partners as we can, and as we've said in the past, I always want to be greedy with the best IPs, so when you get the AAA office Star Trek-type opportunities, we want to do those in-house whenever possible. So in order to do that, we also need to continue to build our capacity because our internal capacity is maxed out on the games that we're working on right now, so we have to go to more partners. Again, these things are solvable.

Great, that's helpful. And then last one for me, I'm just curious on advertising revenue, given kind of the increasing level of uncertainty out there, are you seeing pricing for advertising come in a bit or demand flow?

It's a real mix. I'm always surprised that CPIs continue to remain high in a lot of these places as now in a lot of places we're flying blind. So you just got to throw more money at the wall and hope that a certain percent sticks. So I think that the real shift in the people who are paying for advertising landscape over the last year is the total spend hasn't changed, but the number of small players in it has. So it's very much become a game for the big players. And if you don't have that capital to throw at the wall, it's much more challenging to operate on a small budget. It kind of only works at scale now. And then on the other end of it, when it comes to our advertising CPMs, they have come down a little bit, but we've been able to offset that by experimenting with different ad placements and when we show people what so we're pretty happy with the result we've been able to you know I think I think even looking like I think our art that our ad art out which is broken up in our report it was 24 cents last quarter and it's 23 cents this quarter so I guess that's four or five percent which is not immaterial but it hasn't been as bad as we expected to be honest okay fair well I appreciate the time guys thank you so much

Your next question comes from the line of Nihal Upadhyay from Industrial Alliance. Please go ahead.

Hey, guys. I just got a question in terms of the game kit offering and the new genres that you introduced. And I know it's still early days there, but how have they been received with other mobile gaming studios and developers vis-a-vis the idle kit? And then are you seeing more gaming studios as potential partners as game developers who weren't particularly a match for you for the idle gaming kit but are more suitable now for your merge and match kits?

Absolutely. You got it. It's like you read my mind. That's exactly how it works. It's not only like certain studio partners might not want to build an idle game, but they're super stoked about a match game or a merge game. And then the same thing with the IP partners we're going to, and that's the real... opportunity here is is you know some IPs are perfect for idle and some not so much so by having this depth of genres merge match idle the fashion elements from that we use in RuPaul these these are great like we have some IPs and again once that I we haven't announced yet so I can't name specifically but that are perfect matches for that that wouldn't be for idle so That's how, as we continue to grow and as we turn into a full-featured platform, we need to hit all of these genres. Perfect.

And then following up, in terms of R&D spend, how should we think about that going forward? It was roughly 18% of revenue, the highest it's been. Is that kind of the benchmark now as you ramp up your gaming portfolio? Or do you expect that to come down a bit because you've already added four new game kit offerings?

We expect the dollars spent to go up. But, I mean, if all goes right, as the percentage of revenue will go down, right? So we expect to, like, I've been running this business for 12 years. And we always stay profitable. I don't get in front of my ski tips. So we're growing as the opportunity arises and as the funding to do that growth is in the till. So the more big hits we're able to put out, the faster we can go.

Perfect.

And then to follow up to that, are there any other kits that you still want to produce beyond the starter kit in terms of, you know, game segments go, or do you want to kind of consolidate what you have now and grow your developer partnership base and whatnot?

We want to become best in class at each of these before we... So we don't want to go too wide until we're sure we're truly experts at it. Idle, of course, it's unquestionably industry-wide. We are the kings of Idle. If you want to build an Idle game, the first thing you do is copy what Eastside Games does. You go look at any new Idle game by any company out there, and they generally look like ours because they just copy us. We want to do the same in Match and Merge. We're seeing great early results in this. We're learning a lot very quickly. We're talking to all of the partners we can and competitors for that matter to learn the best practices around this. We will turn that into a playbook and then pass that on to our partners. So we can't go out and sign 20 new match deals tomorrow. We've got two or three of them going on. We want to be best in class at them and then we scale them out. So we ultimately want to do this with essentially all of the genres. But we're picking and choosing the ones we feel are essentially ripe for disruption. And Idle was very much that. When we first moved into the Idle space, ARPDAUs were low, kind of 20, 25 cents, but retention was great. And we fundamentally changed the way these games are monetized and got them to dollar ARPDAUs while having similar retention rates. Merge and match are both the same kind of thing. The ARPDAUs are relatively low. The opportunity to do it better is there, and we're already seeing a fruit from our labors in making them better, and we think we can take Merge 2 as a great example of a game with incredible 50% plus day one retention rates, but 20 cent ARPDAUs. firmly believe that we have the formula to get it $2 ARP DAOs and still keep the retention rates high. Gotcha. Perfect.

And then the last one for me, I was kind of interested, and you mentioned certain games are suited for certain IP partners. Now, is that something that you discussed previous to presenting to an IP partner about a potential partnership or do some IP partners prefer certain games?

People come to us constantly saying, will you build an idle game for us? Because we are the best in class at idle. So some studio, some IP holders come to us because they want an idle game. Some IP partners come to us because they know, you know, we're, we're a top tier publisher. And so they want us to build any game for them. And then it's a discussion back and forth of what that game should be and what the best fit for that genre is. And sometimes they have ideas in their head. and we convince them otherwise. And sometimes, you know, they come to us wanting a match three game. We agree that that's the best possible match for that IP. And we go about, you know, designing and building and going back and forth with them to get the perfect pitch. It's actually, like, by the time, I can't say who, but, you know, again, massive IP. And so what we do is with our IP partners at, you know, whether it's Warner or NBC or, Disney or wherever it might be, we go back and forth with them really in partnership and on the same team to put together a pitch deck that we know will resonate with the showrunner or the production company that ultimately owns the IP and as a team present to them to get them on board. When we did RuPaul's Drag Race as an example, We work very closely with CAA and with World of Wonder to put a pitch deck together that we knew RuPaul was going to look at and say, this is absolutely fantastic. This is exactly what I'm looking for. So by the time we get to that point, you know, we've got the inside knowledge in what they say. We don't just pitch them blindly of like, hey, here's a pitch deck for what we think will be a cool game for the Mandalorian. It's, I don't know, you've got to go back and forth. And by the time you go to, what's his name? Jay Braz, what's his name? The Star Trek, the guy who's done all the new Star Trek, but he's just killing it from swingers. Anyway, by the time he sees the pitch deck, everybody at the Disney game team, like LucasArts game team and licensing team has seen every possible detail of it and we're back and forth and he just sees it and goes, oh my God, this is exactly what I'm looking for.

Perfect.

All right. Thanks, guys. I'll pass the line.

David, are you back on the line? We lost you there. You dropped off and couldn't hear you.

Your next question is a follow-up from David McFadgen from Cormac Securities. Please go ahead.

Sorry about that, guys. I was calling my cell phone and it dropped. Hopefully this won't drop. Just a couple of other questions. When I think about RuPaul in the office, I'm just wondering where we are in the monetization stage like are those properties still ramping or are they kind of plateaued and you're just still just but still generating lots of revenue from them I was just wondering about that and then so when you think about 22 you have four marquee super marquee titles in 22 is that the expectation for 23 and have another four thanks so yes those both of those games that you mentioned are still ramping generally it's about a year after worldwide launch

to get it full featured, figure out who the players are and exactly what they want. And then at that point, it plateaus. But it plateaus and continues on for five, seven, nine years. So neither of those games have plateaued yet. They're still in growth stages. They're still having features added. We're still figuring out exactly what the players want. RuPaul is really almost there. And we launched it in November of last year, or late October or November of last year. And it'll be around the same time where effectively we move it from the growth portfolio to the active portfolio. And it becomes a live ops machine. And at that point, it's just adding new content all the time, not building core features. The office is still building core features. We have a really big update coming in September that we're excited about. So those are still in its early stages.

Oh, and marquee games for next year.

Yeah. Well, we're trying to do 20 games next year. Call me crazy. Call me, you know, overambitious. It's not going to be trivial, I'll tell you that. We do not have 20 games on the docket today. But we've got another six months left in this year and Kirk and Wally and Lisa and their team and Jim are working their butts off to line those up. And there's lots of, you know, there's lots of long form and red lines going back and forth. So I'm confident we're going to get there. And absolutely there is at least four incredible super marquee IPs for next year. But it's going to be a four. It's not going to be, you know, we did four this year. We're not going to double it and do eight next year. It'll be probably five.

Okay, okay. All right. Yeah, that's it for me. Thanks.

Thanks, David. Those are great questions. And everybody else, great questions. You know, thanks for your time. Thanks for coming out. Thanks for listening. You know, as always, feel free to reach out to me anytime and I can give you additional color and details on all of these things. um you know another solid quarter we're we're ramping and growing and executing to plan i'm super excited about this business uh you know the employees are super excited about it um i can't wait for summer to be over so that people go lock themselves back in their dark rainy cages and play video games more this concludes today's conference call you may now disconnect your line