Magnite Q3 2023 Earnings Call Transcript

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November 15, 2023

There are 2 speakers on the call.

Operator

Hey, everyone. As I mentioned earlier, I am doing something different on my live stream today. As you may know, I'm the chief innovation officer of Gamesquare, a Nasdaq listed company that trades under the ticker game. Every quarter, our company hosts a conference call, which we thought would be a great opportunity to feature on my livestream. So you will see more of what I do at Game Square.

Operator

We also thought it would be a great opportunity to host investors on my Twitch channel to get the live streaming experience that is such a big part of our community. I'm sure there will be questions, so the chat will be Emotes only for today, and I'll pin a message that can take you to Game Square's website where you can learn more about our business and ask questions. Justin Kenna, who is Game Square CEO, is hosting today's stream from Complexity's live streaming room in Frisco, Texas. You know, at the address they share with the NFL team, but the Lions will be absolutely destroying in a few weeks. Complexity is also owned by Game Square.

Operator

The entire thing gives me conflicting feelings about being a Detroit Lions fan, but I better be on my best behavior and not go there today. Most importantly, he is Tim's, Cloaks, and my boss, which also kind of makes me, him and Cloaks's boss. But we also won't go there. Not today. So let me hand over the stream to Justin for some formalities before we talk about what the future holds at Game Square.

Speaker 1

Thanks, Ninja, and good luck on December 30 when the Lions come to town. I think you might need it. I'm extremely excited to be here today and to review the progress we are making at Game Square as we create a leading technology enabled platform that helps connect brands to gaming fans and youth audiences globally. Today's livestream is being broadcast over Twitch as well as our social channels and our company website. We believe that we're the 1st public company ever to livestream a quarterly conference call On Twitch, reflecting our core focus of driving stakeholder engagement through innovation.

Speaker 1

I'll start today's stream with an overview of the progress we are making, including the recently announced definitive agreement to acquire FaZe Clan. Before joining Ninja in a Q and A discussion on the future of Game Square and the innovation we are bringing to our markets, our customers And gaming fans across the world. Before we begin, I have to satisfy our lawyers' advice by stating 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 MD and A for the quarter ended September 30, 2023, which can be found in our company profile at sedar.com and on the company's website.

Speaker 1

So with these formalities out of the way, let's get down to business. For those not familiar with Game Square, our journey started only a couple of years ago With 1 operating subsidiary and annualized revenue of approximately $3,000,000 Since our inception in the end of 2020, our strategy has been focused On creating a leading media company focused on gaming and youth culture and rapidly getting to scale. I'm extremely encouraged with our success of the past 3 years as we've announced 5 acquisitions, including recently announced Phase transaction, which will create a company With approximately 138,000,000 in revenue. Our ability to grow revenue by over 45 times in under 3 years As a result of the comprehensive platform of media and agency solutions, gaming and esports organizations, production services and technology capabilities that we've assembled. Our modern end to end media platform continues to drive growth even during challenging market conditions.

Speaker 1

Brands are coming to Game Square because of our ability to provide clients with best in class technology assets, a large influencer network, An award winning agency and creative capabilities. As a result, Game Square can offer unparalleled insight into consumer behaviors, Develop data driven creative strategies and measure and optimize campaigns towards customer acquisition goals in real time, creating impactful marketing solutions that drive strong returns for our customers. During the Q3, revenue increased 13% Over the Q2 to a record $16,000,000 and was up 58% from the same period last year. Reflecting the benefits of the Enjin Gaming acquisition and strong organic growth, our Q3 results also reflect the strides we are making to improve our cash burn. For the Q3, our adjusted EBITDA loss was $3,600,000 a $500,000 or $500,000 improvement from the Q2 of 2023.

Speaker 1

We also continue to strengthen our balance sheet to support growth and invest in our business. During the quarter, we announced a $10,000,000 working capital line With SLR Capital Partners that matures in September of 2026. After Oh, Sawyer. Allow us to streamline our focus to support our marketing technology capabilities. We ended the Q3 with a solid pipeline For the Q4 and a strong outlook for 2024, we expect sales in our Q4 to be up significantly from 3rd quarter levels, reflecting strong seasonality and solid demand for our media and creative services and technology solutions.

Speaker 1

Our strong outlook reflects the solid integration of the April 2023 acquisition of Engine Gaming, which significantly enhanced our scale, Remove duplicative operating and corporate expenses, and most importantly, added technology based capabilities to complete our differentiated end to end marketing technology platform. As a result of this transformative acquisition, we have quickly expanded our client offerings to take advantage of notable commercial trends that enable brands and game publishers to target key audiences and measure performance and attribution data Engine Gaming is creating exciting revenue opportunities, including the growing success of new performance marketing strategies As companies are increasingly looking at ways to maximize their returns on marketing investments. During the Q3, We announced multiple new clients representing over $2,000,000 of annual revenue in 2023. Based on our current pipeline and customer relationships, We expect performance marketing sales can grow to $8,000,000 to $10,000,000 in annual revenue in 2024 with gross margins between 25% 30%, And we are increasing our investment to accelerate growth even further. As we've highlighted in the past, By currently serving 8 of the top 10 largest game publishers in the world, we are able to uncover trends through our comprehensive data and insights access.

Speaker 1

Game publishers are currently generating 60% of their revenue through creators and brand ambassadors. Being able to manage and activate those relationships Through our creator marketing platform has opened up a number of game publisher relationships and enabled us to cross sell these additional platform capabilities To drive more revenue per customer. We are also seeing growing adoption for our Unreal Editor for Fortnite Or UEFN Services that leverage Game Square's design, production and digital experience capabilities. These innovative marketing campaigns build custom worlds for brands in popular gaming titles such as Fortnite. During the Q3, we announced Four new UEFN campaigns with prominent blue chip global brands worth nearly $1,000,000 We expect growing demand for our UEFN services As large brands look at ways to engage with gaming audiences by creating custom gaming worlds.

Speaker 1

The activations also reflect Game Square's ability to create a seamless bridge between brands and gamers by offering a unique platform For interactive brand experiences in the digital world. We believe this will be an important growth engine in 2024 and beyond. As you can see, the Enjin Gaming acquisition has contributed to significant revenue and cost synergies, and we are focused on replicating its success With the recently announced acquisition of FaZe Clan. FaZe Clan is one of the biggest brands and influencers across the global gaming market. The combination with FaZe Clan continues our strategy of acquiring leading companies focused on esports, gaming, and youth culture To increase capabilities, grow scale, unlock cost savings, empower fans and creators, and ultimately drive value for shareholders.

Speaker 1

We believe there are significant strategic and financial benefits to the acquisition as we leverage the powerful infrastructure We have created a full spectrum of resources within the Game Square ecosystem to reinvigorate and drive value at FaZe. I'm extremely excited to welcome back 3 of FaZe Clan's founders to lead FaZe and reestablish the brand's authenticity. FaZe Banks, Tempur, and Apex are highly motivated to reengage with FaZe Clan's core fan base and empower FaZe's creators and community. As a result of the FaZe Clan acquisition, Game Square will be the top creator networking gaming and esports with over 250,000,000 hours of content watched annually. The company will have a powerful talent network that includes Ninja, Tim the Tapman, Trayvon Diggs, Max Holloway, Cloaksy, Dick Merckx, FaZe Banks, Rudd, Tempur, Apex and FaZe Bronny, just to name a few.

Speaker 1

Game Square and FaZe Clan We'll also combine a hyper engaged global fan base with over 1,000,000,000 of combined audience With a core focus on 13 to 35 34 year old audiences, we'll have a powerful portfolio of brand partners that includes Porsche, Nike, Jack in the Box, Xfinity, Miller Lite and Ghost. Finally, we've we have identified over $18,000,000 in future run rate cost savings The combination of Gamesquare, Engine Gaming and FaZe Clan have created a business with approximately 138,000,000 In annual revenue and an annual gross margin of over 26%, we will have taken nearly $30,000,000 of costs out of emerging corporate overhead And other cost saving actions. Going forward, significant cost savings combined with expected double digit organic revenue growth We'll support a highly profitable financial model. With 1 quarter remaining in 2023, I'm extremely excited about the progress that we've made So far this year and the opportunities to drive value for our shareholders in 2024 and beyond. We entered the 4th quarter with a robust pipeline And expect sales will be up significantly from 3rd quarter levels, which we believe will drive positive adjusted EBITDA in the 4th quarter.

Speaker 1

I'm thrilled by the direction that we are headed, and I look forward to updating you on the continued progress that we're making. So with that, I'd like to bring Ninja back, and let's jump into a little bit of Q and A.

Operator

Alright, Justin. Now it's my turn. We have both been in the business of gaming, esports, and youth culture for a while. How has the overall market influenced Game Square's financial results? And how do you see the market evolving in 2024 and beyond?

Speaker 1

Great question, Ty. Yes. Look, there's no doubt it's been sort of a challenging brand and ad market, and There's been a number of sort of macro factors. I think to sort of touch on esports, firstly, I think that, it's been There's some different sentiment out there at esports winters and other pieces. I think, yeah, esports in general is going through a very sort of natural growth stage of consolidation, I think.

Speaker 1

We remain really bullish on the future of esports and we're seeing publishers and orgs come together and partner together a lot more. I think we'll continue to see that. We see a lot of opportunity in that space, or broadly in the sort of gamer and and and creator economy in general. Look, by every metric in terms of, you know, audience and eyeballs, it's only going north. So we feel really good about how we're positioned to take advantage of that As we start to see markets return it and they will, we're starting to see that brand and those brand and ad dollars, come back.

Speaker 1

And, you know, I think that We're really well positioned at Game Square to take full advantage of that. Ninja, you've built a very large following. And as one of the original streamers, how do you continue to engage with your following and produce compelling and relevant content?

Operator

Woo. Alright. There's your doozy. You know, ain't that that's what it's all about, Justin. I think that for me, like, It's just continuing to, as a streamer, the way that I've been producing content my entire life is been it evolves with the game that I play or the games that I play.

Operator

Right? So It started off early in my career where it was, Halo competitively. So in one view ones, like that was like my way of entertaining my viewers and then that evolved into, you know, still competing for a very long time. And then that evolved into Destiny, right? Switching games to Destiny, then switching games to then Battle Royale came out.

Operator

Right? H1z1, PUBG, Fortnite. And now I'm I'm starting to obviously, we've added the podcast. Right. We're starting to go a different route that way.

Operator

And we are about to start, you know, New Year's is going to be another incredible event. So I think just continuing to give really cool experiences and and know, something giving people something to look forward to, you know, and and it's like a small event here and there to attend. And just giving them the content that they've always liked, they they continue to want. You know what I mean? If it isn't broke, don't fix it.

Operator

And, like, what I've always loved to do with my content and how I've always looked something I've lived by is I just want to entertain people with my my, Like voices, you know, any funny funny voices, accents I can do, impressions, references, and, in my gameplay. And also offer a little bit of, A little bit of, like, humor, right, alongside of of just the daily streams in and out. So, like, just things like that, man. I'm going to continue to stream, continue to produce, You know, funny content, hit clips and, just keep popping off, man. I don't know.

Operator

Just, As long as I love it, I feel like it's just natural. And, you know, we come out with content daily, like, and it and it's just, you know, it makes it literally writes itself. It makes especially when I'm playing with my boys and my and, some of my friends, then at that point, it's just like it's just pretty low. Right? Everyone loves a good squad game when we get the boys on.

Speaker 1

So Awesome. Can you tell people what you've accomplished so far and what's in store for the remainder of the year?

Operator

Goal year our goal for year 1 is to be innovative, have new experiences and create content. So innovative experiences and creating content our goal for year 1. Our goal for year 2, we're going to be focused on accelerating more growth and driving more product based sales. This is one of the one of the shirts I'm wearing right now. This is actually one of the shirts that we did with a super small release.

Operator

Like, we just wanted it to to kind of get out there. And this is literally one of the most of the insurance I own. And everyone talks about the quality. It's incredible quality and it looks amazing. And everyone is super happy that they, like the people who did buy it and we dropped a small launch are ecstatic and people have been asking, you know, and this is something so small.

Operator

It's just like a little tiny merch shop, right? Like a drop in the bucket to, to literally the things that we can accomplish. But, yeah, this is one of my favorite shirts and one of my one of my community's favorite shirts, and they always ask me to bring it back. So just, you know.

Speaker 1

Why don't you tell everyone what attracted you to Gamesquare and how we support your efforts to drive innovation and engagement within the gaming community?

Operator

Great question, Justin. It's a great question. I think the the thing that attracted me the most about Gamesquare and is I mean, you just did an incredible job selling on to when we were talking about what it is that you guys do differently than, you know, all those other companies out there, especially with complexity as well. And I think what What really just drew me to you guys over over picking anyone else, over starting something my own, over, over anything like that is you guys just absolutely have, And as you kept, you always say, you always say this in your pitch, babe. You guys have like a front to back, like, right?

Operator

Like a start to beginning, a start to end, like process of, of being able to run events. Right? Being able to start events and then being able to literally get everything that goes into those events and you guys actually also understand the space. Right? So the fact that you guys don't have to go out of your way to reach out to other companies or other people to accomplish the things to get things done.

Operator

Right? Take Tim and Tim and Tim and Tap Man's event, for example, Tim and Tap Man's tailgate And Dallas was one of the most amazing events ever. I was I was super blessed to be a part of it. It was out of this world and a knock out of the park, and you guys were able to do all of that in house, right, with with the companies that that rock with Game Square. So that and just again, I think the the true understanding of the gaming space and the culture and, like, you guys get it.

Operator

And I think that's that's very, very, very important. You can't buy that. And that's, yeah, that's what drew me to you guys. Justin, there have been so many Sports, gaming and media companies that are trying to figure out how to compete in the market and engage with and engage with youth audiences. How is Game Square able to differentiate itself and create a successful business when so many other companies have not been successful?

Speaker 1

Yeah. I mean, it's, you know, people people joke about the hard to reach audience, but, to us that represents a real opportunity. And I think It really is a focus on data and on technology. We, the acquisition of Engine Gaming Really did give us differentiation with Stream Hatchet and access to data in house and understanding, this audience in these communities. Obviously, having a world class team that can execute is important, but I think understanding the audience first and foremost is critical.

Speaker 1

And then having a media network in house that is specifically designed to reach these audiences, this really does give us a differentiated end to end Solution that nobody else in the market has. Now we do have competitors in these different areas, but from an end to end solution from Data and marketing and creative services, technology and media, it's unmatched. And I think that it's proving to be the right formula.

Operator

How do you envision Faze as a part of Game Square?

Speaker 1

Yeah. I mean, it's an incredibly exciting opportunity. It's actually Talking about this the other day and for those that aren't as close to the industry, you know, phase really is the New York Yankees or or more importantly, the Dallas Cowboys, of the gaming world. And and they truly are The biggest global gaming brand in the space. I see a lot of really immediate opportunities in the infrastructure that we built.

Speaker 1

There are that we Currently already work with FaZe, but there are a lot of areas that you face it. They do outsource that we'll be able to bring in house and really sort of Capture a little more revenue and expand margin. I think there's sort of a really good blueprint there. We acquired a complexity sort of two and a half years ago. In that time, It was growing aggregate audience 10 times, growing revenue by over 200%, and taken, you know, a burn and reduced that by Around $10,000,000 to a point where effectively breakeven.

Speaker 1

So I think if you sort of look at that blueprint as to what we're Gonna be able to do it Faze. That's a pretty good indicator. We're extremely excited. I mean, again, Faze is the largest gaming brand by audience and Yeah. They have a larger audience across their their sort of core platforms than any other sporting Team in the world.

Speaker 1

So, yeah, the opportunities are there for us. I think we've built the right infrastructure. We're extremely excited to get to work.

Operator

But, yeah, that's it, man.

Speaker 1

It's been a lot of fun, Ninja. Thank you for joining today's call and for helping expand Game Square's offerings. To everyone on today's live stream, we are just getting started. We believe the long term opportunities at Game Square are immense. 2024 is going to be a transformative year for Game Square as a result of strong organic growth And the successful integration of the FaZe Clan acquisition.

Speaker 1

I'm thrilled by the direction that we are headed and excited to report on our success In the coming months, we hope that you'll continue to follow us. I appreciate everybody tuning in. Thanks very much.

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Earnings Conference Call
Magnite Q3 2023
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