GAME - NASDAQ

Good afternoon, and thank you for joining us for the GameSquare Holdings 2024 Second Quarter 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-Q for the quarter ended June 30, 2024, which will be available on the company's website or with the Securities and Exchange Commission. I would now like to turn the call over to GameSquare's CEO, Justin Kenna. Justin, 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're making at GameSquare as we pursue strategic priorities aimed at creating a fast-growing, highly profitable and next-generation media business. Activity across our business is high, and we are making significant progress towards optimizing our business model, investing in our long-term growth and improving profitability. While we still have work to do, we believe our pro forma results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. On a pro forma basis, revenue was $28.6 million for the 2024 second quarter, representing a 24% increase year-over-year and a 22% increase in 2024 first quarter. Strong revenue growth during the second quarter reflects the initial success of the actions we've taken and the strategies we are pursuing to rapidly grow our business. I'm extremely pleased with the significant improvement in profitability and our pro forma adjusted EBITDA loss for the 2024 second quarter improved to $5.4 million from $10 million for the same period last year and $7.9 million for the 2024 first quarter. The $2.5 million improvement in adjusted EBITDA loss over the past 3 months provides us with growing confidence in our efforts to reach profitability by the 2024 fourth quarter as we expect further revenue growth, higher gross margin and additional OpEx reductions to benefit our business in the second half of the year. As you can see, we expect to see the same, if not, greater dollar improvement in adjusted EBITDA in the third and fourth quarters as we approach profitability. Our operating plan for 2024 focuses on 3 main components: first, to complete the integration of the Fa

Thanks, Justin. As a reminder, 2024's financial results include multiple corporate actions, most significantly, the March 7, 2024, acquisition of Fa

Thanks, Mike. Before we open the call to questions, I want to review our expectations for the remainder of the year. After a solid first half, we believe we are extremely well positioned to achieve well over $100 million in annual revenue with an annual gross margin to range between 22.5% to 27.5%. We anticipate revenue growth to accelerate in the third and fourth quarters. In addition, we remain committed to pursuing strategies to expand gross margin, reduce SG&A expenses and drive profitability. As we look to the seasonally strong second half of the year, we believe we are well positioned to achieve our guidance and benefit from dramatic improvements in profitability. I believe our strong first half financial and operating performance support our initial success in creating a fast-growing, highly profitable and next-generation media business. I look forward to updating investors on our success on our third quarter conference call in November. So with this, Lou, Mike, and I are happy to take questions. Operator, please open up the line to any questions. Thank you.

[Operator Instructions]. The first question comes from Sean McGowan with ROTH Capital.

I don't know if this is a question for Mike or Justin or Lou or anybody, but can you tell us if there were any unusual items that drove the gross margin to its level in the second quarter? Because it looks like your target for the year implies a pretty steep rebound in the back half of the year. So was there anything in the quarter that was unusual? And what gives you the confidence that you can rebound that much?

Yes, I can kick off, and Lou or Mike, feel free to add into this. Sean, the Q2 results had a higher percentage of programmatic revenue within the mix, which is our lowest margin area that kind of drags the blended down. You'll see from some of the recent news, the $3 million that we spoke about and recent sort of brand win, they are from being driven from the agency side of the business, which are much higher in nature. So we do tend to see a fair spike on the agency side and the owned and operated IP side in the back half of the year. So you will see that, seasonally, we are stronger in the back half of the year than the first half of the year, and that tends to come from that higher-margin revenue. So they seem like a bigger jump just based on the numbers, but for each dollar of growth within agency and owned and operated IP, you're going to see a real increase in margins. But we still feel very confident in being able to hit that number. we expect back half of the year margins to be far greater. We still expect revenue to grow, but I think the mix of that revenue will come more from the agency and owned and operated IP areas rather than large sort of growth from programmatic.

Okay. And two kind of housekeeping questions. Can you remind us of where on the income statement we would see embedded things like the transaction costs? And is stock-based comp in one line or is that kind of spread around?

Yes, I can answer that. So all stock-based comps and general and administrative expense, we don't spread it between the 3 primary operating costs. And sorry, Sean, what was the former question?

Yes, where is transaction cost embedded in the P&L?

Transaction costs, yes, roll off into other operating expenses.

Okay. All right. And then my last question is kind of a general question, I guess, for you, Justin. We're at economic times. We get good news. Some days, we get bad news. We've got election stuff, a lot of moving parts. What's your sense among your advertising partners as to what to expect as we go into the holiday season?

Yes. It's certainly been tricky, Sean. I think that there was a lot of discussion earlier in the year that ad and brand spend was back. And we found that our pipeline was really growing, but brands were still quite hesitant to spend that -- we're in a really strong position. I mean we -- that pipeline that we've been working on is starting to really resonate and close and translate into real revenue. Again, we mentioned some of the brands attached to sort of the new $3 million of agency recent wins. I think we mentioned there are a couple of sort of 7-figure deals on the Fa

This concludes the question-and-answer session. I would like to turn the conference back over to Justin Kenna for any closing remarks. Please go ahead.

Thanks, everyone, for joining the call today. We sort of touched on the fact that we're very much looking forward to giving you another update in November, and we are -- this is -- certainly, we've been working tirelessly around the integration of Fa