East Side Games Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Eastside Games Group first quarter 2024 results conference call. At this time, all participants are in 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 Q1 2024 results call. On the call with me today is Mr. Jason Chan, our interim chief financial officer. We are joined by our chief operating officer, Ms. Lisa Sheck, and our chief product officer, Mr. Jim Wagner. I'm happy to share highlights from the first quarter ended March 31st, 2024. And being that we just updated everyone a few weeks ago with our Q4 2023 report, I will keep the call today fairly short and to the point. Mr. Chan will go into detail on our financial results commentary for the period before turning it over to Mrs. Sheck and Mr. Wagner 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 laws. This call includes references to non-GAAP measures. Please refer to our third quarter press release and the 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 of 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. I'll now pass it to Mr. Jason Chan, our interim chief financial officer, for some comments.

Thank you, Jason. Q1 saw us continue on the momentum from Q4 2023 and had us end with $20.8 million in revenue, flat from Q4, and adjusted EBITDA of $4.1 million, roughly a 20% margin. Compared to Q1 2023, this represents an 89% increase in adjusted EBITDA as a percentage of revenue. as well as our second straight quarter with over $4 million in just EBITDA and sixth straight quarter of positive EBITDA over $2.5 million. We will be squarely focused on successfully launching our new games this quarter, as well as scaling titles that are performing ahead of their payback windows. Several games in our portfolio, including Milk, The Office, Blood Farm Munchie Match, and D-Fit, are games showing opportunity to profitably scale and grow top-line revenues. Many of the creative bets we've placed will flow through to May and June as we look to maximize assets against game launches, capitalize on IP content releases, and test strategically scaling UA spend around in-app events where we see periodic spikes in revenue. Our average daily active users for Q1 was 228,000 with a 99-cent ARPDAU and a consistent stickiness rate of 28%. Our cash on hand at March 31st ended at $7.25 million. up 40% from last quarter. We will continue to build on these healthy cash inflows while keeping an eye on new strategic opportunities and profitably scaling upcoming titles in line with our goal of sustainable growth. We've also purchased 1,258,019 shares under our renewed normal course issuer bid through March 31, 2024. This was at a cost of $954,000 from our cash balance. but management and the board strongly believe that the company is currently undervalued, and the best investment we can continue to make is in ourselves. Overall, as a company, we have continued on the momentum set forth from last year's restructure, and our focus will be on setting ourselves up for further growth in Q2 onwards. Thank you for your continued support, and with that, I will now pass off to our Chief Product Officer, Mr. Wagner.

Thank you, Mr. Chand. I'm proud that as a company, we were able to follow up a strong Q4 that was bolstered by holiday spending with an equally strong Q1, which is often a slower quarter for the industry. On the idle side, we released 17 new balances into our idle games, a record number of new balances for our games in a single quarter. New balances regularly give us a 10% to 20% bump to event revenue with the potential to have a breakout balance that can lift revenue 50% over a weekend. In the office, somehow we managed, for example. We had a breakout balance that resulted in an ARPDO of $2.16, which is the highest ARPDO we've had in the lifetime of the game. Season passes continue to be a growing part of our business, and in Q1, we launched our seventh season pass across the portfolio into Cheech and Chong Bud Farm. The March season path in particular was exceptionally strong across all our games, and Bud Farm, Idle Tycoon, Trailer Park Boys, Greasy Money, and Cheech and Chong Bud Farm all saw higher seven-day averages for total revenue and peak ARPDAUs over Q4. We're looking forward to Q2 with more season path launches in more games. Q1 also saw renewed interest in older games in our portfolio. Doctor Who Lost in Time saw a dramatic resurgence of interest from the new television specials debuting on Disney Plus for the first time, resulting in that game hitting peak ARC DAOs to date, and we look forward to the new full Doctor Who season debuting on May 10th to have an even bigger bump. In addition, product improvements to Milk Farm Tycoon produced three times the ARC DAO and five times the Day 3 conversions, allowing us to scale DAO 300%. and total revenue of 400%. We expect that growth to continue into Q2. But on the match side of the business is where we saw the most exciting growth. We continued to improve the KPIs for Bud Farm Munchie Match and hit a lifetime peak day of $0.80 arcdowns and the highest sessions per player per day since launch. We currently have four additional match games that leverage the code and learnings from Munchie Match. These new games are also paired with major IP partners to deliver even higher potential for growth and revenue than our original IP. And we're excited to announce that Cheech and Chong Kush Kingdom will be the first of these four match games and is available now in all territories on iOS and Android. Lisa will talk more about Cheech and Chong Kush Kingdom, but I'm confident that this game and the upcoming match titles will lead revenue growth in 2024 and 2025, But also in the next five years, this strategy will transform the potential for the studio by allowing us to partner with more and bigger IPs with two successful genres of gaming in our repertoire.

Over to Ms. Scheck, our Chief Operating Officer.

As discussed in our last call, we've been focused on operational excellence and building a strong leadership bench. I'm proud to say that we are now seeing the results of those efforts. One of the most significant people ops achievements of the past quarter has been our success in reducing attrition to nearly zero. This is a rare feat in our industry and is a testament to the positive work environment we've been able to cultivate. By investing in our people and creating a culture of empowerment and support, we've created an environment where employees are satisfied and deeply committed to our company and mission. As a result, we've been able to release more game updates than ever before, delighting our players with new content, balances, prizes, features, and storylines. Additionally, we've set a new record for ourselves, and we're able to build, test, soft launch, and release our second match street title, Cheech and Chong Crush Kingdom, in under six months. This marks our second collaboration with Cheech and Chong, a brand that continues to captivate. with its enduring relevance and dynamic presence. The success of our first game with them, which continues to flourish with over 3 million installs and 4.8 stars on the App Store, is a testament to the power of their appeal and the strength of their brand. And that's not all. We are thrilled to announce our collaboration with Hasbro on the upcoming mobile game Power Rangers, set to launch worldwide in Q2. The game is currently available for pre-reg and pre-order now. We believe that the iconic Power Rangers franchise, combined with our classic idle mobile gameplay mechanics, will resonate strongly with fans and players alike, driving engagement and monetization opportunities. With a robust and impressive pipeline of new titles, strong IT relationships with license holders, our leadership in the idle gaming space, and our success in match, we're well positioned to continue our trajectory towards sustained growth. Back to you, Jason.

Thank you, team. That's another strong quarter on the books and a great start to 2024.

Thank you, everyone, for your time today, and we'll now open it up to questions from analysts.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Neil Gilmer from Haywood Securities. Please go ahead.

Yeah, good afternoon, and thanks for taking the questions. Congrats on the quarter here. Maybe just follow up off, you know, part of what I heard out of Jason's comments with respect to UA spend, and given the fact that you guys have done a good job at building your cash balance on the balance sheet, how are you sort of philosophy or strategy of these sorts of, you know, opportunistically, or pardon me if I didn't get the right words correctly, but you know, look at from time to time increasing that UA spend, you know, what sort of strategy there and what else can you share as far as how you're going to approach that through the balance of the year with, you know, a decent cash position on the balance sheet?

The primary goal is to make sure that we're, you know, running possibly and adding to that war chest. So, you know, we have, you know, pretty aggressive payback windows. And, you know, as long as we can continue to buy traffic within those windows, we are constantly stepping it up, stepping it back where we can and stepping it back where we need to. You know, overall, we would love to spend five times as much as we are right now, but the challenge is doing that in a way that we know it will come back. We could easily, you know, spend a lot more money and, you know, we'd make that money back, but not until – well, we wouldn't necessarily make that money back, but You know, increasing top line revenue is doable, but at the cost of profitability. So, it's finding that balance. And right now, with our, you know, near 20% EBITDA margin is, you know, what we're hoping to continue to see going forward on our existing titles. But as we launch new titles like Cheech and Chong, Power Rangers, et cetera, you know, we spend, Like, for instance, right now we're spending, you know, more than 100% of the revenue we're making every day with the launch of Qicheng on growing the game. Now, that will come back over time, but, you know, it does have a drain on our short-term EBITDA. So as we launch more titles, it sucks up some of our short-term cash, but it comes back over time, and we're always disciplined about that.

Yeah, that makes sense. Yeah, so I would assume that, you know, given the fact that you've got, you know, Cush Kingdom that came out yesterday, I think it was, and then you've got the partnership with Hasbro you've announced here, you know, you invest up front to get those initial engagements and then sort of scale it back as you see that return come back on the games or basically just monitoring the KPIs of those games.

Exactly. And then we're always working in the background to improve those KPIs, which allow us to, you know, further improve those windows. And, you know, like Jim was mentioning about introducing new balances, et cetera, that allow us to increase our balance like we did on the office. And then, of course, that allows us to be more aggressive with user acquisition as well.

Yeah, yeah. Okay. And then just taking a look from a modeling perspective here, one thing that I haven't gone through every single page of your financials yet, I know they're posted there, taking a quick read through or whatever, a little bit of a dip down in the R&D spend compared to historical levels. Is that just one time in Q1 or is that sort of a new sort of level that we should expect going forward?

Yeah, I mean, like, you know, last year we scaled back a lot of the titles we've been working on and, you know, focusing on a smaller number of bigger titles. So, you know, the reductions in R&D you're seeing are a result of that scale back. And, you know, some of them took time to kind of place. But, you know, what you see there should be about what it is going forward. Yeah.

Yeah.

Okay. Again, unless we decide to – and believe me, we're negotiating – with a lot of different IPs. And if an opportunity comes that we feel is the right thing to do, we will do it. But I don't expect it this quarter.

Yeah. Yeah. Fair enough. That makes total sense. Okay. I think that's it for me. Thanks very much. All right. Thanks, Neil.

The next question comes from Adhere Cats, 8 Capital. Please go ahead.

Hey, guys. Thanks for taking my question. I wanted to ask on Some of the newer game launches, like AEW Rise to the Top. How are those games kind of performing in the early days? I know it's been out for, call it out, I guess a month or so, a little bit more than that. How are those early games performing in terms of your expectations?

Lisa and Jim, you guys, one of you can talk to that. I can take that.

So, AEW is about, you know, where we positioned that game to be in that it's that base hit. It's bringing in sustainable revenue. It's operating at a profitable level in terms of top line to UA spend right now. But it's not the breakout hit. It's not the thing that's going to substantially change the business going forward.

But it's absolutely a profitable part of our portfolio. Okay.

And then I wanted to confirm one thing. Did you guys mention, maybe, Jason, in your prepared remarks, that you saw an ARPDAU bounce one day in the office somehow we managed?

Is that right? Yeah, I can speak to that.

I think that was in my comment about the performance of ARPDAU. a really successful new balance we launched that lifted us to a lifetime peak ARPDAU of over $2.

Okay, so given that that game has been out for more than a year now, what kind of leads to that one-day balance? Is this something that you guys have done? I'm just wondering how that kind of happens so long after a game has been out in the markets.

Yeah, that comes down to the way that we operate all our – we're constantly trying out new balances for our events. So we run weekend events and always putting work into balances and essentially new – different feeling and designed events every weekend. And this one was a particularly successful one. And the great thing about that is now we can take that event that performed well in the office and have this amazing peak day, and we can port it to all the other games in our portfolio. So we expect as that trickles out, we're going to see, you know, maybe not peak lifetime, lifetime peak ARPDAU days, but very strong weekend performances whenever we run that event in those games.

Okay, awesome. And then just maybe from a capital allocation perspective, do you guys continue to be active on the NCIB, or how are you thinking about outside of, of course, US spending? How are you thinking about your cash balance?

Keep building it. You know, we're as aggressive as we can be on the NCIB. I wish we could be more aggressive, but the restrictions in the market, you know, prevent us from doing so. So, you know, we're continuing to build up our war chest to, you know, when we get that next breakout hit to be able to scale it very quickly, as well as to lock down absolutely exceptional IP opportunities, which, you know, of course, with every IP opportunity, well, not every, but most IP opportunities, and especially the big ones, they often require a significant outlay of cash. So we want – there's a couple of big ones that we're looking at, and we want to make sure we have the cash on hand to be able to do those if the opportunity arises.

And just quickly, that next biggest hit, is there anything in the pipeline right now that you would expect would be that next biggest hit, or is it more so launching the game, seeing how it performs, then really spending on increasing the U.A.? ?

We only spend on UA when we see the results. Every game we're building is going to be a massive hit. That's why we build them, but you never know until you launch it. It's just like every movie ever made, it's going to win the Academy Award for Best Picture. Not all of them do. Every time we step to the bat, we're trying to beat the next Monopoly Go. There's a couple in our portfolio right now in our production pipeline that are coming out late in the year that I'm especially excited about, but you know, there's a couple more games that we're launching this year, and hopefully they do exceptionally well, and hopefully Cheech and Chong and Power Rangers are also breakout hits, but you never know until you know.

Got it. Thanks a lot, guys. Appreciate the comments. I'll pass the line.

As a reminder, if you have a question, please press one star followed by the one. Your next question comes from Scott Buck from HC Wainwright. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my questions. Jason, how many game kit partners are you working with currently? And given the environment, have the economics changed in those partnerships at all?

Yeah, so Jim or Lisa, you guys can talk to the specifics on the number of partners we're working with. But the economics haven't dramatically changed with our existing partners. The economics that we're negotiating with IP partners definitely have, whereas the challenge of launching a new game is significantly higher than it's ever been. And so, you know, IP partners are beginning to realize that, you know, it took a while for them to come around and realize that the numbers they were getting five years ago are not the numbers they're going to get now. And the number of partners that we have to choose from is definitely significantly higher as for small independent game studios in the industry right now, it's really challenging. It's nearly impossible to raise money for a new venture. And the number of projects on the go that they can pick up as work for hire projects is much less than it was. So the competition for that talent is definitely less, and that allows us to pick and choose the right ones. But, you know, much like the rest of the industry, we're also working on fewer projects than everybody else is. So, you know, we're just – we're able to pick the best developers and create very fair agreements with them.

Great. That's helpful. And on the IP holders, what are those conversations like currently in terms of them wanting to get into the space? I mean, is the appetite still what it was, or has it slowed a bit just given, you know, kind of general economic uncertainty?

I would say it's increased. All of them are – hungrier than ever to sign opportunities because those signatures are less than they used to be. So there's fewer people that are willing to sign up for those kinds of dollars. But the biggest thing that we're looking for is how those partners can support us. Gone are the days where you could just put the name Star Wars into the title of your game and launch it on mobile and have it get millions and millions of downloads. Those days are gone. So now when we look at partners, we look at partners that we feel can really drive and grow the game. So, you know, AAW was a good bet for us in that sense, in that all of the wrestlers are able to help us promote and create content for ads, et cetera, for the games. And as well, RuPaul is a fantastic example of that, being that, you know, all the queens and all the different shows and all of the – different geographies allow us to leverage Queens from those areas. There are so many different shows that are premiering or having their finales at different places all around the world. So it really gives us a lot of touch points to promote around. Whereas when you're looking at, you know, even something like Cheech and Chong, to be fair, you know, they just launched a new movie this week, but, you know, they haven't launched a movie in a very long time before that. and arguably are a 40-year-old brand that is a little bit tired. But they are both, you know, have strong followings and are very engaged in promoting the game on their social media feeds and, you know, making content for us that we're able to use with ads and having, you know, Tommy Chong in the ads is very, very powerful. Whereas, you know, with something like The Office, you know, it's more challenging for that title now because we can't exactly get Steve Carell to come and do ads for us. I mean, he will, but it would cost us millions of dollars and we wouldn't get a return. Whereas, you know, smaller IPs with rabid followings like Trailer Park Boys and Cheech and Chong, we can leverage that talent to engage with fans directly to get them to the game.

Great. That's helpful, Collar. That's it for me, guys. Congrats on the results.

Yeah, thanks. Appreciate it.

There are no further questions. I will now turn the call over to Jason Bailey.

Yeah, so thanks, guys. Like I say, that's another solid quarter. You know, we keep delivering what we promise. You know, that's another, you know, revenue's flat, but profits are solid. You know, we're ahead of the headwinds in the industry. You know, I feel really great about the position that we're in as far as our existing titles, the diversity of income we have, as well as the you know, the winds of change in the industry in general that are coming, as well as the, you know, the IP opportunities and the game pipeline that we have coming out this year and early next year. So, you know, it's a solid company in a solid spot. You know, I'm really proud to be part of it and really proud of the work that, you know, Lisa and Jim and Jason Chan and the rest of the C team have been able to do managing everybody. You know, let's be honest here. They do all the work. I just stand here and take the credit once a quarter. You know, it's really an incredible team of people that do wonderful things. So thank you, everybody, for your support.

And, you know, we'll talk again in a few months.

Ladies and gentlemen, this concludes the call for today. Thank you for calling in. Please go ahead and disconnect your lines.