Q3 2022 Enthusiast Gaming Holdings Inc Earnings Call
Good afternoon, and welcome to the enthusiastic.
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I would like now turn the conference over to Mr. Eric Bernacki, Chief Corporate corporate officer Al <unk>.
Plenty.
Just one SEC.
You May go ahead Sir.
Thank you good afternoon, everyone and thank you for joining us easiest gaming third quarter 2022 financial and operating results call. My name is Eric Gronowski, the Chief corporate officer of <unk>.
Gaming with me today is our Chief Executive Officer Adrian Montgomery.
Our Chief Financial Officer, Alex Macdonald and joining us on his first quarterly conference call since becoming President Bill Kara.
We will begin with some prepared remarks from Adrian Bill and Alex before opening the floor to questions before we begin I would 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 of the 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 more complete discussion of the risks and uncertainties facing the company appear in the company's management discussion and analysis for the three months period ended September 32022, which are available on.
Under the company's profile on SEDAR and Edgar as well as on the company's website enthusiastic gaming Dot Com you are 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 or revise any forward looking statements as a result of new information future events or for any other reason.
Now with great pleasure I would like to turn the call over to Adrian Montgomery CEO of enthusiastic gaming Adrian.
Thank you Eric.
Good afternoon, and welcome to our third quarter 2022 financial and operating results Conference call.
I am pleased to share with you the details of another strong and record quarter.
Proving the continued strength of our diversified business model.
And despite the macroeconomic headwinds.
We are on the cusp of reaching profitability.
On today's call I want to reiterate why our business model and strategic plan is the right one and sets us up for sustained profitability in 2023.
Just two years ago. After completing the acquisition of Omnia media enthusiast gaming was largely a programmatic advertising revenue company with a gross profit of $4 $1 million and a gross margin of 16, 8% in Q3 of 2020.
And just eight quarters, we have become an integrated media and entertainment company for gamers rooted in communities content creators and experiences.
Our flywheel model has separated us from the pack.
Our diversified model makes us less reliant than ever on the price fluctuations are programmatic ad units.
Today enthusiast gaming owns some of the largest fan communities in the world.
We own the largest gaming platform on Youtube.
We own and make our own games like little Big Snake moat, apes, and <unk> Dot Io.
We create our own desktop apps with millions of users we sell subscriptions across a number of our properties and we create our own content.
That we distribute on multiple platforms.
Snap Twitch and Tic Toc.
We also post sold out events all over the world through our pocket Gamer brand from London to Toronto to Seattle Helsinki <unk>.
Jordan and beyond.
We are the company that some of the worlds largest brands turn to to execute their gaming and esports strategies names like Lego State farm HBO, Netflix Disney the United States Navy Amazon RBC Nintendo.
Door Dash, Hasbro fidelity, Mattel, Procter and Gamble and more.
As I said, we are on the cusp of sustainable profitability.
We have ample liquidity to get there and we are a dominant player in the gaming and esports world.
Despite the macroeconomic pressures on advertising prices.
We have grown our gross profit over the last eight quarters by more than four times to a record high of $16 $6 million this quarter, while nearly doubling gross margin in that same timeframe.
To 32, 7%.
When you have a business with a 33% margin.
Need much much less scale to become profitable.
How have we done this.
We've been laser focused on developing a diverse and sustainable model that can stand the test of time and build a leadership position within the gaming and E Sports Entertainment industry.
And so we have continued to focus on the following key strategic business priorities that have all pushed enthusiast gaming further and further away from being a lower yield lower margin business focused on programmatic revenue.
And into that diversified media and entertainment company that again is on the cusp of profitability.
These strategic priorities are one invest in a direct sales team.
From the laying the foundation with our first direct sales higher two years ago. Today, we have a sophisticated sales marketing customer success and talent team. The accounts some of the largest companies in the world as its customers.
These customers are not simply buying advertising from us they are coming to us to solve a very important problem.
Which I loosely defined as an age where demographic issue.
They need to reach younger audiences to convert new customers.
But do it in an authentic way and at scale.
Very hard for businesses to do.
This is exactly what our direct sales customer success and content teams deliver day in and day out and when delivered right.
It leads to higher conversion rates for our customers for our customers.
Plain old print programmatic advertising they.
They pay more for it and that drives higher margins for our business.
Number two.
ROE a vibrant subscription business.
We have long held the belief that video game fans will pay for content that they find valuable.
And this belief has proven to be true.
And so we have grown both organically and through strategic acquisitions, our subscriber base from under 100000 in early 2020 to 260000.
At the end of this past quarter.
Today, our subscription business as an annual run rate revenue business, a $15 million and counting and a meaningful driver of margin growth across the company.
Number three.
Focus on product based services.
We know our audiences consume content in many different ways much of this variety underpins our flywheel strategy we have built.
That caters to the diverse entertainment needs and habits of our Gen Z and millennial game our audiences.
Another data point, we have learned is that the retention and engagement rate on a product is far greater than on an editorial piece of content let.
Let me explain.
Last year, we acquired you Dot GG, one of the largest stats and analytics communities for league of legends players late.
Late last year, <unk> launched a desktop companion app for players to use while playing league of legends.
This app or what we're referring to when we say product has been downloaded over $1 2 million times and has become integrated into daily and weekly habitual use.
This level of engagement extends the lifecycle of our product base.
Our product based services significantly beyond the written piece and in many cases some video content.
This lifestyle lifecycle extension is also driving higher margins in our business.
Other examples of growing high margin products within our flywheel.
Our addicting games, the Sims resource IC veins and tab status.
Number four live event experiences.
While we have certainly all become too familiar with living in a remote world as a result of the COVID-19 pandemic. The gaming community has never lost its desire to connect in person.
After a two year hiatus, we resumed running live events earlier this year within our pocket game or vertical.
Pocket Gamer connects runs a series of live global gaming events and places like London, Seattle, Toronto, Helsinki, Finland, and most recently in Jordan. This past weekend, a key location in the rapidly growing middle East gaming market share.
Showcasing how the world's largest game publishers and developers come together to learn share and grow the business of gaming.
And not only have we resumed live events, but we are seeing record attendants and increasing participation from across the gaming industry, including some of the world's largest game developers publishers media and investors.
Our Q3 pocket Gamer conference in Helsinki, some more than a 120 industry speakers across 17 themed tracks sharing insights and knowledge on a wide range of relevant topics sponsors of the event included meta agoura apps Flyer Huawei ex solar App loving and.
The company is represented by featured speakers and panelists included electronic Arts humble bundle mini clip unity square Enix and Tencent.
And again the theory holds true with events as it does with subscriptions that.
But if you can deliver a valuable experience gamers and in the case of these pocket gamer events industry participants and experts are recognizing the inherent tremendous values.
So as you can see the above strategic priorities have meaningfully reduced the businesses dependents on programmatic advertising, while shifting the revenue mix, which has had an outsized positive effect on margin growth over the past eight quarters.
We are on the right path and we will continue to drive the financial performance of this business forward as we have always done.
And despite market valuations.
Far from optimal we will continue to build long term shareholder value, while the market corrects itself over time.
During Q3, we delivered strong results again with revenue, increasing 17% to $50 6 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 the addicting games and <unk> properties as well.
This quarter revenue was impacted by the macroeconomic pressures on advertising rates, but as I highlighted in my opening remarks, our continued revenue diversification strategy pushed Q3 to a record gross profit of $16 6 million.
Up 64% from $10 1 million last year.
Q3 gross profit was not just a record high for any Q3, but for any quarter and enthusiast gaming's history, and we still have the seasonally strong Q4 to come.
Margin expanded 270 basis points to 32, 7% in the quarter.
And expanded 930 basis points from 23, 4% in Q3 of last year.
The increase in gross margin continues to be driven by the strong performance of higher direct sales and subscription growth and M&A contribution.
On direct sales I am pleased to report another strong quarter.
<unk> sales grew almost 50% to $10 1 million in Q3 compared to $6 8 million last year.
Renewals and additional business with existing customers accounted for 65% of that number again, a strong balance sheet a validation of the return on investment we are delivering to our customers and if you remember the list.
Highlights at the beginning these are very sophisticated.
Customers, who have demonstrable ROI needs to validate their spend.
And this has them coming back.
Again, despite macroeconomic pressure.
Turning to subscriptions.
Revenue grew 51% year over year to $3 8 million in Q3.
The increase in subscription revenue was driven by an increase in paid subscribers and pricing optimization.
Paid subscribers or 260000 as at.
At September 30, or 20, almost 26% increase versus paid subscribers of 207000 as at.
September 30 of last year.
I'd now like to pass it over to Bill Kara to speak our new president to speak to one of the most exciting parts of the quarter. Our first of its kind content partnership with the National Football League as well as some other exciting trends that has us optimistic about the business.
Thanks Adrian.
First off as this is my first quarterly conference call since being appointed President I'd like to say Hello to our shareholders shareholders analysts and other stakeholders for joining today.
Adrian is right. The NFL deal, we announced in August and launched in September call Tuesday Night gaming is truly an exciting and transformational moment for enthusiast gaming for.
For some background the NFL put an RFP out in 2021 looking for a partner and big ideas to help execute first of its kind of gaining strategy.
After a long almost 18 months process from RFP to executing an agreement the National Football League chose enthusiast gaming as its partner to launch Tuesday night gaming.
It is an exciting new content platform for brands and agencies to connect with a younger audience through bespoke custom content talent integrations.
Including owned moments featured segments, social Activations and more.
It is important to recognize two points here.
NFL recognize that our path to a younger audience leads directly to gaming and esports and second the NFL chose enthusiast gaming as its partner to execute this crucial strategy.
We want to be in business with the NFL full stop we expect this multi year partnership to be profitable on a standalone basis.
Is that has another equally powerful benefit a large reason why we are on the cusp of profitability is that as Adrian summarized in his remarks earlier, we created a direct sales and customer success function from scratch two years ago.
And that this quarter contributed north of $10 million in revenue at a target 50% margin now alongside the NFL, we assigned new direct sales with Hulu, the food and drug administration, Nickelodeon Disney and Universal Pictures with more to be announced in the near future.
Growth in direct sales will underpin our sustained profitability and the halo effect of being in the company of the National Football League.
Is substantial.
We signed a deal at the end of August and it was important to launch in conjunction with the start of the football season.
Each month, we have little to no lead time to pre sell but we wanted to be a good partner and demonstrate that we can move quickly.
Already we have done big deals as I've mentioned, a moment ago and because of the NFL. We are speaking to brands, we have never spoken before.
We're already locking up deals in Q1, 2023 with close to $2 million.
We have received inbound requests from two other major professional sports leagues, who have reached out to us talk about doing something similar with them, which will allow our business of scale even further.
Not only are we excited about the NFL deal.
We showed the business case to our lender and describe the opportunity there.
Incredibly supportive seeing how this enhances our path to sustained profitability and increase the size of our debt facility by an additional $10 million.
Here are some early audience metrics for the NFL Tuesday night gaming show.
Since the September launch, we've generated $3 9 million total views on Youtube across the PNG channel broad content and live streams with an additional one point sorry.
The $1 4 million total hours watched.
$1 7 million organic impressions on Twitter and $8 5 million views on tick tock.
Sure.
One other example of an activation we launched in the quarter was the work that we did with fidelity, where we created the fidelity of Minecraft safe real challenge.
In order to create a meaningful connection.
With the next generation of investors fidelity tapped into gaming to position the brand as a resource to help investors achieve success.
Custom made Minecraft map featured weekly challenges if players were unable to complete them that would be taken to the fidelity safe room, where they could find fidelity tips of tools to help them complete the challenge. The program was supported and promoted by luminosity talent and amplified through custom videos of social.
Close to maximize awareness and engagement.
Again. Another example of a high margin flywheel activation that brings together different assets to create a custom solution for brands.
Subsequent to the quarter I'm excited about some of the recent work we started with Netflix Netflix recently launched.
Live show live animated series.
Sure.
In June .
And as Netflix came to us.
For advice on talent and how to promote the series across our network of ticked up channels, giving viewers a glimpse into the animated series that is set to air on Netflix.
We are thrilled to partner with Netflix This new partnership provides a unique opportunity for Netflix to reach out to their non subscribers on other platforms like Twitch.
We are constantly striving to deliver new and quality content and experiences to our community of gamers and esports fans across the world and this partnership marks another powerful vote of confidence in our platform of digital media assets and our unique ability to reach.
Audiences.
It's just another unique example of a flywheel and action where sales content and talent come together to deliver a bespoke solution to our clients.
And while on the topic of things subsequent to the quarter and are particularly bullish on a few trends in the gaming industry that have a positive read through for some of our fan communities in Q4.
Last weekend the league of Legends World Championship took place with record high attendance. This demonstrates the continued strength of the league of legends franchise, which bodes well for <unk>.
Electronic arts transitions late last month.
Its long running successful franchise the sins, two a free to play game.
As owners of the largest Vance Sims community assumes resource we have seen a marked increase in activity both in free and subscription offerings.
Finally.
World of Warcraft will be releasing its next expansion pack dragging flight later this month.
The latest expansion the last expansion pack shadowlands saw engagement numbers rise on our site IC veins and youre watching for a similar impact with the release of this next pack.
I will now turn it back to Adrian for additional remarks.
Thank you Bill.
Now that we've discussed the quarter.
I do want to reiterate that.
That the search for new CEO continues and remains a top priority of the company.
Immediately following the AGM in July of this year the board struck a committee of independent directors.
And hired a fabulous firm Russell Reynolds.
And la based executive search firm with the mandate being run by the head of their CEO practice based in California.
We have an excellent list of candidates and we're confident we will have a new CEO shortly who will take this business to the next level and carry the momentum we have established.
In closing I do want to reiterate.
That we do not need to raise additional capital on our road to profitability, we have substantial liquidity to achieve sustainable profitability in 2023 with close to $21 million on the balance sheet by virtue of the increased facility an untapped line of credit with our lender.
Additionally, we also seized an opportunity in the quarter to sell a small cluster of legacy fan communities, which were not profitable for sale multiple of four five times revenue.
Think about that in the context of our current valuation we sold a small cluster of money losing communities representing.
Almost half of 1% of our revenue for close to 7 million Canadian dollars.
The combination of these two moves bolstered the balance sheet and gave management and the board unanimous confidence to proceed with our NFL partnership.
Which we expect will further drive the business towards increased profitability in 2023 and beyond.
I will now turn the call over to our CFO , Alex Macdonald for further commentary on our financial results and outlook.
Thank you Adrian certainly it was a dynamic quarter or third quarter of 2022, which I'll speak to shortly but briefly 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 <unk>.
Radio for presentation in our financial statements the exchange rate between the U S. Dollar in 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.
By increasing NAD prices and demand, which peaks in Q4, the seasonality is isolated to our media and content revenue streams and now back to the quarter.
Q3 revenue was $56 million up 17% from Q3 2021 revenue of $43 3 million Q3 revenue by source was as follows media and content to $44 5 million subscription $3 8 million and esports and entertainment and $2 2 million for Q3 media and contents revenue of 40.
$4 5 million compares to a $38 7 million reported in Q3 2021, an increase of 15%. The increase was driven largely by the following number one was more direct sales direct sales were $10 1 million in Q3 versus $6 8 million in Q3 last year with the majority of direct sales being recognized.
In media and content and number two was the continued strong performance in our two larger acquisitions from 2021, and Addicting games and you got Gigi.
These increases in media and content revenue were offset by a decrease in CPM with a resulting impact on our P&L.
Our web RPM was 12% lower in Q3 2022 as compared to Q3 2021 caused by macro headwinds and digital AD prices, particularly in the second half of Q3 Q3 subscription revenue was an all time record high of $3 8 million up 52% from $2 $5 million in Q3 of last year the increase.
Was largely driven by an increase in paid subscribers, which were 260000 as at September 32022, compared to 207000 as at September 32021. This was also paired with a higher yield on a per subscriber basis Q3 E Sports and entertainment revenue was $2 3 million up eight.
<unk> from $2 1 million in Q3 last year. The Companys Entertainment Division continues to benefit from the return of live events in Q3 and inaugural Pocket Gamer connects Toronto event was held along with a very successful return a pocket Gamer connects Helsinki Entertainment revenue accounts for $1 5 million.
Of the $2 3 million E sports and entertainment bucket with esports accounting for the remaining 800000 certainly for the first time the company's business model is being tested against macro headwinds, particularly in the digital advertising market for over two years, we have been diversifying our revenue with our focus being on how.
Margin revenue streams, including direct sales subscription and more recently, our product portfolio, including new Dot Gigi and addicting games, the higher margins of these revenue streams make them inherently better positioned to absorb pricing fluctuations and this is enabling the business to succeed despite the macro headwinds.
This is most evident in gross profit gross profit was an all time high of $16 6 million in Q3 up 63% from $10 1 million in Q3 last year. This propelled the gross margin to an all time high of 32, 7%, which is up 930 basis points from 23, 4% in Q3 last year.
And we are hyper focused on that gross profit number of $16 6 million, particularly when comparing it to the cash operating expenses of the business total operating expenses were $26 6 million up from $21 3 million in Q3 of last year operating expenses in Q3.
Include noncash items of amortization and depreciation of $4 1 million share based compensation of <unk> 8 million and a non recurring expense for AGM legal and advisory costs of $1 1 million as well as a foreign exchange gain of <unk> 5 million also <unk>.
<unk> in Q3 content to expense is $2 million of investments into our NFL partnership, which Adrian and Bill spoke of earlier the remaining $19 1 million of operating expenses are the recurring cash based expenses of the core business and are down approximately 900000 from Q2.
And while gross profit continues to rise we've taken additional steps to propel the convergence of these two numbers at the end of Q3 in September we sold a number of legacy editorial properties for gross consideration of $6 8 million, which will result in a net annual savings of approximately $2 million most of which is in the first half of.
The year.
So subsequent to the quarter end, we eliminated additional opex, while exceeding $1 million per year, and we expect further efficiencies and opex will be found us in the quarter. The remaining convergence of gross profit and cash based opex being our path to profitability will be driven by number one as we.
Success of our high margin revenue streams, leading to increasing gross profit number two was the sale of the editorial assets and the net savings realized number three R&D efficiencies found in Opex and number four is our NFL partnership which has signed material amounts of revenue to be recognized.
Over the coming quarters in summary, gross profits are increasing costs are decreasing and this combined will lead us into a profitable 2023 and beyond.
And we have the resources to make it happen during Q3, we expanded our credit facilities by $10 million, resulting in cash of $15 8 million as at September 32022. In addition to that we have a line of credit available to us for $5 million for total available cash of $28 million as at September 32022.
Our two other material income statement amounts, which are notable and calculating net loss and comprehensive loss in Q3 due to a combination of rising interest rates high inflation and contracting equity valuations indicators of impairment were present and the company performed interim impairment testing across its seven CG use there.
Results of this testing or a goodwill impairment charge across two of the company's <unk> for a total of $31 3 million. This is a noncash adjustment and the details and assumptions surrounding this expense are disclosed in note 10 to the financial statements. In addition, as I mentioned earlier the company had sold certain legacy editorial web assets for <unk>.
Consideration of $6 8 million the company Derecognize, a $2 million carrying value relating to these intangible assets in connection with the sale. This resulted in a gain on sale of intangible assets of approximately $4 8 million. These.
These items had a material impact on net loss and comprehensive loss, which was $30 2 million in Q3, resulting in a net loss per share both basic and diluted was <unk> 25.
I remain grateful to the analysts for their continued work on the company I also wish to thank my team for their hard work on this busy quarter led by the VP finance, Nathan Teal and to our shareholders and other stakeholders, including our lending partners. Thank you for your continued trust in us as custodians of enthusiast gaming finally to the members of the enthusiast gaming family.
My fellow employees. Thank you for your continued hard work and they remain in my judgment, our most valuable asset we take pride in this quarter because our model has been tested and it is standing strong and there is continued success, both now and in the future to be found in our business.
And of course, ladies and gentlemen, our business is.
The business of gaming operator.
Operator, I kindly turn it back to you.
Yes.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
At this time, well pause momentarily to assemble our roster.
Okay.
The first question comes with Robert Young with Canaccord Genuity. Please go ahead.
Hey, good evening.
I just wanted to dig a little more into the seasonality for the next couple of quarters.
Q4, but as you noted typically stronger Q1, a little bit of a weak weaker.
Sequentially. If you could just talk about what you see given maybe some heightened headwinds I think you said in the prepared remarks that you've seen a larger impact from the macro later in Q3, and so how does that trending into Q4, and then Q1.
Rob how are you this is Alex.
Yes, certainly there so the typical seasonality as we know would be increasing prices and demand, peaking in Q4.
Hi.
So we remain fully confident that prices will continue to rise, but most of that seasonality is still ahead of us the black Friday weekend, cyber Monday, leading into the holiday season, and the Flushing of the annual budgets that occurs in the back end of December .
That <unk>.
That will still caused an increase for my judgment the question will be.
How much of an increase where we see this year will it be a little muted in comparison to a normal year similar to yes, how we saw a muted seasonality in the back half of Q3, because these types of patterns also exist within quarters I think.
I think that what this quarter is showing though.
We are seeing an example of the P&L and the business model been stress tested and the gross profit is holding up strong I would once.
Stronger seasonality, we still derive gross profit from the programmatic channels.
However, they are much lower margin. So there is some installation there and gross profits as more and more fueled by the higher margins, which streams, which are less affected.
It remains to be seen though.
The big movements are still ahead of us in the quarter.
And.
Also remained to be seen.
Okay and is there an argument for.
Tightening macro leanne.
Rich AD buyer to save a little more ammunition for Q4 legged theyre taking into Q3 budgets. So that they have more to deploy in Q4, because that's such.
An important.
Period.
Yes. This is adrian.
Anecdotally I would agree with you and.
We saw some shift.
On the direct side, even from Q3 to Q4, so I would agree with you there is obviously.
Big Big events in Q4 think about Hollywood Studios think about.
As Alex said, Black Friday, and cyber Monday and so.
That is an encouraging trend I think for us quarter over quarter.
Okay, and then I wanted to ask the same seasonality question around your expectation of breaking through EBITDA.
Profitability I'm not sure if thats still possible in Q4.
But I'm just curious if you still expect it to improve in Q4, and then weakened a bit in Q1.
We have a shot at EBITDA profitability in Q4, despite macroeconomic pressure and it's because.
Where we're really growing our higher margin.
Diversified revenue streams so.
Certainly the world has changed.
From an external perspective, we still do have a shot at it.
That bolsters, our confidence I think that we expect.
To have substantial sustainable profitability in 2023 as well so we really.
In many ways, we remain on track for that.
And I think it is a result of the business that we built since the since the purchase of Omnia media and again.
Being able to double gross margin and only eight quarters.
Has us on that cusp of profitability.
Okay. Thanks for taking the question so I'll pass the line.
Thanks, Rob.
Yes.
Thank you.
Next question comes with Scott Buck with H C Wainwright.
You May go ahead.
Thanks for taking my questions.
First one from me I'm, just curious if you could give us a little color on who the incremental subscriber is and how you grow that business from a $15 million run rate business.
30, or $50 million run rate business.
Hi, This is bill I'll take this call I think the biggest growth that we've had has largely been organic on a subscription base and going forward, it's going to be a continuation of how to optimize that organic growth, but also layering it onto it a user acquisition strategy.
Is typically found in other gaming companies. So we have a lot of area of expansion that hasn't been tapped into new user acquisition is a major one and of course continue organic optimization is going to get us there as well, but primarily through user acquisition and that will be a major effort of our teams in 2023.
Great that's helpful and my second question Curie.
Curious if as you look across the business, whether it's any other.
Potential divestitures that Youre looking at.
Not at the present time.
Okay. Thanks, and just one more quick one.
Sure.
Macro environment continued to deteriorate, what kind of levers do you have on the opex side too to help offset that.
Well.
We have.
A number of levers on the Opex side, and I think that.
Really our.
Our.
Commencement of cost cutting initiatives started really in Q1 in the back part of Q1 and Q2 of this year.
And we've made substantial reductions as you can see without affecting the gross profit line. So.
Certainly there have been some head count reduction.
Certainly.
We've eliminated a number of positions in an advantageous way through the sale of our editorial sites.
And then really and Bill has done a tremendous job with this we've really.
<unk> started to get aggressive on our tech costs.
Our engineering costs and so.
We.
Are very very focused on the cost line.
As Alex said.
Opex went down.
Almost $1 million quarter over quarter, while at the same time margin grew substantially so costs are going down they're going to continue to go down.
We expect sequential margin improvement, but really no stone is being left unturned on the cost side.
And we're <unk>.
Benefiting from the fact that.
We got out in front of this.
Starting in March of 2022.
Okay I appreciate the added color guys. Thank you very much.
Thank you.
Okay.
Once again, if you have a question. Please press Star then one.
The next question comes with Gianluca Tucci with Haywood Securities. Please go ahead.
Hi, guys good afternoon.
I just want to ask in terms of Q4, given that the World Cup is in Q4 for the first time ever how your customers are positioned for that incremental ad spend and and how exposed.
Is the company to capturing.
A portion of that incremental AD spend that's caused by the World Cup every four years.
Jonathan how are you doing this is Alex.
Exposure is a good thing in that circumstance.
Certainly we have.
A number of places for us to capture it.
Two come to mind immediately.
One as you may recall in April we acquired.
FFS.
Basketball scope, so we see a convergence between sports lifestyle and gaming lifestyle.
And FFS was an entry point for us into that football or soccer World and we do have partnerships the Premier League.
And there are campaigns coming out of the EMEA region, which is the region.
Established a sales team in at the beginning of this year and not to mention of course, our NFL partnership.
So we're fairly well positioned Adrian auction looks at markets and industries. He has spoken about the movie industry and other industries we've targeted.
Sports is clearly something where after the next big driver for direct sales.
And I think.
Particularly on properties, such as <unk> and on NFL.
We're likely.
Gonna be benefited in Q4 from that spend.
Yeah.
Okay, that's great thanks and.
I'm impressed by the continued gross margin uplift there.
How much of that is caused by a direct sales growth.
And how much of it is other I guess optimization efforts that you guys are working on.
A large part of it is direct sales growth.
<unk> direct sales.
50% margin business that we created from scratch.
In 2020.
And its now turning over meaningful meaningful.
<unk> gross profit and continues to grow.
And it's really the great.
Outward example.
Of how we stitch these assets together and make the whole greater than the sum of the parts and it results in this high margin verticals. So direct sales plays.
Stanchion role.
As we've taken the business again away from that.
Programmatic heavy.
Business to this.
Almost 33% margin integrated Entertainment company and again.
When we create these campaigns.
Through the direct sales channel Bill talked about fidelity investments, Netflix Disney Adidas et cetera, et cetera, we're not just selling media.
We're selling bespoke solutions that drive specific.
<unk> is an ROI criteria these sophisticated company so.
It is a huge part of the profitable growth of our business and it's driving a lot of that margin and again.
Other examples subscription and the continued growth of subscription through number of subscribers added in pricing optimization has driven margin expansion as well.
Our desktop App on <unk>, which now has over $1 2 million downloads and generate meaningful revenue on a weekly basis. That's another example of us branching out into products.
The new game titles that we have through addicting games.
In game advertising that we sell the integrated sponsorships that involve those game titles.
Increased subscription on the AG profile.
Platform. These are all levers and then don't forget pocket Gamer look we were growing this business substantially during COVID-19.
And we lost.
That left hand.
Our live events business is now back in full force Helsinki was a massive success for pocket Gamer, we're in Jordan and the Middle East, we're going to Saudi Arabia at the end of the month, London, which is our flagship event highly profitable is coming in and Janney.
So that live event business is back in full force.
Pocket Gamer is selling out all over the globe and that's yet another lever.
To drive substantial margin improvement.
Okay. That's great. So it sounds like you guys continue to expect gross profit growth to outpace overall sales growth is that fair to assume.
Yes.
Okay, great. Thanks, guys.
Yeah.
The next question comes with drew Mcreynolds with RBC capital markets. Please go ahead.
Yes, thanks very much good evening, just two for me.
I guess first.
Maybe for you Alex just on FX.
What kind of dynamic there was in terms of gross margin.
The quarter on that one and then maybe one for you Adrian just a bigger picture.
Every company is obviously.
Going to revisit.
Some strategic initiatives or cost structure at this juncture and it sounds like Youre fully on top of that do you feel that you are constrained at all in terms of.
It's still continuing in tackling the real important strategic priorities for the company.
Given given the uncertainty in the environment tour.
And are you pretty comfortable you can kind.
Kind of trimmed.
Trim costs deal with a choppy macro environment, that's still obviously invest where do you want to with that thank you.
Okay.
I'll, let Alex handle the FX first and then I'll answer the second part of <unk> go ahead.
Hey, Joe So yeah, FX FX gave us and particularly in the gross profit it did get a small bump I think the average FX rate Q3 over Q2 was up about two five.
<unk>.
So you can imagine that multiplied over just north of $16 million. Although there was an offsetting factor to that and thats in the GBP the GBP versus CAD declined.
<unk>.
This quarter, we withheld sinking events out of our steel media subsidiary, which has a functional currency of GBP and the books or GDP.
That we lost some FX on so there is an offsetting so it helps.
Hi.
I enjoyed the rising the strengthening U S dollar, but but there are offsetting factors and in the end it doesn't have a huge net material impact because we also have a lot of expenses.
So not not too material, but there was a little bit of.
A little bit of impact there from those movements okay.
Got it.
And then as it pertains.
To being constrained in the environment.
I think we.
We were.
We're very disciplined about what our growth drivers are in our growth drivers are increased direct sales increased subscription.
Increased growth.
<unk> products.
And Thats really.
Where we've been focused on and those teams are intact and those teams continued to deliver.
We as I said earlier in the call.
We started attacking the cost structure in February and March of this year.
With some upcoming.
Redundancies and other head count reductions that we made quite effectively early we've gotten more and more aggressive in terms of cost reductions.
And we're also in a situation.
Where opex is going down it will continue.
To be attacked.
And margin is growing.
At the same time and so really.
We got out in front of this.
We continue in this world to be very very judicious about our spend and the teams that are driving the organic growth are intact and don't need expansion.
And at the same time, we had a lender.
That was sufficiently.
Pressed and supportive of the growth profile of the business to give us $10 million.
Of additional debt financing and I think one of the things, particularly in this environment drew.
That the team deserves a lot of credit for was a very very advantageous sale of some money losing.
Web communities.
To the tune of almost 7 million Canadian dollars and so the impact the cumulative impact of all of that.
Has put us in a position, where we continue to grow where we need to grow but again.
We will continue to turn over every rock and the cost structure.
Times warranted.
And I think we got on top of it early and we continue to stay on top of it.
Okay, that's great great context. Thanks.
Okay.
Thank you.
It seems they've got no further questions.
Be handing back to the management for closing remarks.
Thank you very much.
Thank you very much.
And thanks to everyone for coming in.
To this call.
The team remains resolved.
As we stay very very focused very disciplined on our path to sustained profitability.
The Delta is shrinking costs are going down they will continue to go down margin is going up it will continue to go up the delta is shrinking.
We are very very focused on the task at hand to <unk>.
Build.
That sustainable profitable business, which we are on the doorstep of.
And I would be remiss if in my last parting comments here I wouldn't again to echo what Alex said reveal who is entirely possible responsible.
For all that hard work and all of those results, particularly in a very tough environment and that is the hardworking enthusiasts that show up every day.
That.
Give their all that obsess.
Over this business.
That share their passion and their love for all things gaming and esports and.
They truly are.
And you enthusiasts, who are listening on the call you truly are responsible for our ability to continue to show resiliency and growth.
Particularly at a time like this so hats off to all of you.
Thank you for everything that you do thanks to our shareholders. Thanks to our analysts thanks to everyone.
Who is part of the enthusiast gaming story and as always we will continue heads down to deliver for you. Thank you.
Thank you. This conference is now concluded.
Thank you for attending today's presentation you may now disconnect.
[noise] [music].
Okay.