GAME - NASDAQ

Good afternoon and thank you for joining us for the GameSquare Holdings 2023 Full Year Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. [Operator Instructions] Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For information about forward-looking statements and risk factors, please see our 10-K for the year ended December 31, 2023 which is available on the company's website or with the Securities and Exchange Commission. I will now turn the call over to GameSquare's CEO, Justin Kenna. Please go ahead.

Thank you and good afternoon to everyone joining us on today's call. I'm extremely excited to review the progress we are making at GameSquare as we pursue strategic priorities aimed at creating a next-generation media business. Since GameSquare's inception in August of 2020, we have quickly scaled revenue primarily through an M&A strategy focused on acquiring industry-leading technology, media and creative assets and we ended 2023 with $52 million in annual revenue, compared to $28 million in 2022 and just $11 million in 2021. Growth in 2023 would have been stronger had we owned Engine Gaming for the full year and revenue would've increased to $61 million in 2023. As you can see, we have been extremely active in executing our growth strategies, optimizing our business model and building a disruptive platform that we believe will create lasting value for our shareholders. To date, we have completed 5 acquisitions while divesting 2 non-core assets since August of 2020. Integrating acquisitions takes a significant amount of focus, resources and time. There are also onetime expenses over the near term that we incur before we start to see the financial benefits of operating and cost synergies. I want to recognize the dedication and efforts of the Board, management team and associates at GameSquare, as well as our acquisition partners. I believe we will see the benefits of our M&A efforts in 2024 and beyond and I want to use my time today to review our 2023 performance, the actions we have completed in 2023 and so far this year and the go-forward strategies we are pursuing before turning the call over to Mike to run through our financial results in 2023. As I said, it takes time before the benefits of an acquisition can be seen in the company's financial results. Our 2023 financial results also reflect softer growth than we had anticipated at the beginning of the year. This was impacted primarily by a slowdown in spending by several of our brand partners on the media side of our business and other delays as a result of more cautious overall spending patterns. These trends were seen across the media and advertising landscape. We were not immune from broad budget cuts in 2023. As a result, two high-margin multimillion programs that we expected to recognize earlier in the year were pulled during the fourth quarter. These programs had an impact on both sales and profitability during the quarter and our mix of revenue was more skewed to lower-margin programmatic advertising sales. While budgets retracted in 2023, we don't believe this trend will continue in 2024. We are starting to see signs of normalizing advertising spend and our pipeline remains really strong. In fact, [few] [ph] 4:09 programs in 2023 remain in our pipeline which we expect to materialize and convert into sales in the near term in 2024. As GameSquare's business has evolved during the fourth quarter, we also restructured our sales and marketing organization to better align with our new operating model. We added a new proven Head of Commercial to lead our high-performing sales team. While this temporarily impacted sales during the fourth quarter, our team has done a tremendous job maintaining relationships and supporting our pipeline, which we believe will convert into new sales opportunities in 2024 and beyond, especially as our markets continue to improve. Despite these near-term impacts, we have made significant progress executing against our long-term growth strategies. So, let's look at the actions we've completed in more detail, starting with the Engine Gaming acquisition. In April 2023, we completed the acquisition of Engine Gaming, which significantly enhanced our scale and added technology-based capabilities to enhance our differentiated next-generation media platform. I'm encouraged by the progress we made integrating the acquisition and removing duplicative operating and corporate expenses throughout the year. While the extent of the cost synergies have been marked by additional M&A activities, we estimate that we have removed approximately $7 million of annualized cash operating expenses from the combined business during 2023 as a result of the transaction. The Engine transaction also fast tracked our efforts to list on the NASDAQ Stock Exchange in 2023. And most recently, in March 2024, we voluntarily delisted from the TSX Venture Exchange and re-domiciled the company from Canada to the U.S. where the majority of our operating subsidiaries, brand partners and shareholders are located. While these actions required investments during the 2023 fourth and 2024 first quarters, they have simplified our operating structure and they are expected to further reduce our operating expenses going forward. During 2023, we made strategic investments in our business to continue to provide our brand partners with new innovative technologies and services. This includes the 2023 launch of our world-building capabilities. World building develops custom worlds for brands and popular gaming titles such as Fortnite and Roblox. And during 2023, we worked with global brands, including Mastercard, Samsung, Six Flags, and Coca-Cola. Through our world-building efforts, we provide end-to-end solutions, including conceptualization and development of gaming worlds, along with a campaign strategy, execution and amplification through the marketing services offered by our various subsidiaries. World building has been a fast-growing, high-margin strategy and we expect these activities to continue to drive organic growth in 2024. Another organic area of growth in 2023 was through our creative-driven marketing initiatives. The combination of Engine Gaming's best-in-class technology assets with GameSquare's award-winning agency and creative capabilities allows the company to offer unparalleled insight into consumer behaviors. It also allows us to develop data-driven creative strategies and measure and optimize campaigns towards customer acquisition goals in real time, creating impactful marketing solutions that drive ROI for GameSquare's customers. Finally, having an omni-channel engagement approach has become an important component to building audiences. As a result, during the fourth quarter of 2023, we made additional investments in our events business, including the addition of Paul Ioakim to lead this division and our efforts to support our brand partners as they look to drive powerful and immersive connections with their customers. We continue to focus on investing in organic growth opportunities while optimizing our business to take advantage of large growing secular growth trends. I'm pleased to announce that over the past 4 months, we have completed the biggest moves in our company's history. First, because of the Engine transaction, we completed the sale of non-core radio assets associated with Frankly Media in December of 2023. The radio assets had approximately $1.8 million of annual sales and added $2.75 million of non-dilutive capital to our balance sheet with another $650,000 in the form of contingent consideration to be collected in April 2024 and '25, if the contingencies are met. Most importantly, in March of 2024, we completed the acquisition of Fa

Thanks, Justin. Comparing our 2023 full year results to the prior year, total revenue increased by 85.2% or by $23.9 million to $52.0 million from $28.1 million in the prior year. The increase in revenue was primarily due to the contribution from the April 2023 Engine Gaming transaction. Gross margin for the 2023 full year was $13.4 million or 25.9% of sales compared to $9.7 million or 34.4% of sales in 2022. The decline in gross margin for the year reflects a less profitable mix of sales which temporarily impacted gross margin in the fourth quarter. While we have made significant strides in improving our operating cash burn figures, on a combined basis, adjusted EBITDA losses for 2023 amounted to $15 million compared to a loss of $13.2 million last year. As a percentage of revenue, our adjusted EBITDA improved from 47.2% last year to 28.8% in 2023. We believe the integration activities between GameSquare and Fa

Thanks, Mike. As you can see, 2023 and the beginning of 2024 have been historic periods for the company as we work to build a disruptive and innovative next-generation media company. We are pursuing additional value-creating actions to not only optimize our business but add additional capabilities and resources to the company. Looking to 2024, on a pro forma basis, that assumes a full year's contribution for the March 2024 Fa

[Operator Instructions] Our first question comes from Sean McGowan of ROTH Capital Partners.

If I can, I got a couple of questions. One on the gross margin. I think, Mike, you were talking about factors that affected the full year margin being mostly mix. But if you look at it on a -- just for the fourth quarter, it seems quite a bit lower than just a mix issue. Are there other kind of onetime things, maybe true-ups that are in that December quarter number that would make that unusually low or is 9% actually indicative of how low it could go?

Go ahead, Justin.

Yes, I'll jump in and then Mike, if you want to add some color, feel free. Yes, Sean, we kind of touched on it in the call a little. We had a couple of projects on our -- on the agency side of the business where budgets were pulled by clients. I mean, I think we've sort of seen that across the industry in general. There were some headwinds that obviously we've been having to navigate. I think largely, we've navigated them really well, but a couple of projects where budgets were pulled back, we're doing our best to get those realized here in 2024 and making some really good progress. But in Q4 of 2024, obviously, pulling back a few million dollars on these larger projects that are obviously higher margin in nature, you then get an ultimate revenue mix that has a higher percentage of programmatic revenue. So, certainly not ideal in Q4 and certainly not a trend that you would expect to see continue. We've got a really strong pipeline on the agency side. That part of our business is continuing to grow, but it was something that we faced just through to sort of some market headwinds and budgets being bought away. So, definitely due to the higher mix of programmatic revenue in Q4 and certainly not something that we expect to see continue.

Okay. I have one other question and then I wanted to ask you to clarify something from your prepared remarks. The other question I had was what would give you the confidence that, that pullback that you referenced would not recur? I mean, are people not as concerned about the environment in '24 as they were in the fourth quarter of '23?

Yes. I mean, I think, so far in 2024, we've definitely seen a lot of sentiment shift in the market. I'd say our pipeline is as strong as it's ever been, if not stronger than ever. I think obviously, bringing in the acquisition of Fa

Okay. And then the clarification, if I could ask you that is, I think earlier in the call towards the beginning, you mentioned -- I think you said $7 million worth of costs that have been taken out. And then later, you referenced $15 million to come. And I was asking you to -- I'd like to know how those relate to each other? Are they unrelated to? Are they two different kind of cost reductions or is one included in the other?

Yes. So the $7 million in cost reductions is in relation to the Engine Gaming transaction. In terms of sort of the annualized...

And the other one is for Fa

Yes. So the annualized costs that we've been able to realize by that transaction, I think, the reality is that it's been pretty tough out there in the micro-cap market. And I think, really, there's an opportunity for us to start to get to scale, right? There's no doubt that being a public company is expensive and I think we're starting to realize that, right? Obviously, we mentioned kind of getting to the $100 million in revenue. That's one piece, going to get some scale. But obviously, the other important piece is reducing cost and trying to get to profitability. I think we've been able to realize some real cost savings as part of the Engine deal. And we think that there's more than double to be realized here with Fa

That concludes the question-and-answer session. I would like to turn the conference back over to Justin Kenna for closing remarks.

Thank you. And again, thank you, everybody, for joining the call today. We are very appreciative of the continued support. We're working around the clock to really drive value for shareholders and feel really good about where the company is positioned to do exactly that. We're incredibly excited by the Fa