Enthusiast Gaming Holdings Inc.
Q2 2022 Earnings Call Transcript

Published: 15 Aug 2022

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Enthusiast Gaming Holdings, Inc. Second Quarter 2022 Financial Results Conference Call. . I would now like to turn the conference over to Eric Bernofsky, Chief Corporate Officer. Please go ahead.

[Eric Bernofsky:]

Thank you, Sachi. Good afternoon, everyone, and thank you for joining Enthusiast Gaming's second quarter 2022 financial operating results call. My name is Eric Bernofsky, Chief Corporate Officer of Enthusiast Gaming. With me today is our Chief Executive Officer, Adrian Montgomery; and our Chief Financial Officer, Alex Macdonald. We'll begin with some prepared remarks from Adrian and Alex before opening the floor to questions. Before we begin, I'd like to remind everyone today's presentation contains forward-looking information that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. A more complete discussion of the risks and uncertainties facing the company appear in the company's management discussion and analysis for the 3-month period ended June 30, 2022, which are available under the company's profile on SEDAR and EDGAR as well as the company's website, enthusiastgaming.com. You're cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. The company disclaims any intention or obligation except to the extent required by law to update and revise any forward-looking statements as a result of new information, future events or for any other reason. Now I'm now happy to turn the call over to Adrian Montgomery, Chief Executive Officer of Enthusiast Gaming. Adrian?

[Adrian Montgomery:]

Thank you, Eric. Good afternoon, and welcome to our second quarter 2022 financial results conference call. I'm pleased to share with you the details of yet another strong quarter, particularly in light of the macroeconomic backdrop we are in. I'll provide some context around our key performance metrics, including revenue growth, and, in particular, direct sales growth, subscription growth, gross profit growth, which reached the highest in the company's history this quarter. And lastly, I'll talk about how we see the second half of the year shaping up which we will expect to be a continuation of the same performance trends we have delivered in previous quarters led by strong revenue and margin growth. But first, I want to address a topic that has been on a lot of shareholders' minds. Shortly after reporting an extremely strong Q1 this year and what is typically the seasonally slowest period in our business, a shareholder group spoke out and saw change. While this was an unfortunate and costly distraction, which took up the bulk of the second quarter. We respect the voices and opinions of all shareholders, and we listen. Today, we are aligned and we have already moved forward with a number of changes that we believe are the right ones for our business. Our Annual General Meeting last month saw the election of 4 new highly qualified directors, Angela Ruggiero, David Goldhill, Janny Lee and Scott O’Neil. This diversity of experiences will help guide our business forward and open up new growth opportunities that will drive lasting shareholder value. As you know, the new board is conducting a CEO search and pending completion of that, I will be moving to chair the Board and continue to focus on strategy and growth. Last week, we announced that Bill Kara, CEO of Addicting Games, which we acquired late last year, is being appointed as President of Enthusiast Gaming and will bring an enhanced gamer-focused vision to the day-to-day operations of the business. As a lifelong gamer and entrepreneur, Bill, who is based in Los Angeles, has been in the gaming industry for over 20 years with a passion and love for blending gaming, education, technology and the emerging Web3 space. I look forward to continue to work closely with Bill in his new role. During the first half of 2022, we delivered our strongest half year results to date, led by accelerated revenue growth and substantial gross margin expansion. Q2 2022 was impressive, with revenue up 38% year-over-year to $51.1 million. The year-over-year increase in revenue was driven by increased direct sales including both new and repeat customers, higher subscription revenue, the acquisitions and growth of both Addicting Games and U.GG properties and higher RPMs across both web and video. Gross profit grew to an all-time record high of $15.3 million, up 91% from $8 million at this time last year. Q2 gross profit was not just a record high for any Q2 but for any quarter in Enthusiast history, and we still have the seasonally strong second half to come. Gross margin expanded to 30% in the quarter, an increase of 840 basis points versus gross margin of 21.6% in Q2 2021. The increase in gross margin continues to be driven by the strong performance of Addicting Games in U.GG as well as growth in the higher direct sales and subscription revenue streams. On direct sales, I am pleased to report yet another strong quarter. Direct sales grew 111% to $9.3 million in Q2 compared to $4.4 million in Q2 last year. Renewals and additional business with existing customers accounted for 71% of direct sales revenue. At Enthusiasts, we have the largest scaled media offering in gaming, and in Q2, some of our partners included Adidas, the United States Navy, State Farm, HBO Max, LEGO, Universal Pictures, Procter & Gamble, FanDuel, Toyota, Logitech, the Federal -- the Food and Drug Administration and RBC. We are a one-stop solution for these companies gaming and esports strategies. A few activations I would like to highlight are the following

[Alex Macdonald:]

Thank you, Adrian. It was indeed a big first half to the year, and that first half got stronger this quarter, our second quarter 2022. Before I begin my commentary on that, here are my usual notes. I note that our results are presented in Canadian dollars. I note that the significant majority of our revenues and expenses are measured in U.S. dollars and are translated into Canadian dollars for presentation in our financial statements. The exchange rate between the U.S. dollar and our presentation currency of the Canadian dollar should be monitored and considered when analyzing our forecasting results. And I note that our business is affected by seasonal trends in digital advertising with sequential increases each quarter throughout the year, driven by increasing ad prices and demand, which peaks in Q4. This seasonality is isolated to our media and content revenue streams. And now let's talk business. Q2 revenue was $51.1 million, up 38% from Q2 2021 revenue of $37.1 million. Q2 revenue by source was as follows

[Operator:]

. The first question is from Drew McReynolds from RBC.

[Drew McReynolds:]

Maybe starting at the high level, just given the Board and management transition that's underway maybe for you, Adrian. Just can you comment on at this point, what would be the strategy evolving from what it was before. Are you able to give any time line associated with a new CEO coming on board? And then third part of this, just in terms of the distraction, which you alluded to in Q2, certainly don't see a lot emerging in terms of the results, but maybe speak to that a little bit and to what extent that disruption could impact Q3?

[Adrian Montgomery:]

Sure. Well, from a very high level, the strategy of creating an integrated media and entertainment company and building a leading integrated media and entertainment company for gamers and esports fans remains very much intact. And clearly, from the results, we're seeing outsized growth and a lot of optimism around the path that we're on. Certainly, as we've made some acquisitions that have been very, very good for the company, we've inherited a number of product-based communities. I'm thinking U.GG, Addicting Games, less media, more product and a bunch of talented developers and gaming technicians. And so if there's any new focus within the parameters of building that media and entertainment company. I think there's a lot of exciting things you're going to see as we evolve the business on the product side and our ability to create new products that resonate with our fans and our audience. And so that has me really excited. I also think that the future of Enthusiast Gaming, and it's reflected in some of the management changes we made recently elevating Bill Kara to President. The future of this business and the future leadership of this business to fully exploit the potential that we've created for ourselves really does come from the United States and beyond. We started as a Canadian company, but we want to see more and more of our leaders and our operational leaders come from the United States. This is a really attractive opportunity for the next CEO of the company. The board is committed to finding the right person. And I'm not going to give a time line on that because we don't want to rush it. If that fantastic person shows up, in the short term, great. If it takes a little bit of time to get it right, I think we're happy with that as well. And so -- but the search committee has been struck, and we're starting that process as we said we would. Yes. Look, we have to take our shareholders' concerns seriously. We got through the other side of this. We have an aligned shareholder base. That's all good. But the people that run Enthusiast Gaming and work here every day have the same common characteristic with the employees of any other business and that they're human beings and that kind of turmoil and that kind of spotlight can be a distraction. It's really a testament to the business model, but more specifically, the fantastic people who work here each and every day that against that backdrop and that noise, we were able to deliver such a stellar quarter. And I think that the resolve of the model and the resolve of the people are going to carry the day, next quarter and the quarters to come.

[Drew McReynolds:]

Great. Thanks for that additional context. I appreciate it. Just maybe 1 last one, and then maybe I'll get back in the queue. Just with respect to your outlook for the back half, obviously, bucking the trend, I think, to a lot of other companies out there in this particular space, not unlike what happened in Q1 and frankly prior quarters. Can you talk to any emerging macro headwinds or revenue headwinds for that matter that you see at the moment? Or is it genuinely just the bottom-up momentum of all the different growth deltas that you're putting in place really overshadowing that broader kind of macro picture?

[Adrian Montgomery:]

Thanks, Drew. Certainly, we're not immune from what the rest of the world is going through. And candidly, there have been conversations and observations from some of our client base that have talked about some headwinds that they see in their business that may impact their spending budgets. I don't think that's out of the ordinary of what other companies are experiencing right now, but they're contained at the conversation level right now, and what I would point out and you sort of referenced this in the preamble to your question, the real unique thing about Enthusiast Gaming. And when I talk about Top Gun and I talked about the United States Navy, State Farm, H&R Block, the work we do with Adidas and Amazon, et cetera, et cetera. We don't just sell media. We're not like an IGN. We're not like a pure-play YouTube MCN. We really package up content creators, experiences, communities, web, YouTube inventory, custom content activations and we really provide that one-stop solution for them. So we're somewhat inoculated in the business model that we offer from just being a pure-play seller of media. And I think that is our secret sauce. And so we have been able to buck the trend to date. We're not immune from what's going on in the world. But while we're on top of this horse, we'll keep trying to buck it.

[Operator:]

The next question is from Mike Crawford from B. Riley Securities.

[Michael Crawford:]

Can you hear me?

[Adrian Montgomery:]

Yes. Mike.

[Michael Crawford:]

Just digging a little bit more into advertising. Can you just provide some more color on your strides to monetize available inventory, including direct sales targets, maybe as a percent of available inventory or sales? And then what you're seeing regarding ad prices and CPMs overall, and how much of total inventory you can monetize?

[Alex Macdonald:]

Mike, it's Alex. I can provide a couple of factors there. So for our inventory, we maintain -- we have a vision to get to 10% of our inventory moving to direct sales. That's kind of a medium-term goal. We are at about 2.5%. 10% would, in my judgment, still be below industry normal for large mega publishers like us, like members of the Comscore Top 100 list. But we are sitting at about 2.5% utilization. We'd like to see that get to 10% beyond that over the horizon, that there's room to go significantly beyond that. But 10% for us is our stated goal we're at 2.5% so far on direct. As far as utilizing the inventory in other ways, I mean, obviously, we do plenty of programmatic sales. We continue to push for increased demand and competition on our bidded networks and try to improve our yield. But our focus really is moving that inventory out of programmatic and into direct.

[Michael Crawford:]

Okay. And then just regarding trends on ad prices and CPMs overall, including programmatic?

[Alex Macdonald:]

Yes. So I mean, I've seen them as steady. I echo what Adrian said, we aren't necessarily immune to market movements. The online the digital industry for digital ad units is one of the most commoditized liquid markets in the entire world. It is subject to market fluctuations. But right now, my opinion is holding -- it's holding in there. I echo again what Adrian said, I remember when some companies cautioned on their Q3 results last year, they were very worried about it. We haven't seen it yet. We are strong. And right now, it is to be expected. I think July performed to be expected on a pricing basis.

[Michael Crawford:]

Okay. And then I just have one more on prioritization. So ev.io sounds like a great repeatable playbook. Is there another title that's coming up there? And then just related, I know you've been working on this project GG for over a year and what is the status of that project?

[Adrian Montgomery:]

Sure. So right now, as bullish as we are on Web3, we have something very special. And again, we're quite unique. There's a lot of companies in the space -- esports organizations that can embrace Web3, but we actually are embracing Web3 with intellectual property that we own and that we control. And right now, ev.io is experiencing such significant growth that we're going to use that as our template for a little while longer. Certainly, we have other game titles like Little Big Snake and Mope and Shockwave, et cetera, et cetera. But stay tuned for our next iteration of something special with ev.io in the days and weeks to come. So we're going to ride that in ag until it drops a hum. And then as for GG, as we said last quarter, look, GG is something that we feel strongly about. Internally within the organization, it's our code word for innovation against the reality is the world right now, we're taking a cautious approach to it. We're not going to back the truck up and put the significant investment into it. So we're going to get it right. Like I said before, I mean, G-mail was in beta for 10 years. So if we have to be prudent and do it right, we're going to do it right. At the same time, like I said in my answer to Drew, particularly in the back half of last year with Addicting Games, U.GG, Tab. We have some really cool product-based communities. We have some really talented people at U. We've got Shinggo and Alan and their team, , Bill Kara, and the team at Addicting Games, and we're excited to innovate on the products that are within -- that are in their minds and on their development timetables to exploit. So we're very much innovating. We're very much going down the product road. We're going to incorporate elements of GG into a lot of the stuff that we're doing. And we're going to take our time on the original GG plan to get it right.

[Operator:]

The next question is from Gianluca Tucci from Haywood Securities.

[Gianluca Tucci:]

I was on mute. I'm on the call here on Neal Gilmer's behalf. A couple of questions here. First on gross margins, how are they trending thus far in Q3? And how is the outlook for the back half of the year? I think you had mentioned that the target is 40% longer term, but how should we be thinking about the second half?

[Alex Macdonald:]

Good to have you on the call. This is Alex. Look, there's no change. I mean, I spoke about, in my commentary, 8 consecutive quarters of sequential increases. That's kind of what we're here to do. We don't mind if we're build them on 40 basis points at a time or 140 basis points in time. We're taking a step up every quarter. That's how we see it. I wouldn't expect huge leaps at any given point. We typically are in the 50 to 100 basis points range. So that's how we see it continuing. So that applies to the back half of the year that applies to next year. As far as 40, I just think back to 2 years ago when we made our march from 16 to 30 our original journey. And we said that's a medium-term target. We accomplished it in 8 quarters. that's the next leg of our journey. So it's not a short term before means, but that's where we have our sights set next. That's our next journey and when it comes to gross margin.

[Gianluca Tucci:]

Okay. Fantastic. And then just on EBITDA, my last question here. You guys are clearly on a path to profitability there. Do you have a time line at the back of your head that you're willing to share on the call here in terms of achieving adjusted EBITDA profitability.

[Adrian Montgomery:]

Yes. We've discussed it as happening in the very near term. And that's why Alex referenced in his remarks, the importance given our OpEx of cresting over that 30% margin threshold. And so we feel like our original prognostications about the near-term likelihood of EBITDA positivity coming in Q4, absent a material macro issue with median ad spending or absent some form of transformational opportunity that may land on our doorstep. We feel that our prognostications are in line. And again, that's the importance of that sequential margin expansion getting north of 30%, continuing to drive it higher, stabilizing OpEx and we feel that we're in the zone to deliver on our promise.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Adrian Montgomery for any closing remarks.

[Adrian Montgomery:]

Thank you. And I would just like to thank everyone on the call again for your interest in the Enthusiast story. And really with my final remarks, certainly, Q2 was one that we're going to remember for quite some time for a variety of different reasons. But again, as I said earlier, I just want to salute the hard-working over 250 person staff of Enthusiast for staying the course, for getting up every day despite what was going on in the outside world and just working hard, delivering, innovating, taking risks, executing, triumphing, it really -- a company is only as strong as its people. And we had a unique moment in time where the resolve of our employees was tested as few employees get tested, and you all delivered in spades for the benefit of the company, for the benefit of the shareholders and on behalf of everyone on the management team, I just want to thank all of the Enthusiasts out there for showing what character is all about, and it's meant the world to us, and it's given us so much optimism with the people that we have that we get to work with each and every day what the future holds for this great company. So thanks, Enthusiasts. And that concludes our conference call.

[Operator:]

This concludes today's call. You may disconnect your lines at this time. Thank you for participating, and have a pleasant day.