East Side Games Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Eastside Games Group third quarter 2023 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 for analysts only. I would now like to hand the conference over to your speaker today, Jason Bailey, board chair, CEO, and founder of Eastside Games Group. Thank you. Please go ahead.

Thank you, operator, and welcome everyone to Eastside Games Group's Q3 2023 results call. On the call with me today is Jason Chan, our interim chief financial officer. We are also joined by our chief operating officer, Lisa Sheck, and our chief product officer, Jim Wagner. I'm very excited to share highlights from our third quarter and the September 30th, 2023 results. I will also be giving an update on our business strategy and key events that have taken place since we last reported in August. Mr. Chan will go into greater detail in our financial results commentary for the period before turning it over to Lisa and Jim for some final remarks before we open it up to analyst questions. I'd like to remind you that certain statements made on this call are forward-looking within the meaning of applicable securities law. This call includes references to non-GAAP measures. Please refer to our third quarter press release and MD&A for cautionary statements relating to 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 can be found in the investor section out on our website at www.eastsidegamesgroup.com. Under the financial information section and an audio replay of this call will also be available on our website. Q3 was a quarter of continued transition and reaction to the ongoing changes in the global games market. We aggressively restructured our business to ensure ongoing profitability, independent, and long-term positive cash flow. Many of the changes made will be fully reflected in Q4 as we benefit from a full quarter of the new paradigm. This was achieved primarily through cost reductions and smart fiscal management by our new C-suite. We have talked about this refocus extensively on the past few earnings calls, and Q3 continues to show the fruits of that labor. We have a business that is profitable, stable, and lean, a business with a strong pipeline of new products to layer on top of our existing strong foundation and our focus on a long-term profitability. We have a company with zero debt, sufficient cash, an easily sustained run rate, and a pipeline of exciting releases with massive potential. I'll now pass it to Mr. Jason Chan, our interim chief financial officer, for some comments.

Thank you, Jason. As mentioned, this quarter we pursued a strategic shift to set us on the path to future sustainable growth while maintaining profitability. The restructure for Q3 resulted in $5 million of annualized all-tax savings. We expect to start realizing these efficiencies in Q4 with minimal expected impact on our top line. Q3 had us end at $20.8 million in revenue and adjusted EBITDA of $3.1 million. roughly a 15% margin. This is our fourth straight quarter of positive adjusted EBITDA over $2.5 million and the highest we've had since Q1 of 2022. We continue to realize efficiencies in our yearly spend. Q3 year-to-date, we spent $15.3 million compared to $31.3 million last year. For Q4, we will continue to increase spend on campaigns that have a proven payback period as we improve and adapt to this changing market landscape. Our average daily active users for the quarter were 239,000, which is down from T2, but our rate of repeat daily users is up slightly at 29% business rates. The drop is mainly due to a combination of seasonality trends, along with the realignment of our marketing focus to campaigns targeting more profitable segments of our mobile gaming audience. As Jason mentioned, our cash on hand on September 30th ended at $3.6 million. This represents a $2 million swing in net cash positions from Q2 and is the most cash we've had on hand since Q1 of this year. We anticipate healthier cash flows to come in the future as part of our switch to shift for increased profitability. We've also purchased 733,879 shares under our normal course issuer bid through September 30th at an average cost of $0.95 per share. and we're currently looking to acquire as much as restrictions allow going forward. In conclusion, we've seen immediate returns from our restructure this August, and we remain confident that the changes implemented will lay the groundwork for a stronger Q4 and 2024. Thank you for your continued support, and now I will pass it on to our Chief Product Officer, Mr. Jim Wagner.

Thank you, Mr. Chair. On the product side, despite scaling back on operational costs, we were able to maintain or improve our content and feature output for our portfolio of games. Q3 was the quarter where we bore the fruit of many initiatives of 2023. It was the quarter we built and released Season Pass for Trailer Park Boys Grease and Money, released a secondary Season Pass into RuPaul's Drag Race Superstar, and introduced interstitial ads into our games for the first time. The results was a comparable revenue to the previous quarter, despite decreasing UA spend by over 30%. In Q4, we will continue this momentum on the idle game side of the business by sporting season pass to more games, releasing new event types for the office on how we manage, and optimizing new releases in soft launch to maximize their performance at worldwide launch. But the biggest success story for Q3 was on the Match 3 side of the business. Q3 was the quarter that we crossed an important threshold for our match-free game, Bud Farm Munchie Match, needing and maintaining an average ARK DAO over 50 cents. With that goal achieved, now we move to scale the game while maintaining a D180 return on ad spend to minimize risk in a difficult predict market. The success of BudMatch opens up a multitude of opportunities for IP projects in the future, doubling down on what we've learned from IDLE to give us options to navigate the future in the mobile game industry. Over to Nidhvisa Shek, our Chief Operating Officer, for additional comments.

We've talked about our focus on operational excellence over the last few calls. Operational excellence goes beyond simply producing costs or increasing productivity, both of which we've done. It aims to create a long-term company culture that fosters efficient growth and is smart about our fiscal decisions. Over the last quarter, we've successfully transformed ESG into a leaner, stronger, and hyper-focused company. We audited each and every line item of our costs and reduced or eliminated all non-mission critical expenses. We doubled down on automation to streamline repetitive tasks and reduce human error. We eliminated unnecessary redundancies, moved people into the right roles where they're thriving and doing their best work, and rolled out systems to track and measure our results and productivity. We did this with minimal to no disruptions to our day-to-day operations. We did not miss a single client release. We did not miss a single content release, not a single teacher, and we saw teams come together in ways we've never seen before. With a stronger cash flow velocity, we're able to profitably invest in the most exciting projects, like Bud Farm Lunch and Match. Like Jim and Jason mentioned before me, we have never seen such strong and consistent game metrics, and we are thrilled to invest and double down in the match genre. Back to you, Jason.

Thanks, guys. In Q3 of 2022, we made a promise to investors to focus on EBITDA over top-line growth. We have very much delivered on that promise with four consecutive quarters over $2.5 million in adjusted EBITDA. We have grown our margin to 15% and plan to continue that focus and increase that margin further. Thank you for your time today, and we will now open it up to questions from analysts.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press R followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press R2.

One moment, please, for your first question. Your first question comes from the line of Neil Gilmer from Haywood Securities.

Your line is now open.

Yes, thanks. Hi, guys. Maybe just I'll start with the restructuring and the anticipated $5 million in annualized savings. I just want to clarify that we'll see that reflected through the operating expense line. And, you know, I guess you said most of it should start to flow through in Q4. So we sort of see, you know, an overall reduction of a little over $1 million in that line this quarter, Q4, and going forward into next year.

JC, you want to take that one? Yes. So, yes, we are expecting to see the first benefits from that come through in Q4. The majority of it, though, will be 2024. But, yes, that is the correct take on that one. And it will appear in the operating costs.

Okay. Thank you. So, to be clear, Neil, like most of these things, you know, kind of late August, through September is when we were initiating them, you know, renegotiating contracts, et cetera, et cetera. So, you know, most of those don't appear in Q3 at all. Some of them will come a little bit in Q4, but, you know, a lot of these renegotiated contracts will really take effect for 2024. Okay.

Okay. Thanks. I guess it was a couple weeks after your last call or whatever, you guys pressed the AEW right to the top in the European beta launch and so forth. Did you hear any comments on this call on it about, you know, how that's progressed and whether there's going to be a wider rollout or any sort of timeframe along there?

So, yeah, it hasn't gone worldwide yet. Jim or Lisa, do you guys want to talk a little bit about what we're seeing in AEW and any specific plans that we're talking about?

I can take this.

Yeah, there you go.

Yeah, no, we're both here. So the AEW launch is in Canada. So we are out in Canada. We are out in Europe. And we are continuing to keep it in soft launch, optimize metrics, and get the AEW brand ready. And so we have pre-registrations, pre-orders, hype that's going to be going out in December. And we are expected to worldwide this game middle of Q1.

Okay, thanks. And then, you know, Jason or whoever, you talk about your strong pipeline. It sounds like based on the commentary on the cost here, there's nothing that's going through a worldwide launch in this quarter, obviously. It sounds like, you know, you'll have a few of them that you are expecting to worldwide launch in 2024?

For sure in 2024. Yeah, I mean, the Bud Farm Monkey Match has now been launched worldwide in Q4. Like, the beginning of October, we put it worldwide, pushing hard. There will be more on that to follow in a, you know, kind of separate preface. But the, yeah, so Bud Farm Monkey Match is out now. A lot more coming in the match genre, but still a few other idol projects on the go, the biggest one being the AEW.

Okay, thanks for the question. We'll pass the line.

Our next question comes from the line of Adhir Kadde from 8 Capital. Their line is now open.

Hey, good evening, guys. Thanks for taking my question. Just on some of these operational efficiencies that you guys are finding, and the $5 million in cost savings that we should see in 2024. Is that kind of the extent of it, or are you guys continuing to look for cost efficiencies? And can we see that $5 million number increase throughout the balance of this year and into next year as well?

We've been pretty aggressive. I don't – like, anything at this point will be, you know, bits and drabs. But all of the major negotiations and changes and contracts have, you know, already been done. Wally's not on the line who took the lead on most of this stuff, JC. Is there anything major still to come? My assumption was that we've kind of covered everything already.

Yeah, so at this point, the majority of the contract negotiations for the major costs, they'll be flowing through in Q4.

It is going to be an iterative process.

to improve our software and G&A extensions. But I'll say that, you know, I believe, but there's still room for improvement if we do find more items in 2024.

Some of the licenses are expiring next year, so that's another opportunity to rethink.

Awesome. Thanks a lot. And there's an interesting line in the press release that talks about some efficiencies in the UA spending. Could you, by chance, elaborate on that? Like, what are you guys doing differently that you're doing this year as opposed to last year? Just kind of want to dive into that a little bit.

Thanks. Most of that is just significant ongoing changes in the – marketing and UA across the entire mobile games industry has really dramatically changed over the last year. You know, so we continue to react and grow, trying different strategies. You know, we're really focused on swapping out how we're attacking those things. Yeah, we can talk a little bit more in detail later. But, yeah, essentially just changing our approach. And I don't remember the exact number off the top of my head, but I believe it was somewhere around 30% less ad spend with a lot of the same results. Yeah. You know, we're continuing to optimize there, but really where we're expecting the biggest return is as we move into match. You know, it's a different approach, and some of the learnings we're having there are really interesting and could pay off significantly.

Awesome. Thanks a lot, guys. Appreciate your cover. I'll pass it on.

Once again, if you have any questions, please press star 1 on your telephone keypad. There are no further questions at this time. Please continue.

Okay, thanks, everyone. Appreciate you coming on. Most of you know how to reach out to me directly. If not, email jason at eastsidegames.com. Happy to answer any questions correctly, and thank you for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.