GAME - NASDAQ

Lou Schwartz - Chief Executive Officer Tom Rogers - Executive Chairman of Engine Gaming and Media

Greetings! And welcome to the Engine Gaming and Media, Fiscal Fourth Quarter and Full Year 2022 Conference Call. Please note that this conference call is being recorded. [Operator Instructions]. Before we begin, I would like to caution listeners that comments made by management during this call may include forward-looking statements within the meaning of applicable securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see Engine's fiscal financial statements and MD&A for its fiscal fourth quarter and full year 2022, ended August 31, 2022 available on SEDAR and EDGAR. Important qualifications regarding forward-looking statements are also contained in Engine’s earnings release distributed early this afternoon, and also available on SEDAR and in EDGAR. Furthermore, the content of this conference call contains time-sensitive information accurate only as of today, November 29, 2022. Engine undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. And I would now like to turn the conference over to Mr. Lou Schwartz, Chief Executive Officer; and Tom Rogers, Executive Chairman of Engine Gaming and Media. Thank you gentlemen, please go ahead.

Thank you, operator, and thanks to everyone for joining us on our fiscal fourth quarter and full year 2022 earnings call. We had very substantial revenue growth when looked at on an annual and sequential basis for the quarter. To begin, total revenue for the full year ended August 31, 2022 increased 25.6% to a record $41.9 million from $33.3 million in the same year ago period. Total revenue for the fourth quarter increased 24.4% to $11.5 million from $9.2 million in the fiscal third quarter of 2022. The increases were a function of substantial growth in advertising revenue and an increase in SaaS revenue, the two key revenue streams of our business. For the full year of fiscal 2022, advertising revenue increased 28.6% to $32.7 million from $25.4 million in the prior year. Advertising revenue for the fourth quarter of fiscal 2022 was $9 million, increasing 29.2% from the fiscal third quarter of $7 million. Frankly Media supports this growth by continuously optimizing its 50 plus demand partner network to deliver higher yielding advertising revenue for its customers. Frankly increased both CPMs and RPMs during the 2022 fiscal period as compared to previous fiscal year by 33%, despite increasingly challenging market conditions and algorithmic changes to search methodologies. For the full year SaaS revenue increased 15.9% to $9.2 million from $8 million in the prior year. The increase was primarily due to the full year impact of revenue recognized from the Sideqik acquisition and increased SaaS revenue from the Stream Hatchet business. SaaS revenue for the fourth quarter was $2.4 million, 9.4% higher sequentially when compared to $2.2 million in the third fiscal quarter of 2022. As a result, we exit Q4 with an annualized SaaS run rate of approximately $10 million. For the full year ended August 31, 2022, net loss improved significantly to $14.5 million compared to a net loss of $40.7 million in the full fiscal year 2021, an improvement of $26.2 million. Adjusted EBITDA including discontinued operations improved 23.3% sequentially to a loss of $4.3 million when compared to a loss of $5.6 million in the fiscal third quarter of 2022. Exclusive of discontinued operations, adjusted EBITDA was a loss of $4 million for the fourth quarter. When removing accounting estimate charges relating to certain financial assets and liabilities of approximately $400,000, which is the best way to assess our cost reduction efforts relating to operating performance, the revised improvement to adjusted EBITDA is 11.9% when compared to fiscal third quarter 2022 adjusted EBITDA. Evident in our sequential analysis of our adjusted EBITDA, is our pathway to profitability and sustainable growth. In line with this trend, our first fiscal quarter of 2023 is seeing further reduced operating expenses, leading to ongoing improvement in adjusted EBITDA. Additionally, we are continuing to streamline spending across the company with our stated goal of cash flow breakeven on a run rate basis in fiscal 2023, resulting in part from narrowing our focus on our core set of assets. We believe our collection of assets, which Tom will speak to in a moment, provides the company with a continued growth trajectory as evidenced in our recent client wins and contract extensions. Our platforms immersed in the gaming, social influencer and creator content spheres, continuing to benefit from the growing adoption of marketers and product enhancements that enhance their value proposition. These businesses become progressively important to game publishers, agencies, advertisers and sponsors, reaching the increasingly hard to reach younger demographics. I'll now pass the call to our Executive Chairman, Tom Rogers.

Thanks, Lou. Let me focus in for a minute on our very strategically important gaming and social influencer units. Our results continue to define the company as one that, through our data and analytics platforms, we have the ability to guide companies in marketing to gaming audiences, as well as addressing a broader array of brand sponsors, performance marketers and media seller’s needs. We provide highly valuable tech platform, so that marketers can navigate the gaming and social influencer communities with extremely reliable data and analytics that can result in the most productive marketing programs. As targeting challenges have continued to grow in the advertising market, utilizing social influencers as a targeting approach works to our strength in providing both the workflow tools and more direct communications enablement. As marketing programs look to increasingly use social influencers at great scale, and affiliate marketers look to expand their programs in this realm, these trends play very favorably to product enhancements we have developed. We've begun to see in the gaming world an increasing number of clients beginning to utilize the services of both Stream Hatchet and Sideqik. The combined growth of Stream Hatchet and Sideqik fourth quarter-over-quarter is approximately 27%, demonstrating the particular value of both services to sponsors that want to access gaming audiences. To this point, as outlined in Stream Hatchet third quarter video game streaming report, the data our platforms are able to capture and collect is extremely actionable for marketers, researchers and analysts as these platforms develop actionable insights at a best tap into the Gen

Thank you. [Operator Instructions]. Our first question comes from the line of Michael Kupinski with Noble Capital Markets. Please proceed with your questions.

Thank you and good afternoon. I have a couple of 64,000 foot view questions and then some other more specific. There's been some recent press out there that provides some conflicting data about interest in gaming post the pandemic. You know there originally was some data that suggested that, that there was an increased interest in following the pandemic, but some recent press indicated that maybe there has been waning interest. And I was just wondering if you can talk about your eSports play, which has grown, and how do you explain the difference and view of what's out there in the media and what the data might support? I'm just wondering if we could have some color there.

It's a great question. And this really goes to the heart of what Stream Hatchet, our gaming analytics unit tracked. And it’s evident from their recently released report that eSports viewership has really never been higher globally. It reached 40% year-over-year viewership growth in the last year. It's actually an accelerated growth rate in terms of global viewership. And actually eSports viewership is above the third quarter 2020 depths of pandemic time. So for eSports to be above what was considered a highly unusual aberrant point in terms of people locked in and playing live streaming – viewing live streaming games, I think speaks very highly to just how much growth there has been there. What we are finding is that the audiences are there, sponsors are clearly hungry to reach those younger demographics that have become exceptionally difficult to reach in more traditional media. The issue is not if eSports is attracting those audiences. The issue that sometimes creates some skepticism about the eSports space is about whether brands can really successfully connect to those audiences and to successfully connect to those audiences, they need the tools that give them a better understanding of what those audiences are, help brands find the most authentic ways to activate among those audiences, and what we are finding is our specific tools, our business intelligence suites, our real-time dashboards, our creator discovery tools, our assessment of earned media value, our competitive dashboards and just the historical trend data that we're able to bring. Really provide the kind of tools that help advertisers, sponsors navigate this space and will help mature the space for media purposes, so that the vast audience and the amount that brands want to connect that to those audiences can be fully realized. So, I hope that connects your trend question to what we're looking to do to exploit that.

Definitely. And TikTok has begun to show broader audiences beyond the youth demographic in the content creation. I was just wondering, your thoughts on, your focus on gaming which obviously has a younger demographic. Well, do you still think that you'll participate in the broader appeal of social influence marketing given your younger demographic focus?

Yes, that's an important point to clarify, because we analyze over 20 social media and live streaming platforms globally, and we measure the content consumption regardless of whether that's gaming content or other content that is found on those various platforms. We obviously have a distinct and very well-known role when it comes to gaming and the focus on platforms like Twitch or YouTube Gaming, where we provide specific gaming insights. But we think the increased demand by older demographics or TikTok, which has obviously created some huge competitive challenges for traditional media, is actually a great trend for us, because we have years of experience, discovering and connecting and measuring social influencers, content creators on that platform. And so the overall rise of TikTok, its greater usage, and the fact that it has a broadening demographic that includes older demographics than it used to have as a very positive macro trend for us.

Got you. And then just kind of drilling down on the revenues, you put up some nice improvement in revenues in your advertising, particularly and this is, you know kind of goes against what the industry is seeing in a tough environment. Can you kind of just talk a little bit about what's unique about your advertising revenue growth and how you're able to kind of buck [ph] to the trend of – and the headwinds in the environment out there?

Sure. I'll take that one, Mike. Listen, our advertising team has done a tremendous job in managing our inventory. The delivery yield improvement during a really challenging advertising period, including all the Google algorithmic changes, the search and discovery that we've seen. That said, we've been able to grow our CPMs and our RPMs by 33% between fiscal 2021 to 2022. We've accomplished that primarily by diversifying our demand network and driving higher CPM values from our supply inventory through our demand partners. I would say more importantly, our network of sites is targeted. They are brand safe, and they've been proven to engage very highly with audiences. So advertisers are willing to sort of pay us a premium, right, for a safe network and for advertising against a safe audience.

Got you. And this probably is for you, Lou. Can you talk a little bit about the improvement in adjusted EBITDA and what you're looking for? I know you indicated that you should see further improvement in the fiscal first quarter. Can you talk a little bit about your cost reduction efforts? Are they still ongoing? Are we cycling – when are we going to be cycling through most of those cost reduction efforts? And maybe give us just kind of a glimpse of what your thoughts are about how we should look at adjusted EBITDA going into the next fiscal year?

Well, as we stated in our release, we've shown both sort of year-over-year and sequential sort of improvement in our adjusted EBITDA figures, and that's a result of a combination of things. One, just refocusing sort of the business on our B2B elements, but two, also the cost reductions as you highlighted, that came from both corporate and non-corporate expense. And as you know, these take some time to flow through the P&L. We've seen improvement over the last sort of couple of quarters. I think you'll continue to see improvement into Q1, 2023 and in subsequent quarters. This is something that is absolutely top of mind. We've been extremely disciplined about rightsizing the organization and addressing sort of our cash burn rate, and we remain sort of focused on achieving cash flow breakeven in 2023 on a run rate basis.

Great! That's all I have. Thank you guys.

Thanks Mike.

Thanks Mike.

And our next question comes from the line of Jason Tilchen with Canaccord Genuity. Please proceed with your question.

Yeah, great! Thanks for taking the question. Just a quick follow-up first on the advertising business. Obviously, you just talked a lot about the reasons why you saw really strong results in fiscal Q4. The quarter ended August 31, so just wondering if you could comment maybe on some of the trends you've seen over the past few months and if some of that strength has held up as you go into sort of a seasonally important quarter for the advertising business?

Yes, hey Jason! I could start and Tom, if you'd like to augment, feel free. I mean listen, the – we've seen continued improvement in our advertising business, because we've been really nimble and we've been efficient with the inventory that we've been managing on behalf of our publishing customers. And we've been able to offset some of the headwinds that some of our peers have experienced, because we've been able to partner with highly productive demand partners and that's enabled us to offset, right, some of the traffic patterns that we've seen, particularly as we highlighted from some of the algorithmic changes you know from Google. But we're certainly not seeing sort of some – anywhere near what some of the digital – other digital media sort of peers are seeing in terms of the material impact on CPM and RPM. The demand partners really value the inventory and the safety sort of our network and have been able to sort of maintain premium values for the supply that we expose to their networks.

Yes, I think just supplementing that, the upgrade of the exchanges that we offer our inventory through has clearly given us an ability to raise price and the shifts increasingly in inventory to more video-oriented inventory has also contributed to that, and the combination of those upgrades and shifts have countered the somewhat downdraft in advertising that I think the market is more broadly experiencing. As Lou said, our greater challenge has been Google algorithmic changes which hit groups of publishers from time-to-time and making sure that we can adjust to those, which always takes a bit of time when algorithms are changed is really the more direct challenge we've seen and are operating in a tough advertising environment and being able to handle those headwinds.

Thanks a lot, that's really helpful. Just two other quick ones; One, when it comes to these blue-chip wins that we've seen, sort of the pace of those sort of accelerating over the past few quarters. Is it as simple as just a combination of Stream Hatchet and Sideqik that you've talked about a lot? Is there anything else that's going on in regards to your go-to-market strategy, how you are approaching these brands? Are they coming to you? Maybe you could just touch on the success there.

Well, the brands, certainly we have a very formidable reputation in the gaming space, and what we've been increasingly looking to do is get the gaming sector to understand that the breadth that Sideqik brings in terms of tying the gaming and social media world where there's fragmentation among gaming influencers that cross over between live streaming and social media. That's a particular area that we've been able to talk to that is significantly differentiating for us. The other thing that I want to point to since we've talked about brands and we obviously have some really great blue chip clients here that are involved with us. Our social influencer or platform is really also tailored to having a self-served solution for small and medium-sized businesses. They too are suffering some of the consequences of what's going on in terms of targeting efficiency in the advertising world and being able to allocate their marketing resources increasingly towards social influencer spend, is an opportunity. Of course, that social influencer world for a smaller business is not easy to navigate. You really need to be able to really simply and easily have a platform that can discover for you and communicate and provide the payment capability to cut through the friction that would otherwise exist for a small marketing operation, and we have a lot of resource geared toward that, and so I don't want to talk to our success, being one that is only focused on brands. That SMB community is a very important part of the building we're doing.

Great! Another very helpful explanation there. One last one, just on the comments around the run rate of cash flow breakeven for fiscal '23, can you maybe just talk to you know the current cash positioning and just how you feel about the cadence of that maybe burn in the first half of the year or improvements throughout the year? Do you think that there's going to be a need to potentially raise additional capital or do you think that that you know – that trajectory of improving expense reductions and things like that will help reduce that need in fiscal '23?

Yes, so let me respond to that. So we finished our quarter with $8.6 million of cash. You know as I mentioned to Mike, you know some of the adjustments that we've made to OpEx will continue to flow through in future quarters, and I think it will be more evident how aggressive we've been in terms of rightsizing our cost structure and preserving cash to extend sort of our runway. That said, you know we're in the middle of a strategic process. That strategic process is intended right to create scale and to create growth and an opportunity for the company sort of going forward. And we expect that through that strategic process, you know we'll be able to deliver continued sort of growth and the ability to finance the future company on much better terms and remain sort of shareholder-friendly as we've been sort of in the past by reducing sort of any sort of potential dilution in the future. But we remain focused on rationalizing our OpEx and getting to cash flow sort of breakeven on a stand-alone basis in 2023.

Great! Thanks a lot.

There are no additional analysts with questions. And at this time, I would like to turn the floor back over to Lou for any closing comments.

Well, thank you everyone for your attendance today. We look forward to keeping you updated as we make further progress. Thank you again very much for attending. Bye-bye!