Rivalry Corp.

Good morning, ladies and gentlemen, and welcome to the Rivalry Corp fourth quarter and year-end 2023 financial results call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. You can press star 1 at any time. And if at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Friday, April 5, 2024. I would now like to turn the conference over to John Vintich. Please go ahead.

Thank you, Operator, and good morning, everyone. The speaker on today's call will be Stephen Saltz, co-founder and chief executive officer of Rivalry Corp. 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 the 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 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 annual information form dated May 1, 2023, 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 will turn the call over to Stephen Saltz. Stephen?

Thank you, John, and thank you, everyone, for joining us today. Typically, we host our investor call the same day we publish the full set of audited financial statements in MD&A. However, this being year-end, we're still wrapping up the audit, and those statements are still a few weeks away. In the interest of keeping shareholders as current as possible, we wanted to publish these preliminary results as soon as they were ready, and we will be happy to answer any questions you may have at the end of this call. Now, on to the results. As you saw in this morning's news release, in 2023, we delivered a strong full-year result. Betting handle of $423.2 million in 2023 was up 82% from the year prior. Revenue reached $35.7 million, a 34% increase over 2022. And gross profit was $16.2 million, a 66% increase from full year 22. Our offbacks remained relatively steady amid our continued year-over-year growth, with noteworthy declines in marketing spend down $2.2 million, or 15% year-over-year. highlighting the non-linear relationship between spend and growth, which is the key for any business gearing toward profitability, which we remain on the path toward and is why we have maintained our H1 profit guidance. Our net loss in 2023 reduced by 22%, totaling $24.3 million. Player KPIs continued to trend positively in 2023, setting all-time records for average handle per customer up nearly 30% year-over-year, average revenue per user up 38% year-over-year, and record low cost of customer acquisition down 15% year-over-year. The fourth quarter itself represented a slower finish to the year as it's historically experienced. Letting handle the fourth quarter was $85.2 million, a modest increase of 1.5% over Q4 2022, while marketing spend decreased 32% year-over-year. Although within the context of such a significant reduction in marketing spend, we are pleased to still demonstrate modest growth. I will reiterate commentary from our Q3 call in late November surrounding the month of October. That month usually represents the bulk of Q4 before esports goes into the offseason, with October boasting two of the biggest events of the year for two of the largest esports, League of Legends and Dota 2. This year, the events took place in geographies that were completely inverted for the core betting base on rivalry around those titles. meaning that matches took place in the middle of the night and given in-play betting represents the majority of sports bets on rivalry. It did have a negative impact on betting handle experience during the month of October and consequently on Q4 as a whole. With the continued diversification in our business across esports titles, traditional sports, and casinos, we are increasingly blunting the impact of potential events like this. Revenue in Q4 was $6.5 million, a $3 million decrease from Q4 2022 due to less favorable sportsbook outcomes compared to the unusually favorable outcomes experienced in Q4 last year. I'll note, as a percentage of betting handle, revenue was near the average achieved throughout full year 23, highlighting the atypical margin outcome in Q4 22. Gross profit was $3 million in Q4, a $2 million decrease from Q4 22, owing to the relative margin impact noted a moment ago. Gross margin itself was in the mid-40s, consistent with the trend experienced all year. And once again, gross profit as a percentage of betting handle was equal to the average achieved throughout the entire year of 2023, again highlighting the atypical outcome that was counting against in Q4-22 and demonstrating that the margin of the quarter was aligned with the full-year trend. Looking ahead briefly to Q1, we've now begun to strategically deploy the capital from our mid-November investment in areas that are driving customer acquisition and revenue. Among those focus areas are ongoing efforts to stabilize and improve margin that we're proud to say are yielding results with Q4, sorry, with Q1 2024 betting margin trending toward a more than 20% improvement over the average in 2023. We expect the full effect of these investments to begin materializing in our results throughout the first half of 24 and beyond as we amplify proven marketing strategies, release higher margin products, and continue developing proprietary betting experience experiences for our customers. Overall, we are very pleased with what we achieved in 2023. We exited last year with all-time high customer economics, increasingly diversified revenue streams, and a reinforced competitive moat as the market leader in Gen Z betting. We gained meaningful traction in new segments, such as traditional sports, casino, and fantasy, which is widening our opportunity set and positioning us for sustainable growth in the medium to long term. To briefly speak to several of these key accomplishments and tailwinds in more detail, first, we have diversified our revenue streams and products by entering new segments, including the launch of our standalone fantasy NBA app, which is acquiring new users and engaging them in our product universe, supporting the growth we're witnessing in traditional sports, which has grown by 60% since 2022. Additionally, CasinoNow accounts for half our betting handle, and we've continued expanding that product last year with new games, the launch of our iOS mobile app in Ontario, and more. This includes the September release of our latest first-party game, Cash & Dash, which has validated our original game development strategy and its Gen Z customer appeal, becoming the fifth most played casino game on our platform and among the top 10 highest grossing by revenue. The momentum of Cash & Dash is carrying into Q1 and creating downstream B2B licensing opportunities that I'll speak to momentarily. As I spoke to earlier, our customer KPIs reached all-time highs, and by the end of the year, Rivalry's total player registrations eclipsed 2 million. The common thread among these exciting developments is establishing brand and product form factor for Gen Z and digitally native users broadly for viewing Rivalry as an on-ramp to interactive, entertaining, and culturally relevant experiences. Rivalry's brand and the targeted communities of gaming fans and tech-savvy users we've built around us represents one of the greatest competitive advantages in the current sports betting marketplace. Now let's look ahead. 2024 is rife with innovative product releases and developments arriving in Q2 and continuing throughout 2024. Our current pace is incredible and unlike anything in our history, setting the year up for success. I've never had more confidence in our product roadmap and what rivalry is building this year. Apart from new products, original games, and proprietary features, we've been working to dial up the overall feature entertainment value of our core product provide a tech savvy next generation customer with a tailored experience that is well differentiated within the larger sports betting marketplace. In addition to the continued refinement of our product set, we are in the process of unlocking what we believe to be two of the most material developments to our business model since launching Rivalry in 2018. The first is a B2B vertical to license our in-house developed games. And the second is exploration and development within the crypto ecosystem. Touching on the first, we are very grateful for the incredible industry reception Cashinash has received since its late September 2023 release. Our game development strategy has been underpinned by Gen Z expertise, proprietary technology, and entertainment value that we now clearly see as resonating with the next generation of customers. The impact of these games has created a tangible B2B opportunity for our games vertical, opening a new line of revenue for the business that has great potential for global scale. And second, in addition to adding greater support for cryptocurrency on Rivalry, we're also exploring the implementation of adjacent crypto-enabled technologies to meet growing consumer demand and better serve our target audience of digitally native users. The technology in this ecosystem has reached an inflection point that we believe can meaningfully enrich the user experience on our platform, from payments and acquisition to player value and creating enhanced network effects. Evolving alongside our audience and adapting to broader trends in consumer technology will not only maintain our market-leading position among this demographic, but allow us to continue setting the standard for what's possible in this category. Online gambling on the internet in 2024 is quite different from even late 2018 when Rivalry launched. Entirely new internet-based economies earned by significant reduction in payment friction unlocked by cryptocurrency is bringing a whole new global audience into gambling and enhancing many other consumer products. Rivalry's user base grew up on the internet and isn't nearly entirely under the age of 30. Event diagram of Gen Z gamblers, gamers, and crypto enthusiasts or crypto curious has an extremely high degree of overlap, making rivalry uniquely suited to interface positively and unlock value from this emerging ecosystem. We will have much more to say on this in the near future and are eager to demonstrate the value creation potential to our shareholders. With all that said, we're deeply proud of Rivalry's operational excellence demonstrated in 2023 and equally excited about the strategy, product set, and the many other defining opportunities we have on the horizon in 2024. At this point, we'll open up the call for Q&A, so operator, can you please provide the instructions?

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

Should you have a question, please press star followed by the number 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 star followed by number two. If you are using a speakerphone, please leave the handset before pressing any keys.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of adhered Cadvey from 8 Capital. Please go ahead.

Hey guys, thanks for taking my questions this morning. I just want to ask on the reiterating or reaffirming the Q1 profitability guide. You guys have mentioned that you're going to put the pedal to the metal again on kind of some marketing spending and all that. How are you thinking about, you know, balancing growth as well as profitability initiatives as we head into fiscal 2024? Yeah, thanks, Adhir.

So the guidance is for H1. And the guidance, again, we've articulated it in the past, is really that just having revenue exceed expenses and that inflection point being hit in H1. So it's not necessarily that, let's say, Q2 is going to be a clean profit or Q1, but the company will be at a profitable run rate at some point within H1, and then therefore H2 would be generating a reported and call it audited profit. The bridge to get there is, again, the same as we probably articulated in the past, which is a combination of, one, we're getting higher return on invested capital with every dollar that we're putting out. So as we gave in the press release, we've seen obviously pretty significant gains in the average handle per customer. And it was, you know, whatever, 38% in average revenue per customer in 2023, while simultaneously dropping our cost of customer acquisition on a full year basis by 15%. We've dropped it every year. I'd say that our cost of customer acquisition is getting quite low. Not sure how much lower it can go at this point. in some markets. But so if you think about it that way, basically every dollar deployed is acquiring, at least as of last year, 15% more customers who are spending or who are generating now 38% more revenue on per customer in 2023 than we did in 2022. And then as we said, also in the release, our margin in Q1 is trending, just our betting margin. So just again, the revenue we're generating per customer on every dollar wagered. has increased more than 20% over 2023. So that's just, again, additive on top of that 38% that we grew in 2023. So it's a combination of that combined with, yes, we brought in some capital toward the end of last year. We're able now to deploy capital and actually expand marketing spend in places where it's working really well because In Q4, we dropped marketing spend more than 30% year-over-year, which wasn't exactly the optimal thing for the company, but was the state of where things were at the time in terms of what we were comfortable with from a spend perspective. So the combination of all those things and the positivity we're feeling in Q1 in the margin trend is still giving us confidence in that profit bridge in H1. So, yeah, we maintain the guidance for this quarter when we report it.

Okay, got it. Then the second question I'll ask, you said that, you know, some of the bigger events were held in jurisdictions that were less than favorable from a timing perspective. And so that kind of it kind of implies that a big part of your customer base, I know you guys have never released a geographic breakdown, but it kind of means that your customer base is more in this time zone. And so just based on some of the markets that are regulating like Brazil in North America and South America, how are you thinking about that Brazilian market and the licensing that's going on there and just any additional color on that?

Yeah, I think we've always described and even just our external press that our largest color gray market center, our island and license would be within the Southeast Asia region. And then in Latin was certainly Brazil being, being an important one. And in terms of the event, so Southeast Asia markets, Dota two was more popular, the Dota two international, which is that big giant prize pool event every year. Although probably this year was quite small because the publisher changed how they funded it. That event was held in Seattle, the whole thing. So people in Southeast Asia who are large Dota two betters, which is what we see every year, They quite literally would have to be up at 1 or 2 a.m. for the start of the games. So this was just kind of quirky stuff and maybe a bit of extra detail, but we literally had marketing campaigns associated with the Dota marketing we were doing in Southeast Asia that was around basically giving people coupons and money to go buy energy drinks and go to convenience stores kind of in like a joking meme way, literally, so they could stay up and watch the games and therefore battle in rivalry. So With our betting handle being majority percentage in play as essentially every operator now in the modern environment, that therefore made it really challenging for the Dota bettors because that was the middle of the night. And then if you look at LATAM, League of Legends is the bigger game, especially in a market like Brazil. And the entire event was basically held in Korea. And it was just in basically in the SDA time zone more so. So that was the exact same situation where they'd have to be up about, I think the first game started usually around 1230 or 1 a.m. as well, just started the first set of games. So it was the same thing there. So we did everything we could to kind of maneuver around that, but that definitely had like a negative impact on Handel within the quarter. And then to answer the Brazil question, Yeah, we've been following the regulation for two years. This has been a regulatory environment that has said that regulation is coming for many, many years, and people are experiencing that. It certainly right now seems to be the most affirmative around that that it's ever been. People who are watching really closely would see that they published a list toward the end of last year of operators that submitted basically expression of interest and are involved in the process, and rivalry was on that list. Yeah, we are following the process along with everybody else. The regulation itself hasn't yet been published still, and that was expected to come earlier this year. Everyone's still waiting for it. So the recent changes have been positive, though, like, again, tax rate, the gains that are included, verticals, et cetera. Everything is kind of going in the right direction. It is commercially viable, but There's no real finality on the exact timelines, the exact costs, the exact regulation. That stuff's kind of expected to come in the next month or so. So we're kind of waiting for that. But yeah, we're fully prepared to do that. And it'd be great to put a plug of our activity into a regulated market now or a market that I guess would become regulated. So. That's always been the nature of the beast. When you're in gray markets under an Isleman, Malta, Gibraltar, Curacao, whatever license, it's just intrinsic to that business that over time some of these markets may regulate and either you participate in them or don't. We're keen to participate in whatever's happening in Brazil and whenever it does happen. That's where we're at with Brazil.

Okay, excellent. Thanks for that color. It's very helpful. And then maybe my last question is just on some of these new strategic initiatives, whether it's crypto or especially specifically the B2B license, what are your expectations for when that kind of hits the P&L and how should we be thinking of that as a potential revenue driver this year?

Yeah, so there's probably going to be relationships that we're going to form that are more like at a global level, again, what I would consider, let's say, the gray markets. And then there will be probably individual regulated markets where we'll have specific deals with operators. The regulated market ones will take a bit longer, probably later this year. I can't specify exactly when because it just varies based on the market, testing houses and things that, frankly, are completely not really in our control in terms of approvals. the let's say gray market opportunities could be more near term. I wouldn't say it's H1, but probably at some point at H2 for, for that one. Um, but we're hoping to be able to just socialize what's actually happening there. Um, and potentially some opportunities that, that have crystallized around that, um, you know, in the coming months. So we're pretty eager to talk about that. And I can say that the initial set of conversations is, is positive and continuing to progress. So yeah. Well, on crypto, um, yeah, it's, it's, it's, something that we've been working on for a number of months. We're not, let's say, in a position to talk about the plans in that much more detail right now. But what I will say is that one thing for sure is just adding greater support for crypto payments across our platform. I think that Everyone is obviously seeing the running crypto and it seems to come in cycles, but generally the technology is at a significantly more developed level than it was a few cycles ago where on-ramps for users into it is much easier. Ways that you can integrate various, let's say, crypto native experiences into a betting product are here in a way that they weren't a few years ago. And I'd say also from a demographic perspective, if you look at, just being real, if you look at meme stocks, the way that people trade and play those, there's obviously an intrinsic gambling element within that. And the rise of meme coins in the last month or so, these are all basically just crash slash aviator games that are happening in real time every single day across communities on Discord and social and elsewhere that is predominantly made up of people under the age of 30, which look and sound in many cases are quite literally rivalries users. So if there's any brand in the space that could interact with it in a completely organic way and has quite literal demographic overlap and user overlap, it would be us. We've been on and off evaluating this for, frankly, like five years. So there's clearly a significant unlock, we believe, to be had here. And there are efforts we've been working on related to that for most of this year and something that, as well, we expect to probably be able to daylight and talk about in more detail. Yeah, in the next two months or so as well.

Awesome.

Thanks a lot, guys. I'll pass it on.

As there are no further questions at this time, this concludes our Q&A session. I will now turn the call over to Stephen Sals for closing remarks.

Thank you, operator, and thank you, everyone, for joining us on our year-end results call. As mentioned, we expect to file the full financial statements and MD&A in the next several weeks. In the meantime, if there's any additional questions, we're always happy to discuss offline, send us an email, or anything like that.

Thanks, everyone. I would like to thank our speakers for today's presentation, and thank you all for joining us.

This now concludes today's conference. You may now disconnect.