Rivalry Corp.

Good morning, ladies and gentlemen, and welcome to the Rivalry Corp Q1 2022 Results Conference Call. At this time, note that all phone lines are in a listen-only mode, but following the presentation, we will conduct a question-and-answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, May 26, 2022. And I would like to turn the conference over to John Vincic, investor relations for Rivalry Corp. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Our speakers on today's call will be Stephen Saltz, co-founder and chief executive officer of Rivalry Corp, and Keita Corey, chief financial officer. Before we begin, I would like to remind listeners that certain statements made during this conference call presentation may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements of Rivalry Corp. and its subsidiary entities or the industry in which it operates to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. When used in this conference call presentation, such statements use words such as may, will, expect, believe, plan, and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this presentation. These statements involve known and unknown risks, uncertainties, and other factors, including those risk factors identified in the company's prospectus dated September 17, 2021, under the heading risk factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than as required under securities legislation. And now, I would like to turn the call over to Stephen Saltz. Stephen?

Thanks, John. And thank you, everyone, for joining us. As our Q4 and annual earnings conference call was just four weeks ago, and we discussed our pre-release Q1 handle then, among a number of other strategic objectives for 2022, this quarter's remarks will be a little more concise. On the subject of timing, our first quarter results do not include any impacts on our operations in our two new regulated markets, Ontario and Australia, as we launched in Ontario April 4th when the market opened, and Australia on May 9th. We will be able to more meaningfully address the progress we've seen in those markets, as well as our expectations in future quarters. However, I'd like to take a moment to remind everyone of Rivalry's market entry strategy. This is something we discussed in more detail in our recent annual letter and have executed on consistently throughout our history. In many ways, it is the inverse of our peers. In new markets, we start slow on spend, take in feedback, conduct user testing, iterate against it, and build brand awareness in parallel. As underlying key performance indicators hit our target range, we then increase spend accordingly. The most critical piece of our strategy is cost-effective customer acquisition. This requires long-term brand building that turns into brand love with success. Over time, we expect that success to translate into declining customer acquisition costs as beloved brands self-perpetuate product discovery. At that point, operating leverage becomes events as reliance on new spend for every incremental dollar of revenue declines. Our peers will often do the inverse of this, deploying their highest spend in the initial flurry of a marketing launch through promotions, bonusing, and various marketing deals, which then tapers off over time as they see their competitors in the market cool off on spend as well. This has been the case across nearly all U.S. state regulated launches. As an example, in Ontario, our initial experience and that of customers have matched that U.S. model. The market saw a burst of simultaneous launches on April 4th, where capital cannons have since been firing at one another to see who can subsidize the customer the most, i.e. through the offering of promotions and bonuses. This competitive dynamic has played out throughout history across a number of industries. For example, most recently in rideshare and food delivery apps, and like in sports betting, investors are now looking for where the operating leverage truly exists in this model long-term and how companies can sustainably reach a profit. Our slower and more staged approach, which perhaps seemed misguided in a bull market, now looks prudent. Critically, it allows us to pace our balance sheet in a market where runway is vital while still giving the business oxygen to deliver results. And the underlying foundation to all of this is customer health on unit economics first and increased spend second. To wrap this point up, the moderator of the largest Ontario betting chat room heading into launch day on April 4th said it best in a post to the entire community there, and I quote, this is where the money is made. There will be no shortage of opportunities to take advantage of sportsbooks overpaying for customer acquisition. Need I say more? Lastly, I want to provide a quick highlight of our Q1 results, leaving the details for our CFO, Kata Corey. In Q1, we saw continued momentum. Betting handle was $40.2 million, a year-over-year increase of 273% and up 62% sequentially from Q4-21. Revenue was $4.8 million in the first quarter, a year-over-year increase of 149% and up 122% sequentially from Q4-21, both of which were all-time records for the company. And again, this is all generated out of the same international markets as permitted under our Isle of Man license. This strength continued to be driven primarily by our esports business with our betting handle mix still heavily weighted towards esports at approximately 90% of handling Q1 and traditional sports representing the difference. The seasonality for esports is such that late January sees the kickoff of the esports season across all major game titles, which then continues strong until the end of the quarter. Mid-April or early Q2 sees that abate as the first part of the season ends for many titles, only to pick up again in June. As a result, Q2 usually sees a softer esports event calendar than Q1, most of Q3 a fairly strong calendar, followed by the offseason in Q4. At this point, I'll turn the call over to our CFO, Keita, to review our first quarter results in greater detail.

Thank you. Betting handle was $40.2 million in the first quarter. That's a year-over-year increase of 273% from $10.8 million in Q1 2021 and a sequential increase of 62% from $24.9 million in Q4 2021, which was our previous record. We view betting handle as an important metric as it measures overall betting activity and the long-term earning potential of the business. Growth in the handle indicates some combination of an increase in our customer base around the world, and their level of engagement with the platform, meaning the number and size of bets they place. The growth in handle in Q1 was expected. As we've said in the past, and as Stephen briefly detailed earlier, we see seasonality in our business due to the timing of the major esports events that continue to generate the vast majority of our betting activity. Our busiest quarters are typically Q1 and Q3, with the second and fourth quarters tending to experience a slowdown. This pattern held for Q1 2022. We anticipate the seasonality to continue in the coming quarters. It will moderate over time as we diversify our product mix with traditional sports betting and casino, both of which will be independent of the esports calendar. So with that said, given the seasonality of our business, we continue to view year-over-year growth as the most reliable indicator of our momentum. Onto revenue, first quarter revenue was $4.8 million, up 149% from $1.9 million a year earlier, and up 122% sequentially compared to $2.2 million in Q4 2021. We're pleased to start another year with triple-digit growth rates. Gross profit was $682,000 in Q1, up 26% year-over-year, and 71% sequentially. As a percentage of revenue, gross margin was 14%. You will clearly note the percentage difference in year-over-year growth rates across the three figures mentioned thus far, starting from the top with handle, which grew 273% year-over-year, then revenue up 149% year-over-year, and then gross profit up 26% year-over-year. The business model of a sportsbook is generating a spread or a margin on betting handle. This is why, as mentioned at the beginning of my remarks, betting handle represents earning potential. The more handle generated, the more potential for generating spread or margin. and therefore the bigger the potential revenue and gross margin. However, at our stage, although we generate positive margin on our sportsbook, the percentage can still be a bit volatile in any given month. The model of sports betting is such that as total liquidity or the total volume of bets increases, the potential for loss or corrections on the sportsbook declines. Simply, it's easier on average to balance your sportsbook with more bets. This means at scale, our margin will become more consistent and we believe gross profit in particular will start to look much more comparable to the year-over-year growth rates seen in handle and revenue and generally trend higher as a percentage of our revenue. Consistent with our growth strategy, we increased our operating expenses in the first quarter to support our objective. The two largest operating expense items were marketing, advertising, and promotion expense, which is aimed at attracting and retaining users, and general and administrative expense, which largely reflects the higher headcounts and public company costs required to build the business. These two items account for nearly the entire year-over-year increase in operating expenses, with certain other items offsetting each other. Lastly, I will turn to liquidity. We continued to invest in growth during the first quarter. Our cash balance was $30.1 million on March 31, 2022, compared to $35.5 million December 31, 2021. We had working capital of $32.3 million at the end of Q1, compared to $38.5 million at the end of fiscal 2021. We remain very confident in the growth of our financial position and our ability to continue to fund our growth strategy. At this point, I will turn the call back to Stephen to discuss our outlook.

Thanks, Keita. We listed some goals for 2022 in our year-end call last month, and we continue to execute against them. Our focus is on growth across product, new geographies, and an expansion of Rivalry's creative universe. Through financially disciplined management, we believe our positive unit economics will continue to improve and a path to profitability will become clear. Our goals are, one, rolling out a casino offering that is authentic to our core demographic in Q3. It's worth noting that mature operators in our sector will often see up to 50% or more of their revenue driven by their casino offering. Beyond Rushlane, which we consider a different class of games, Rivalry currently has no casino offering. We will be starting with a small set for initial rollout and assessing customer feedback, sentiment, and impact, and then going from there on additional games. We are excited to see the potential contribution of this new vertical to our top line. Second, a meaningful expansion of our traditional sports offering to support the continued interest and growth we are seeing. This is important for Ontario and Australia, where among our target demographic, we are anticipating traditional sports betting interest to likely exceed that of our current markets. We expect initial release of these efforts to hit in Q3, which we will detail more then. Third, launching a mobile app consistent with the surprise and delight we believe the next generation of customers is looking for. We are expecting to deliver this toward the end of Q3. It is critical in order to be long-term competitive in regulated markets that we do so. Historically, we have prioritized all efforts internally on more targeted efforts in existing markets to support growth. We are excited by this initial release of mobile, which we will iterate over time with more features. Fourth, new originally developed games to complement Rushlane and add depth to our massively multiplayer online gambling games category. We've been further developing this internally, bringing on additional talent in order to achieve greater scale. We consider rivalry games division a key point of differentiation and innovation. In the spirit of that, this division taking the learnings from Rushlane is developing a number of new games that we expect to play or test in Q3 with regulator certified testing to follow and full release expected later in the year. Fifth, launching a new geographies under our existing Isle of Man license and assessing new regulated licenses to provide continuous growth in users and brand reach across the globe. And finally, six, building upon our dynamic media strategy to continue positioning Livalry as an industry-leading creative house operating at the forefront of internet culture. With that said, I'll now turn it over to the operator to open up the call for Q&A.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by 1 on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by 2. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. And your first question will be from Adirkezi at 8 Capital. Please go ahead.

Good morning, guys. Thanks for taking my questions here. So I wanted to talk about Australia a little bit. You know, you guys launched there on May 9th, so call it three weeks you've been in that market. I know it's a very mature market. Can you give us a sense of what your go-to-market strategy will be in that market and how it really, if at all, differs from Ontario or even some of the more gray market markets that you're in?

Yeah, for sure. So I'm not sure if anyone saw, we posted it on social, but it was much more active, I'd say, in local Australian media. But yeah, there was a large federal election there. And we produced a very kind of bespoke campaign where we had a, we called it PM campaign, where it was a 8-bit Mike Tyson style fighting game where you could pick one of the two candidates and basically beat the crap out of each other and then share your results on social. And we did a bunch of different kind of campaigns around that. So that was like the initial launch campaign. And then we paired that with, our typical influencer launch campaign. So, you know, a Twitch influencer and a mid beast and a bunch of other large ones where we've definitely captured a decent amount of the largest content creators in gaming or e-sports in Australia. And those have just started to roll out. So the combination of those two things is actually quite good. And I'd say, yeah, The big difference between Australia and Ontario is Ontario had this new regulated market launch where everybody launched at the exact same time and everybody was kind of drowning in promotions. Australia is different because as you mentioned, it's like longstanding regulated market. And we were, it seems like we were one of the first operators to launch there from a sports betting perspective in a while. So it was a little more novel. So I can say like, we definitely found that like the initial deposit volume and frequency exceeded our expectations, even though we do, start quite slow in terms of how we spend and how we deploy. But yeah, we basically did a normal campaign paired with our typical stuff and making sure customers are really taken care of. And then, yeah, kind of just garnering feedback, making quick changes, adding a little bit more sports and stuff that they're looking for and just continuing to go from there. But I'd say fairly typical playbook aside from this PM campaign, which was just super timely because, yeah, the launch was about two, two and a half weeks before that election. So it was just a fun thing to draw attention to.

Gotcha. So seeing those initial deposits exceed expectations, obviously, really good to see. And then the second thing I wanted to ask about was the cross-selling. So in Q4, we really saw the cross-sell shine through, where you were able to put up a strong handle number, despite a seasonally slower quarter for esports, given that traditional sports really picked up the slack. Do you think we could see a similar dynamic kind of play out in Q2?

A little bit. I think actually the sports calendar was even better, though, in Q4 than maybe Q2 because now we're in NBA and NHL playoffs, and we definitely see more stuff, I'd say, during regular season than we would potentially in a playoff, especially as it gets later in. We find there's just more activity in the, I guess, normal course seasons and normal course games than you would find toward the end. So, yeah, I think there will be a bit of support there. We're not expecting some massive decline off of Q1, but I do think we're going to get a little bit more support from sports or it will help definitely blunt the impact of seasonality, which is for sure the objective. And then as casino rolls out later in Q3, that again, we're starting off slow with an initial set of games, but that will even help further because yeah, there's a bit of like an inversion almost between the e-sports and sports seasonality. So Q4 is really bad for e-sports, quite good for sports. Q2 is kind of in between for both. Q3 is great for e-sports, decent for sports. I think NFL season usually takes off then. So yeah, Yeah, it should help, definitely. We're not seeing these crazy volatility moves the way that we used to, but yeah, I'm not sure if it's going to be as good at some of our markets in terms of even the sports calendar for Q2.

Gotcha.

And then I know you mentioned a little bit of this in your script, and I'm kind of paraphrasing here, but you're taking a much more calculated approach in Ontario and just really, you know, in order to maximize the marketing ROI. And you kind of mentioned that you'll be looking for some specific metrics. Can you give us a little, a better sense of what metrics you will be looking at prior to really kind of pushing the pedal on the, on the, on the marketing spend to really kind of go after marketing shared market share just in terms of like, you know, additional color really.

Yeah. Yeah. Yeah. So it's, it's, it's the same as all of our markets. So yeah, the biggest one obviously is really simply cost of customer acquisition. So, but cost of customer acquisition, not just like having great marketing that targets the right cohort. Obviously that's a big piece of it and making sure you're finding your voice and your footing and the demographic and in the channels that make the most sense for you, which you obviously have to do. And that can take a little bit of time to dial in, but it also comes down to product, right? Because people are coming in and, or they're just taking a look at the site and conversion is how we determine cost of customer acquisition. So it's a first time deposit. So, you know, doing great marketing and bringing eyeballs to the site, but then people not converting on it could also have to do with product at times. So what we find in all of our markets is cost of customer acquisition, at least in the early days, can be like a fairly good representation of, I guess, product market fit and marketing fit. And then a little bit further down the line, we look at retention, obviously. So like, are these users coming in, placing one deposit, one bet, having some kind of issue, churning out, or just generally, you know, placing a bet, withdrawing and leaving. So churn is also a key factor. So we've mentioned in the past, right, historically in our grain markets, our cost of customer acquisition has been extremely low once we get it dialed in. And we gave an example in our annual report or annual letter as well. So in these grain markets, it's been several hundred dollars for a while, which is when we talked about leading into the listing and have been kind of directional on. And we've also been saying that definitely in Ontario, in Australia, we're expecting that to be, you know, probably double just because the value of the better is much higher. So what I can say is, you know, average deposit sizes and average bet sizes as we anticipated. And these markets are, you know, three to four X plus our historical gray markets that we've operated in. So yeah, higher value of customer, which is great. It means cost of customer acquisition is higher. So once that gets dialed in, once we think that retention looks good or users aren't immediately churning out, then we'll increase spend. And yeah, I mean, for More Color Ontario, like our marketing spend, as I think we said, even on the last call that we had planned, and now we're through all this in the first month, we spent under $100,000 in the first month of launch, right? We know there's competitors that were spending that the first hour of April 4th on bonuses alone or promotions alone. So yeah, it's, it's been modest and we didn't want to go toe to toe with over a dozen sports books trying to out promote each other. It's just not, it's, it's, it's just, you know, you're, you're going to kind of blow up the balance sheet with sharp betters bonus hunting you and you're not going to retain them anyways. You've got the best experience in the world. So we think more natural market dynamics are going to play out over the next 12 months where everyone's going to be through their launch. They're going to get all their promotions out of the way. And then it's going to weight more towards natural points of differentiation being product, brand, and overall user experience, which is where we do very well. So, yeah, that's been it so far.

Great. And then just on Rushlane, you touched on it again a little bit in your preamble. And I get the strategic benefit of Rushlane. It increases dwell time on the platform. When users are embedding, it helps with engagement, leads higher ARPU. So can you give us a sense of how that's playing out in Rushlane specifically? Is it kind of seeing those intended results?

It is. I think as we said last call, it's not independently monetizing as a SWAT machine would, just given the nature of the game. We said this even from the beginning. It's a one and a half to two minute play time, even longer if you're waiting for people to join the match. And overall it was really just to kind of introduce that IP and I'd say that universe to rivalry users and then to continue developing in games behind it. So the nature of it is it's like very popular during popular betting times where, as you said, like in between matches, people will seem to kind of flock to that while they're waiting for the next match to start and while they're waiting for like a bet to settle or whatever it may be. So it continues to serve that purpose. Again, it's not a plot machine functionality in terms of independent monetization, but it's keeping people on the site. It's reducing cost of customer acquisition through the events that we run and getting people engaged in the platform. And it's really just kind of set the foundation for further development. And it's informative. It just provides information for the development team to understand how to approach the next set of games, which is what they've been doing. So just taking the learnings from that.

Awesome. I appreciate all the cover. I'll pass the line.

Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch tone phone. And your next question will be from David McFadgen at Cormark Securities. Please go ahead.

Oh, yeah. Hi, guys. A couple of questions. So first of all, just on the gross profit margin, I know it was down year over year. And as you said, that doesn't reflect Ontario and Australia. So I'm just wondering, where you think that's going to go over the next couple of quarters with your launch into those two markets? And then secondly, just on the G&A expense, you know, obviously it ramped year over year as expected, but is this kind of the level that you expect it to be, or is it going to increase further with the launch in Ontario and Australia?

Thanks. Yep. Yeah. So if you look at the gross margin, I mean, the fact that it grew with 20, 26% year over year, but the revenue was up significantly, you know, gross margin Q1 last year was almost 30%. And obviously this year it's about half that. So as Kate has said in her opening remarks, like there's just still volatility with our current liquidity and our total, our current total number of handle. What we expect with Ontario and Australia is, as I said, like a little bit more weighty towards traditional sports where we find slightly more market efficiency, I guess I'd say, you know, it's something we've talked about for years when the business is a private and into going public is e-sports better. They're definitely like a little more emotional, maybe a little more one-sided. So they'll vote for, they'll bet on the fan favorite or they'll just kind of pile on the underdog. If the creator they're following is betting that way and it can create definitely a little more volatile action from time to time. So yeah, I think our gut and our expectation is in the next couple of quarters, as we find more diversity in the sports books. So the percentage of handle, not just being e-sports and sports evens out or just, you know, has a greater mix, but also even the breakdown of individual titles in the e-sports category has more diversity. It should help to find more stability in the margin. So yeah, I think directionally, we think it will improve and go up is our expectation. And we're taking kind of measures internally to, to do that for sure and try and do that as well as we can. On the GNA side, we are in a launch period. So we had not historically launched any markets for a year, year and a half. We were prepping for Ontario and Australia. We had another great market that we're working on for later this year. So every single time we do a new market launch, there's hiring that goes into that because we need to hire local staff or a local team to help run the market. We've been doing a bunch of engineering hiring as well to just backfill all the requirements that come with having multiple regulators and essentially multiple different versions of the product. And then obviously initial marketing deals spend, just the way that we account for is there are certain deals that are full year deals or coming in the next couple of months that you start to pay for. So there's upfront costs just associated with launch. So yeah, like we expect in Q2, there will be like another bump of cost because you've got that launch, but it's not going to be met with handle or top line necessarily because those markets are an early ramp. So it's a bit of like a U curve where, you know, cost or burn is going to increase and it should kind of stabilize as revenue and gross profit starts to come out of those markets over time. So my expectation is Q2 will see an increase in cost. Q3 probably a little more modest because we'll have gone through a lot of initial hiring and marketing spend that was needed. And then it should start to stabilize after that. We're not expecting like aggregate company wide burn here. definitely on fixed costs to increase materially, probably beyond Q3. And then variable, which is really just rev share paid to our odds provider, payment service provider fees and marketing fees. That's going to move with growth. So as the business is growing and we're generating more handle and more revenue on the sports book, we've got to pay out more rev share as more people are depositing. We pay more fees associated with payments. And if we're having healthy customer union economics and markets, we will continue to put money behind growth in those markets on marketing. But, yeah, from a pure G&A perspective, I don't think really beyond Q3 there's going to be massive moves, and we're going to have to kind of double what we needed to get the business situated for the next leg of growth.

Okay. Okay. Thanks a lot.

Sweet.

Thank you. And at this time, Mr. Seltz, we have no further questions. Please proceed.

Great. Thanks, everyone, for joining and listening in. And if you have any further questions, you can just shoot me an email after and we can obviously take it offline. So thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.