Super League Enterprise Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 14, 2023

There are 4 speakers on the call.

Operator

Hello, and welcome to the Super League Third Quarter 2023 Conference Call. Please note this conference is being recorded. Before we begin, I'd like to caution listeners that comments made by management during this call may include forward looking statements within the meaning of applicable security laws. These statements involve material risks, uncertainties and actual results could differ from those projected in any forward looking statement due to numerous factors. Important qualifications regarding forward looking statements or also contained in Super League's earnings release distributed earlier this afternoon and also available on SEDAR and EDGAR.

Operator

Furthermore, the content of this conference call contains time sensitive information accurate only as of today, November 14, 2023. Super League undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. I'd now like to turn the conference call over to Ann Hand, Chief Executive Officer. Please go ahead, Ann.

Speaker 1

Thank you so much, Kevin. Hello, and welcome to our quarterly call. I'm delighted to report Super League's Q3 2023 financial results along with other corporate updates. So let's hit the big headline out of the gate. We delivered a quarterly record of $7,200,000 in revenue, representing top line year over year revenue growth of 60% versus prior year Q3.

Speaker 1

While the Q3 presented a volatile macro Economic backdrop based on the uncertainty of the interest rate cycle, we know rippled across the equity market. Super League step change quarterly and revenue growth It is empirical validation that our scalable, vertically integrated and highly innovative publishing and product engine across some of today's leading digital social platforms and the wider 3 d web is in demand by many of the largest brands in the world. So as we always do on our calls, let's first frame the industry context and key trends that establish us with a differentiated position and present us an exciting opportunity. Traditional digital advertising continues to face headwinds with ad blocking, cord cutting, The shifting landscape of audiences and attention spans, much of digital advertising doesn't perform for marketers the way it did in the past. And the statistics tell the story here.

Speaker 1

There are over 500,000,000 users in digital social platforms that are more gamified or interactive, such as Roblox, Minecraft and And while there is still a learning curve for brands to understand these emerging yet already mighty marketing channels, the audience has already moved there. They're there and they're highly engaged. In fact, the average Roblox user spends 156 minutes a day on the platform as compared to 95 minutes on TikTok and 74 minutes on YouTube, 156 minutes a day. Super League is well positioned to reap the reward as ad dollars are going to inevitably catch up to this seismic shift in audience and again, attention. And it's worth noting that immersive content performs.

Speaker 1

Immersive content increases consumer engagement by 252% and has a 40% higher conversion rate. And 47% of U. S. Consumers expect to discover brands first in 3 d platforms through their digital personas as a true digitally native generation. Now there are 3 megatrends that are guiding us here.

Speaker 1

These are the trends that accelerate our growth and strategy. 1st, digital lives and commerce, meaning a blended existence, notably for Gen Z and Alpha, between their digital and their physical selves. It impacts how they behave, how they prefer to interact and consume. 2nd, as we've talked about before, the continued democratization of content creation or often called the emergence of the content creator class through co creation platforms like Roblox and TikTok. And finally, another megatrend is AI led transformation that enables accelerated offer development, more efficient, faster R and D cycles and more Super League is embracing and living these trends and these trends are fueling our business model.

Speaker 1

Now let me elaborate on our strong Q3 performance. We've taken notable strategic actions in 2023 that have impacted our trajectory. The acquisition of Mellon enabled us to form SL Studios And there is our fairly new but very coveted partnership with Roblox Partner Programs. We're one of a handful of companies that has this privileged relationship and it is our view a clear sign that Roblox endorses the value we add to their ecosystem and the essential role we play as strategists, innovators and product builders inside their amazing platform. On to our pipeline.

Speaker 1

Our current audience reach combined with our end to end solutions is proving that we can take an increasingly larger share of advertisers' wallets. And customers are continuously coming back to work with us as our repeat buying percentage for the quarter remains at a strong 70 plus percent. As well our average pipeline deal remains in that $300,000 to $400,000 range with new brand and partner entrants over the last few months like Kraft Heinz, Hershey's, Walmart and Publicis. We have closed on 3 7 figure deals this year versus just one 7 figure deal in 2022 at about $1,200,000 but it's much more about the frequency of 7 figure deals in our pipeline and even more the size of these 7 figure deals that's growing. For me, this might be one of the most important proof points and maybe one of the most important things that I'm going to say on this call.

Speaker 1

And I really want investors to take stock of this. Recently, we landed our largest deal ever in our history, a deal valued at nearly $4,000,000 spread across a few quarters. So again, let's pause on that. A nearly $4,000,000 singular deal, 3 times our largest deal last year. This sends a big message to brands and agencies that Super League is uniquely positioned to be a go to partner for all of their immersive marketing goals, Along with the increasing strategic imperatives that brands and agencies face that they need to create a more persistent presence in these immersive social channels for their brands, and Super League is positioned to be that go to partner.

Speaker 1

Now you've heard me mention before that we served over 80 brands last year to deliver nearly $20,000,000 in revenue. As our deal sizes continue to grow,

Speaker 2

It means we have the

Speaker 1

potential in the future to deliver big top line results in 2024 and beyond with a fraction of the number of brands. And our sales force effectiveness continues to improve with our top sellers establishing a new ceiling of about $4,000,000 to $4,500,000 in annual booked revenue as compared to a sales capacity of approximately $2,500,000 in 2022 for a top seller. That's all the pieces of the puzzle coming together here. Our compelling one stop shop solutions, increasing brand partner knowledge and the confidence in our capability to be the team that can deliver against it and a more productive sales force built on a lean operating structure. Again, this is scale.

Speaker 1

This is operating leverage kicking in But that was a strategic choice and a good one in my opinion, and I'd do it again. Again, we believe the size of this deal will send a shockwave through the hallways of global ad agencies We are supporting the largest brands in the world that Super League is a company that they must get to know. This doesn't change our resolve to continue to walk up margins to our target 40% to 50% range and we can do that through new product lines and expanded revenue streams as we prove ourselves as the strategist and product builder to partner. And to round out the P and L, in the Q3, we saw the impact of the material cost cutting reductions that we launched in the back half of last year, And we delivered a 33% reduction in operating costs on a non GAAP basis relative to the same quarter prior year. This reduction coupled with top line growth has taken a sizable bite out of our operating losses on a quarterly basis as we make significant progress towards our goal of breakeven in 2024 with a more optimized organization and a cost structure that's focused on revenue generation.

Speaker 1

Now to expand on some of our Q3 and subsequent operating highlights, as I mentioned previously, our partnership with Roblox is a source of great pride. This came about through a lot of relationship building and hard work. We've established ourselves as an innovator in their platform over the last few years and a trusted partner for their beloved brand and community. In my view, this validates the important role Roblox sees that we play in the health of their ecosystem. Now Roblox is the leading platform where the next generation prefers to socialize digitally.

Speaker 1

As I shared at the onset of the call, 156 minutes a day, the average Roblox user. And this partnership opens up our access to their massive user base, which is 100 of 1,000,000 strong, along with potential access to their long list of marquee global brand partners. The Partner Program enables Super League to sell both our own immersive capability and proprietary dynamic content Along with Roblox's highly innovative wide reaching ad inventory, it really further expands our suite of products and allows us to take down larger and larger revenue So on to some other partner specifics, leveraging our tech and capability, every week we are launching new immersive experiences and products for powerful brands and IP owners and none shine brighter than the launch of Hamilton and Roblox. The Hamilton simulator brings the biggest Broadway hit ever into a 3 d environment with remarkable early results. Hamilton Simulator went viral with over 1,000,000 visits in the 1st 2 weeks And surpassed top Roblox experiences in terms of average session time of 21 minutes and overall rating of 97%.

Speaker 1

As we know, Hamilton is a once in a generation cultural touchstone and this persistent gamified Broadway experience That anything that exists in the physical world can have a virtual twin to reach new audiences and it also demonstrates that education can be more fun and memorable. And Hamilton isn't our only persistent experience. You've heard us talk before about Yoss Island. We continue to support a consortium of signature Abu Dhabi to bring Yoss Island to life, full of iconic Abu Dhabi attractions and one of the most expansive tycoon experiences on roadblocks. The attractions within the virtual environment are situated at Compass Space, representing 15 square miles in the real world, enabling endless exploration and interaction within a socially engaging world.

Speaker 1

And another more recent wildly fun experience we activated was the enchanting world of DreamWorks Animation Trolls Fan Together via Roblox's Livetopia. And yes, I really did play this one myself, much like I played in Barbie's Dream House, as you may know. This unprecedented collaboration allows us to blend the magic of Trolls with the boundless creativity of the Roblox community And forge a new frontier where film and digital experiences coalesce into something truly extraordinary by fusing storytelling, interactive play and musical delight. The captivating waveguang listening party experience received 22,000,000 visits, which is about twice the So now let's turn to the capital markets. We can't avoid them, right?

Speaker 1

As so many investors have said to me, Anne, the markets aren't your fault, but they're your problem, right? And they're all our problem here as investors as well. We completed a $2,200,000 public offering early in the Q3, which provided necessary working capital and funds for general corporate purposes to support the ongoing growth and development of Super League. Additionally, we executed a 1 for 20 reverse stock split in a conservative and Variantial metaverse is ripe for consolidation, and we are continuously monitoring the market for select opportunities. In parallel with the judicious view of M and A, like any smart operator, management is actively working to address our short and long term capital requirements and we'll provide additional updates via our SEC filings.

Speaker 1

Given the challenging environment for raising capital and the necessary time spent on those initiatives, I'm looking forward to successfully closing this chapter in short order and focusing on our 2024 path to profitability. And looking ahead to Q4 and on the heels of our largest deal ever, as I've said, we have line of sight on at least $9,000,000 in revenue and we're just at the mid So that completes our review of the 3rd quarter and corporate update. And with that operator, we can go to Q and A.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is coming from Howard Halpern from Taglich Brothers. Your line is now live.

Speaker 2

Congratulations on a great quarter in a challenging environment like you said. In terms of the cost structure, are we pretty much set now with that $7,000,000 operating Baseline number even with that big contracting program that's coming up?

Speaker 1

Well, certainly on an operating cost structure, we continue to look for additional ways to trim Our operating expense, we have pulled the largest levers that we started pulling, as I mentioned, in the back half of the year. As well, I do believe that from a cost of revenue perspective, you will see a little bit of that continued pressure on margins in Q4 because again that sizable program that I mentioned, the heart and soul of it is a Q4 program. There's pieces of it that are recognized and the appropriate cost of revenues associated in Q3, but it is primarily a Q4 program.

Speaker 2

And is that new is this win does this meet your goal of having longer duration programs?

Speaker 1

Yes, it's a good question. It is actually just a good old fashioned campaign, right? So it's just a few month campaign. That's a long campaign. So I don't want to devalue that at all, but it's with a pretty big branded house of products and offers.

Speaker 1

And we believe that this does 2 things for us. It first allows us to go into that Larger holding company and talk about what we did for just one of their product lines and the opportunity to do it for more of their product lines. It certainly is the beginning as we've talked about before about us also going back and saying, what an amazing amount of engagement you just pulled off for 90 days. Now you just got all those fans excited and you just disappeared on them. So why wouldn't we be an anchor or a core part of All the campaigns that you're doing across that brand for 2024.

Speaker 1

So that's more of that persistent approach. And then the other exciting thing about this specific deal is it was actually the very large ad agency, the holding company that supports This mega global brand that came to us and said, we think you guys are the best people to manage this. And that's a big deal because While the company that we're doing this activation for has 100 plus product lines under them, You're now talking about a massive global ad agency as well who has hundreds of brands that they support. And so when we talk about persistent programs now, we're not just talking about what can we do persistently for the specific brand that we're representing in these channels. But could we almost become the quasi internal agency or agency of record For these large ad holding companies who are already seeing us as the one trusted capable place because we've been in this space For almost a decade, we understand it so well.

Speaker 1

Our could we almost become their go to partner as well? And that would open the pipeline to a lot of brands too. So There's a lot of legs of ways that we can grab more dollars either through continuous programs, working more with these master brands that have a suite of products and offers And sub brands underneath them and then really changing our agency relationship so that we become their first point of Anytime they have a brand, say they want to explore these immersive channels.

Speaker 2

Okay. And how does the Roblox partnership Agreement, how does that figure in terms of the number of referrals you get or you have to go out and

Speaker 1

Yes. So the first way it works is that we are a handful of, one of a handful of companies that has the opportunity to resell They're massive ad inventory as well across their entire platform. So imagine if we already had a beautiful menu of immersive And we'll now get to bolt on all of their Special unique products. And now when we go and we package deals to brands, we're grabbing a lot of their products too. So that makes those deal sizes bigger for us.

Speaker 1

And Roblox doesn't have a sales team to do that. So that makes us in a special position. We're not competing against them in that case. But then as well, they don't publish immersive worlds or experiences. So anytime, think about the biggest brands, the Nikes of the world and others, They're going to call Roblox first and say, hey, I want to work with you.

Speaker 1

We're now again on this short list of companies That they will now pass that referral through to. So it has the potential to be the single greatest injection into our pipeline of potential deals that we can be pursuing. So, it really supplements our ad inventory and helps our programs and packages get better, but it becomes a really powerful referral tool as well as you mentioned.

Speaker 2

Okay. Thanks and keep up the great work.

Speaker 1

Thank you.

Operator

Thank you. Our next question is for answering by Scott Buck and congrats on the Q3 2023 revenue number. I know your gamers skew a bit younger, but curious if you've seen any pullback in automotive ad spend?

Speaker 1

No, actually on the contrary, we in Q3, I think had our largest automotive spend ever. We did a pretty sizable program for Toyota, and that's a repeat customer with us. And so we're seeing that, That's a vertical like fashion and beauty, CPG, food. These are verticals that we weren't as strong in maybe a year ago. We were heavily skewed towards entertainment and toys, but now we're seeing some nice signature brands that are coming into those verticals and they're coming back for more.

Speaker 1

Fashion and Beauty, it's the L'Oreal and their suite of brands like Maybelline and Urban Decay and others. But specifically to automotive, The way while we do have a portion of our reach is certainly under 13, we work with A lot of brands that are targeting that over 13 audience, whether it's State Farm and Visa, Financial Services, certainly automotive Excuse their 14 15 year olds are thinking about getting their license in that first car. And so we can uniquely help them reach that over 13 audience and very Specifically, if they're trying to reach, even when a little older, Roblox talks a lot about the fact that their platform in general is aging up. And there is data to support that they're watching, them start to build a little more presence in that kind of 17 plus as well. And some of that makes perfect sense because that 17 year old grew up in roadblocks.

Speaker 1

And so as long as the offers and experiences that speak to the 17 year old are still there just like The ones that speak to the under 13, they can keep that stickiness to the platform because it's more than gaming for them. It's their social hangout with the friends that grew up on it. So they're aging up. We have seen that then respectfully, ours have been shifted and aged up a little. And to date, we haven't had any brand that we can't deliver the right program to hit the audience they want.

Speaker 1

Sometimes brands will say, I want And over 18 audience. In the case of Toyota specifically, it is a family friendly content activation. It's not specifically in Roblox. So it is trying to reach a wide net, both the young kind of up and coming driver as well as the parents who are maybe making that investment in the next

Operator

Thank you. We do have a follow-up coming from Scott Buck. The added cost of revenue in this quarter is that pulled forward? Should we expect some relief in Q4? Thank you.

Speaker 1

I answered this a little earlier. Clayton, do you want to jump in and add anything?

Speaker 3

Yes. So that particular program that Anne mentioned during Her remarks earlier is a Q3 and Q4 program. And so we certainly mentioned the importance of that particular program and how delighted we were to take it on. But it is one that expands Q3 and Q4 and we were and we accepted a lower margin with Respect to that, but with respect to that program, that lower margin should wind up in Q4 of 2023. So it's not something that we expect to carry and continue into 2024 As we continue to, again, as Ann said, walk up our margins to that 45% to 50% level.

Speaker 3

Yes. Agreed.

Operator

Thank you. And a second follow-up from Scott is your large $4,000,000 contract coming from an entirely new customer. Is this an existing relationship that the company has?

Speaker 1

It's a new customer and we're really excited to tell you more about it in our next earnings call.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Speaker 1

All right. So on a final note, we understand it's been a challenging time for our shareholders in spite of our strong top line growth. We believe the value of our current share price is at a meaningful discount and consequently company insiders, including myself, Have taken the opportunity to further increase our ownership. Our strategy is continuing to prove itself out. We've built a leading vertically integrated immersive innovation engine We're successfully monetizing the 3 d web that exists today with an exciting vision for the opportunity presented by the 3 d web of tomorrow.

Speaker 1

That is why we modified our name recently and took out the word gaming, because gaming represents our roots, but our future is even bigger and brighter. And with that, I encourage you to visit superleague.com to immerse yourself with our capabilities and the exciting brand work that we do. We wish you a great day and thank you as always for joining us along with your continued interest and support.

Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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