Enthusiast Gaming Holdings Inc. (EGLX) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Enthusiast Gaming Holdings Incorporated First Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Bernofsky, Chief Corporate Officer. Thank you, Eric. You may begin.
Eric Bernofsky: Thank you, operator. Good afternoon, everyone, and welcome to Enthusiast Gaming’s first quarter 2021 earnings call. I'm joined by Adrian Montgomery, our Chief Executive Officer; Alex Macdonald, our Chief Financial Officer; and Thamba Tharmalingam, our Chief Operating Officer. We'll begin with commentary on the quarter before opening the floor to questions from analysts.
Adrian Montgomery: Thank you, Eric. Good afternoon and welcome to our first quarter 2021 financial earnings call and the first such call since the completion of our NASDAQ listing last month. Before we begin, I would just like to publicly recognize the outstanding contributions of our hardworking Enthusiast Gaming staff all over the world that wake up every day and give it their all in making our company better. Despite the still very difficult challenges of COVID and the impacts that has and continued to have on their individual lives. To each and every one of you out there in Enthusiast land, I say thank you. I am pleased to report that Q1 revenue grew by more than 320% to $30 million from $7 million in Q1 last year, fueled both by our focused acquisition strategy as well as gains in direct sales, which grew to $2.2 million in the quarter from just $60,000 at this time last year. And subscription revenue led by growth in the number of paid subscribers by 49%. Alex will share more details about our financial performance later in the call. Our proprietary flywheel strategy that underpins our organic growth is working. The strategy that we deployed in the market in 2020 and discussed in detail on the 2020 year-end financial results conference is gaining traction in the market every single day. This flywheel that consists of a more diversified set of revenue streams, including more direct to brand advertising and sponsorship sales, more paid subscriptions, more content licensing and distribution are all performing within our – within or ahead of our expectation.
Alex Macdonald: Thank you, Adrian. It's great to be able to comment on a strong Q1, which has really laid the foundation for a very successful 2021 year to come. I got to start by reminding listeners that the acquisition of Omnia Media occurred on August 30, 2020, the comparative financial figures relating to Q1 2020 and the statements in the MD&A do not include the results of Omnia except where noted and the references to pro forma figures in our commentary will assume that the acquisition of Omnia Media occurred on the first day of the respective period.
Operator: Thank you. Our first question comes from Mike Crawford with B. Riley. Please proceed with your question.
Mike Crawford: Thanks. The question on your 300 million global audience, what kind of variance do you see day-to-day, week-to-week, month-to-month on that audience? And also any comments on like how often these people are coming back within a month?
Alex Macdonald: Hey, Mike, how are you doing? This is Alex. I mean, the variance – the audience comes from three places for us, web, video and esports. And then we use, especially for web and video, we rely on a third-party data provider. So the variances we see are not that great, which is why we just essentially round the number and say 300. It's typically above and beyond. Actually it's always been above and beyond in a while, but that data is not always extremely timely. So we don't provide 300, 310 or 315 or whatever the variance may be. With that said, the variance is not that great to be honest. I wouldn't call it material over 300. The more important KPI there, which is why we provide this, is the number of views. You're right on saying how often they come back. And the other question is, of course, how much are they watching content? So that's why we provide exact webpage views and video views. To answer the question of how many times they come back, there's too many properties, it varies drastically. I think on the web, we have certain properties where they're coming back over 20 times a month. I think the Sims is an example of that. How many samples of the Sims there?
Adrian Montgomery: Sure, Alex. We get some of the audience, we get multiple return, multiple visits even on the same day and there's seasonality trends when it comes to weekends and months and what have you. I do note that there's a lot of return on the video. The video return is very high. I mean, you can see the video views and you can guess how many users are coming from each segments. I mean, to be honest, I'll tell you it's approximately – it's pretty well distributed between web video and esports audiences. And the video views are so high, so they're coming back pretty often. I hope that's helpful. What was the second part?
Mike Crawford: No, that was it. That's helpful. And then, so for my second question, so thanks for talking about direct sales going sequentially during the year. And I just want to confirm that that does include sponsorship revenue. But where can that go – like for example, Manchester United, I think charges £50 million a year for its t-shirt sponsor. So, yes, G FUEL and elf and a couple others on the Luminosity jerseys, but where can that go for Enthusiast?
Adrian Montgomery: Well, again, Mike, our key differentiator in the marketplace is the integrated offering that normally brings a number of these assets to bear sponsorship and media and custom content activation. So again, I think when it comes to actual jersey sponsorship, I think it can only go up certainly as esports continues to mature as a pastime. And look, the number – if you notice some of the bigger deals that we've announced recently, the Samsungs, the ExitLags, they're all including esports jersey sponsorship. That's a key component that these companies want and I think that's a really good sign. So there's a lot of growth around esports sponsorship.
Mike Crawford: Okay. Thank you, Adrian.
Adrian Montgomery: Thank you.
Operator: Thank you. Our next question comes from Rob Young with Canaccord Genuity. Please proceed with your question.
Rob Young: Hi, good evening. I was looking back at some past investor presentations on your company. Phase 1, Phase 2, Phase 3 were building scale, monetizing the subscriptions licensing. And then the idea of having a social network or broader monetization of this user base, the audience you have seemed like a longer term driver. And so now this acquisition that you're announcing Tabwire seems like you're accelerating that. Is this part of the original plan, or is this something that you're moving more quickly for opportunity? And then maybe if you step back for a second, maybe talk about your relative, the opportunity set from this sort of step into social the pan-subscription? How do those sort of rank when you think about the opportunity relative to direct and the subscription strategy up till now?
Adrian Montgomery: Yes. Thanks, Rob. It's Adrian. I'll start off. Yes, certainly we mapped out the various phases of our growth, and you're right, in the sense that the social platform was after other initiatives. When we started the conference calls, I think there were some questions around what were we thinking subscription offering. I think some folks were asking particularly in light of the Cloud9 subscription program, would there be a Luminosity subscription? And we had indicated our perspective was that, yes, we could do that. We could sequentially rollout premium models on individual sites. But if you recall, we also said, we think there's something bigger here. We think there's a pan-Enthusiast offering that we can roll more and more things into. And literally as we brainstormed the growth of premium, the growth of subscription, we very much saw it linked with the acceleration of the social platform. And so the two ideas went from being in silos to really seeing them as more complimentary than we ever had before. And that's why we've accelerated the social platform and we want to tie the social platform to the subscription offering. Now for us, we see a void in the marketplace. We do not see, and I think gamers would agree with you that there really isn't a gaming-centric social platform that spans publishers, that spans game titles et cetera, et cetera. And with such a large and highly engaged audience, we think we are in prime position to fill that void. And so – and we also think that we have certain assets that could be incredibly powerful allies as we build this out, namely our roster of relationships with content creators, people with really, really large and engaged followings of their own to the extent that we can start to involve them in the development of this program, I think that can be our secret sauce. So we're very bullish about it. We think there's not a lot in the market right now. And just given the fact that we touch publishers, we touch esports organization, we touch content creators, we touch the whole ecosystem of gaming that we can be the gaming platform of choice. And we want that to go hand in hand with an enhanced subscription offering.
Rob Young: Right. And then the new data capabilities that you're talking about that you're building with this, maybe talk a little about that. You've talked about the unique set of data that you have given the audience, but do you think capabilities like a social network typically have much stronger targeting? And is that what you're talking about when you're talking about enhanced data capabilities? Maybe give a little more detail there, that'd be helpful.
Adrian Montgomery: Yes. I’d ask our COO, Thamba, to comment on that. This is his first conference call. So everyone give him a warm welcome and go easy on him the first time. He's got a grizzled beard like Alex. Please go ahead.
Thamba Tharmalingam: All right. Thank you, Adrian. And just to add some color to that in terms of data and what we're looking to accomplish with our pan-Enthusiast subscription offering. So as Adrian mentioned, our value proposition on the social platform will be very unique, in that it's going to address specific gamers' needs that are not addressed by other platforms today, such as gamer identity, such as features on cheater index, and what have you. When it comes to advanced data capabilities, think of it as us having access to the number of gamer profiles. Now we have access as part of the acquisition, but it goes further because we now will have first-party relationship with this many gamers and their behaviors, their patterns, their usage, our ability to provide and cater to their needs in terms of gaming needs, right? And yes, they will be – we will have the advanced ability to do targeted ads, run targeted campaigns in a much more sophisticated fashion than how we're able to execute that today.
Rob Young: All right. Super helpful. If I could sneak one little a numbers question in on gross margins? Alex, you were talking about the progression of pro forma. Given the lower level of revenue and the quarter-to-quarter decline in the direct, I'm trying to understand why gross margins went up quarter-over-quarter and I'll pass the line.
Alex Macdonald: Okay. Yes, sure. I mean, mathematically, it'd be pretty simple. Of course, Q1, strong seasonal effects, so media and content revenue is going to come down, it comes down in programmatic. And to be honest, at a similar ratio that it kind of came down on direct, I want to point out from direct by the way, what’s beautiful about the Q1 is as Adrian mentioned, more direct sales remain in Q1 for future periods than were recognized in Q1. So we’re very proud of the sales team, certainly. So what happens is that the same time subscription continues to grow, it has a higher percent of the overall bucket, which helps continue to push-up that gross margin and we're confident. That's what I want to see, right? Like I spoke in the last four quarters, it goes to a high 19.8% from 16.1% that you're talking just shy of 1% a quarter. And that's it, that's what we need right on this growth initiative. 1% or 2% a quarter, some tuck-in acquisitions along the way, that's how this P&L profile transforms into that of a traditional media company with high margin, high gross profit. And at the same time, we're growing revenue and those two things compound beautifully. But anyway, that's the mathematical explanation.
Rob Young: Thanks a lot.
Adrian Montgomery: Of course.
Operator: Thank you. Our next question comes from Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.
Brian Kinstlinger: Great. Thanks so much for taking my questions and nice quarter. I want to dig in a little bit into Tabwire, is this mostly an asset acquisition or do they also have a subscription and ad model and if so, can you break it down? And then once you're completed with Project GG, talk about how you plan an outreach program to your 300 million viewers?
Adrian Montgomery: Yeah, thanks. I'll start and then pass to Thamba. Yeah, the great thing about this acquisition for us is that it's a mixture, it's a mixture of tech, it's a key component to executing a strategy. And the data capabilities and the technology capabilities that Tabwire has I would say conservatively in – and again this goes back to Rob Young's question, a lot of what made the Tabwire acquisition attractive to us was the fact that, yeah, perhaps this social platform we saw it coming a little bit later than we now do because, tabs, data and technology capabilities were able to vault us forward, in some cases upwards over a year. So they really compress the timeline in terms of what they have in their toolbox. The other thing about Tab is, Tab is an advertising platform today. They sell ads, they make money and so again this is a pliable acquisition just on being a partner site we've folded in through our own acquisition strategy. And then when you layer on the tech and then when you layer on the fact that it can vault us eight months to a year forward in terms of our roadmap for EG, it just made a lot of sense.
Thamba Tharmalingam: Yeah. Just to add to that, this is Thambha. So the two other points to your question in terms of perhaps that makes – think of it as very similar to how we started on the TSR journey. TSR is a property had ad revenue, but now we've got a massive subscription offering on that business and that's doing phenomenally well. Similarly, what we're going to do on Snapchat is, we - it does have ad revenue today, but really our focus is building it and building the EG platform and launching subscription offerings on that. And as I said earlier, the subscription offering would not be a paywall to get past ads, but it'll have meaningful propositions that'll resonate with the gamers to command that price premium in the marketplace.
Brian Kinstlinger: Great. That’s helpful. And my other question, if you could talk about – it was early in sounded very important to TikTok strategy you've got the first episode of Gamers Greatest Talent (sic) that you produced and was streamed. How is that being monetized and how do you plan on monetizing these episodes going forward?
Adrian Montgomery: Well, right now it's being monetized through TikTok and elf Cosmetics paying us to be affiliated with the program. And that in and out of itself is – excuse me for one second – and that in and out of itself is significant. And then again, this is a franchise that we created and we own, we own the URLs, we own the concept, the trademark, et cetera. And we're now sitting with a property that we developed from scratch that has gone viral around the world on TikTok to the tune of close 12 billion impressions on the hashtag. So we know we have something special and now we have to think about how we license it, where we license it, what we do with it, what other formats could shoot off of it, but it gets back to what we're doing here and what we're executing again is a strategy to become a media and content company and certainly developing proprietary content, being able to layer in incredibly popular influencers on the LG Roster to serve as judges. We had Chica last week, we've got Anomaly this Sunday, we've got some of the biggest gamers involved in the property. We've got the biggest social platform, arguably being TikTok involved. We have all the ingredients to make this a growing and lucrative franchise for us.
Brian Kinstlinger: Great. Thanks so much.
Adrian Montgomery: Thank you, Brian.
Operator: Thank you. Our next question comes from Colin George with Haywood Securities. Please proceed with your question.
Colin George: Hey guys congrats on the quarter. My question is kind of with regards to events going forward. Alex, commented on how there was the drop in the revenue year-over-year with the loss of the live event in London, because the costs are lower gross margins might be a bit higher. So with the reopening happening at the U.S. and UK, heading in that direction, do you see going back to live events or sticking with the virtual events and maybe going with a hybrid event going forward?
Alex Macdonald: Yeah, look, I think that we would love to see in-person events resume. We think, again, we're a business about building communities and there's nothing more powerful for a community than to interact with each other physically. And so live events, we hope that they resume, certainly we've demonstrated a competency in the past year to relatively seamlessly migrate our physical events to virtual and digital events. And defend and in some cases improve the margin. So we can do both and we will continue to do both. And yeah, I would point out that, again this is our second conference analysts or earnings conference in a row, and in the last two quarters in normal times, we would have had our flagship EGLX event dropped in Q4 to the tune of significant revenue. We would have had our Pocket Gamer London drop in Q1. So this is our second quarter missing a flagship event and still showing strong quarter-on-quarter, year-on-year growth which just speaks again to the flywheel and the diversity of the asset mix. And so we're going to continue to be versatile and opportunistic on the events and experiences side going forward.
Colin George: Okay. Thanks. That's helpful. That's all for me.
Alex Macdonald: Thanks.
Operator: Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Please proceed with your question.
Derek Soderberg: Hey guys, thanks for taking my questions. I want to start with the pan-Enthusiast offering. Just curious what sort of testing you've done in the market for a subscription service you're proposing? What sort of feedback are you getting on that offering? And what's driving your confidence in that bundled product, are there a lot of users that consume content on multiple of your standalone web and video assets? Is there some crossover in users between some of those assets?
Thamba Tharmalingam: Yes. Thamba here, I can take that question. So yes, we have done – we have done a couple of market tests to see what the appetite for pan-Enthusiast offering would be like, get, knowing that we've got this captive audience of 300 million that comes to our properties. We – one of the opportunities that we have is Enthusiast Gaming is a house of brands. We've got multiple brands through which we interact with our audience. So we think we've tested it in a couple of properties, as I said earlier. And we know that the pan-Enthusiast offering is going to resonate really well with our audience so that they can unlock using a single sign-on ID or a single brand affiliation, they can unlock various assets across our network, whether it be video, web or other specific assets that we'd be creating for our subscribers.
Derek Soderberg: Got it. And then Alex, how should we be modeling shares outstanding next quarter? And then just generally, how are you feeling about the cash position?
Alex Macdonald: Sure. So the shares outstanding, we have – I mean, the subsequent events we – to-date in the MDA, we got obviously a very decent cap table, the subsequent events layout, the option of warrant exercises and whatnot. I wouldn't anticipate any major movements that’s pursuant to an announcement, perhaps some shares issued on Tabwire as our press release stated, which we will include in our press release if that happens. Other than that, there are small amounts of options and whatnot that cycles through most of those – all of those data in the subsequent events. Sorry, can you repeat the second part of the…
Derek Soderberg: On cash position.
Alex Macdonald: And of course, on cash position, we feel good, right. We did the offering in February the debt is like extremely low. In fact, I'd say our debt equity ratio is quite low for us right now. And with that said, we also have 14 million untouched credit available. So we're feeling fine about the cash position. And these acquisitions too, I mean these are going to add to not only the gross profit, but also straight to the bottom line. Icy Veins for example is – that helps it's incremental and it's going to help profitability. So we're feeling good.
Derek Soderberg: Got it. Thanks guys.
Operator: . There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.
