Enthusiast Gaming Holdings Inc. (EGLX) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day everyone and welcome to the Enthusiast Gaming Holdings Inc. Fiscal Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's is being recorded. At this time, I'd like to turn the conference call over to Eric Bernofsky, Chief Corporate Officer. Please go ahead.
Eric Bernofsky: Thank you, operator. Good afternoon, everyone. Welcome to Enthusiast Gaming’s second quarter 2021 earnings call. My name is Eric Bernofsky, Chief Corporate Officer of Enthusiast Gaming. I'm joined by our Chief Executive Officer, Adrian Montgomery; our Chief Financial Officer, Alex Macdonald; and our Chief Operating Officer, Thamba Tharmalingam. We'll begin with commentary on the quarter before opening the floor to questions. Before we begin, I’d like to remind everyone that today’s presentation contains forward-looking information that involves 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 as 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. A more complete discussion of the risks and uncertainties facing the company appear in the company’s management discussion and analysis for the three-month period ending June 30th, 2021, which are available under the company’s profiles on SEDAR and EDGAR as well as on the company’s website. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. Company disclaims any intention or obligation, except to the extent required by law to update and revise any forward-looking statements as a result of new information, future events, or for any other reason. Now, I will turn the call over to Adrian Montgomery, Chief Executive Officer.
Adrian Montgomery: Thank you, Eric. Good afternoon and welcome to our second quarter 2021 financial earnings call. It is my pleasure to once again report on the financial and operational accomplishments our team made last quarter and speak about what we believe will be an exciting second half of the year. I'm extremely pleased with our results this quarter and the significant growth we have achieved across all of our financial and operating metrics and I would like to thank each and every one of the hard working Enthusiast employees for all of their efforts to put us in the position that we are in today. Despite the headwinds posed by unfavorable exchange rates, we managed to exceed expectations across the board on revenue, gross profit, and gross margin. I'm pleased to report that Q2 revenue grew by more than 427% to CAD37.1 million from CAD7 million in Q2 last year, and gross profit grew to CAD8 million from CAD3.2 million a year ago, while gross margin improved to 21.6%, which is a nearly 200 basis point increase from just one quarter ago. Revenue growth continues to be driven by our focused buy and build strategy. Key organic growth drivers including direct advertising and sponsorship sales grew to CAD4.4 million in the quarter from approximately CAD500,000 in Q2 last year, and double from CAD2.2 million just a quarter ago. Some of the partners we worked with in this past quarter include the major blue chip brands such as State Farm, Bell, Bethesda, Disney Plus, Mars, PlayStation, GlaxoSmithKline, Microsoft, Red Bull, HBO Max, Twitch, Hasbro, new G Fuel, Riot, ExitLag, Excedrin, Fireball, eBay, Bet365, Sony Pictures, Toyota, and General Motors. The number of paid subscribers at June 30th was 155,000 compared to 111,000 a year ago, an increase of 40%. Most notably, however, is the acceleration of growth we are seeing in paid subscriptions. This quarter we added 18,000 net new subscribers, the highest quarterly growth in four quarters. This is a direct result of the investment we made in Q4 last year to establish a team dedicated to growing subscriptions. The upward momentum in net new subscribers this quarter is proof that that strategy is working. We remain confident that subscriptions will continue to show meaningful growth in the back half of the year. As we've mentioned previously, we believe subscriptions to be one of our most exciting growth opportunities. That's why we announced our plans to build a pan-enthusiast social network with a premium subscription opportunity for our target Gen Z and millennial audience, codenamed Project GZ. We're making strong progress on this front and I'm pleased to announce today that we expect to release an exclusive alpha version with select gamers toward the end of September. As we said before, direct sales and subscriptions are two of our highest margin revenue streams and you can see how the growth this quarter has contributed to gross margin improvement by nearly 200 basis points or nearly two full percentage points. We like the direction both of these businesses are moving in and the upward trajectory they're on as we move through the second half of 2021, which is our busiest time of the year. You've heard me talk about our proprietary flywheel in the past and I'd like to take a moment to reiterate why we believe this is the right strategy. Every month, millions of video game and eSports fans come to one or more of our 100-plus web properties, or thousand-plus YouTube channels, watch our talented Luminosity Gaming streamers on Twitch, and I would point out we are the number one most watched organized -- eSports organization in the world this year on that platform. Or tune into one of our proprietary shows like Gamers Got Talent or Rising Stars. The first season of Gamers Got Talent aired in Q2 and it was sponsored by TikTok and E.L.F. Cosmetics. Live streamed on Twitch over six episodes, GGT had a total audience reach of north of 10 million viewers. Discussions are now in full swing on another follow-up season. Another unique content experience we are particularly proud of is our partnership with Grammy Award winning International Music superstars Coldplay. for the event in May, we collaborated with DJ Xu and Luminosity gamer Star Fresh to launch an exclusive remix of Coldplay's new hit single Higher Power, which was live streamed on Luminosity Gaming's Twitch channel. The collaboration of music and gaming is proving to be a powerful combination for fans and sponsors and we look forward to more events like this in the future. This is our fan flywheel which delivers great content and experiences throughout the gamers' fan journey. And we will continue to add meaningfully to this fan flywheel both through organic and acquisitive means. At the same time, companies across North America are trying to build out and deploy strategies to reach Gen Z and millennials at scale. And we have been out there talking about it in recent months. You can read and see it in places like Bloomberg, the MIT Sloan Management Review, USA Today, Digiday, Washington Post, and others. We are winning in the marketplace because we offer more touch points to Gen Z and millennials than anyone else out there. We are selling integrated packages that include media, sponsorship, unique content, talent activations, and eSports. This breadth of offering is proving to be a winning strategy, as is evidenced by the doubling of our direct sales business this quarter to CAD4.4 million from CAD2.2 million in q1 of this year. On a currency adjusted basis, our Q2 performance in direct sales is similar to the direct sales for all of Enthusiasts in 2020. In Q2, we partnered with the US Ad Council and the COVID collaborative on their COVID-19 Vaccine Education Initiative, promoting COVID-19 vaccine awareness and education among young adults. It was the largest and most significant public health communications campaign in U.S. history and we were very proud to be the Ad Council's gaming partner. Hollywood studios and filmed entertainment remain an exciting growing category for us. This quarter we completed activations for Universal Pictures to promote the North American release of F9, the latest in the Fast and Furious franchise. We work with Walt Disney Studios to promote Black Widow and we partnered with the United Artists to promote The Guy Ritchie film, Wrath of Man. Those studios leveraged our innovative platform of video game and eSports fan communities, customized content, and integration with top gaming influencers. For F9 specifically, the activation included custom content activations with Luminosity Gaming talent and across Enthusiast's gaming media brands. Five exclusive Grand Theft Auto events throughout the launch weekend with Luminosity Gaming talent competing against fans, using Fast and Furious inspired mods, and media placement across arcade cloud and upcomer. Fans vs. Luminosity All Stars gameplay, even during the finals of Gamers Greatest Talent. We remain confident that Hollywood and filmed entertainment will continue to be an exciting growing category for us as we move through the rest of 2021. And the pipeline of opportunities continues to grow. Subsequent to the quarter, we announced a renewed and expanded Luminosity Gaming sponsorship deal with G Fuel, as well as an integrated media and eSports partnership with the United States Navy that will include the creation of multiple unique gaming activations, incorporating our company's roster of gamers, creators, and athletes to increase awareness of the wide range of professional opportunities the Navy offers. We're also currently in market with innovative campaigns for State Farm and DoorDash to name just a few. Another activation I'm particularly proud of is the innovative work we are doing with Lego. In partnership with Lego Technic, we have launched the Luminosity Academy to push the boundaries of creativity and guide the development of young gamers. As you can see, we have worked with pop brands on their biggest campaigns this quarter. We've executed on many new programs and provided innovative ways for brands to reach the elusive Gen Z audience, and it's working. So anticipating that, we'll continue to build on this exemplary quarter, we are adding more staff. We now have more people in key centers, including New York, London, and Los Angeles. We've added people in Detroit and we're looking at adding members to our direct sales team in Chicago. Our monetization flywheel which consists of a diversified revenue stream continues to gain significant traction each and every month. I've already highlighted the performance of direct to brand sales and paid subscriptions. But we're also seeing gains within our content licensing and distribution segment, particularly on platforms like snap, where we are distributing more content that leverages our expertise, and reach for the type of content gamers want. In May, we launched a new YouTube channel, called Arcade Blocks focused on Roblox related content. That channel has already garnered almost 100,000 subscribers and nearly 1 million watch hours. We're also pushing deeper into storytelling with original content for a gaming audience. Our new brand Upcomer which also launched in Q2 expanded into snap with two different properties, live stream fails and rage quit. These are properties we've created from scratch that are already contributing three new subscribers and content. This quarter we completed our NASDAQ listing and subsequently raised gross proceeds of just over CAD60 million. This raised significantly improved our balance sheet and has allowed us to accelerate our business plans with a particular focus on mergers and acquisitions. On the M&A front, we successfully closed the icy veins and tab stats acquisitions in the quarter, and they are great and they are integrating well into our fan and monetization flywheels. We are well-funded to continue to execute on additional acquisitions that will expand our audience reach, provide a deeper and more authentic fan experience. unlock new revenue streams within our flywheel and be a creative to margin. We anticipate being able to execute on additional exciting transactions this quarter. We're just getting started and believe very much in our buy and build growth strategy centered around our proprietary monetization flywheel. As you can see, we have accomplished a lot in the first half of 2021 and we are confident in our team's ability to continue to grow and to continue to execute in the back half of the year. I will now turn the call over to our CFO, Alex Macdonald for further commentary on the results.
Alex Macdonald: Thank you, Adrian. And we find ourselves here once again, in a fortunate position to be able to comment on an exemplary quarter -- our second quarter 2021. I have a few notes to mention before I begin my commentary, and note that our results are presented in Canadian dollars. I note that our business is affected by seasonal trends and digital advertising with sequential increases each quarter throughout the year, driven by increasing that prices and demand, which peaks in Q4. This seasonality is isolated to our media and content revenue streams, as we head into the second half of the year, I want to note that the increase between Q4 and Q3 ad prices is much greater than the increase between Q3 and Q2 ad prices. Also note that the acquisition of Omnia media occurred on August 30 2020. The comparative financial figures relating to Q2 2020 in the statements and the MDA do not include the results of Omnia except where noted. The 2021 balance sheet and income statements include the balances of the company, including Omnia. And now back to the second quarter, we're seeing continued progress across the metrics of drive this business Q2 revenue was CAD37.1 million, up 430% from the reported Q2 2020 revenue of CAD7 million. This increase was driven by our acquisition strategy, including Omnia as well as strong organic growth and direct sales and across all three of our revenue streams of media and content eSports and entertainment and subscriptions. Due to revenue by source was as follows media and contents CAD33.5 million, subscription CAD2 million, and eSports and entertainment CAD1.6 million. The media and content revenue of CAD33.5 million compares to a CAD0.42 million reported in Q2 2020, or nearly eight times. Q2 media and content revenue attributable to Omnia is CAD26 million, which is up 29% year-over-year. Q2 media and content revenue excluding Omnia is CAD7.5 million which is up 79% year-over-year. This increase in Q1 media and content revenue apart from the impact of the Omnia acquisition is mainly due to a significant increase in direct sales, the majority of which are recognized in media and content and a portion of those are recognized in Omnia, total direct sales were CAD4.4 million in Q2 2021 as compared to CAD600,000 in Q2 2020. Number two, a web RPM which was 175% higher in Q2 as compared to Q2 2020, which was caused by our continued internal ad platform optimization efforts and a shift in the distribution of views amongst different properties. This results is also driven by the prior year's downturn of the digital ad market related to the COVID-19 pandemic, a downturn we now declare has fully recovered. And the three was the addition of 18 new partner websites added to the web platform in the first half of 2021. And number four is the continued expansion of our owned and operated video properties, which also contributed to the increase in sequential quarterly video views. Video views were 9.7 billion in Q2 compared to 7.3 billion in Q1 this year. Q2 subscription revenue was 2 million, up 18% from 1.7 million in Q2 2020. The increase in subscription revenue is attributable to an increase in paid subscribers. The company had approximately 111,000 paid subscribers as at June 30th, 2020. This number is increased to approximately 155,000 paid subscribers as at June 30th, 2021. The company continues to grow the subscriber base on its existing subscription offerings through pricing optimization, promotional events, and marketing initiatives. The increase in paid subscribers outpaced the increase in subscription revenue due to movements in foreign exchange rates, which I will discuss shortly. Q2 eSports and entertainment revenue was CAD1.6 million as compared to CAD1.1 million in Q2 2020. This 45% increase year-over-year is as a result of the growth of our virtual events, such as Pocket Gamer Digital as well as increased sponsorship of Luminosity. So, there is a revenue head when I want to point out relating to Q2. The significant majority of our revenue is earned and measured in US dollars, which is translated into Canadian dollars for presentation in our financial statements. The average USD to CAD exchange rate in Q2 2020 was 138.5 which drops to 122.8 in Q2 2021. Had the exchange rate remained constant at 138.5, revenues in Q2 2021 would have been CAD4.9 million higher for a total of CAD42 million. Even on a pro forma basis to include the acquisition of Omnia, on a constant currency measurement, revenue would have been up 54% year-over-year. While the FX movements have a similar effect on cost of sales in certain areas of OpEx, with limited net economic impact, we feel that the strong momentum the company has shown in Q2, should be considered in light of this revenue headwind. The exchange rate between the U.S. dollar and our presentation currency of the Canadian dollar should be monitored and considered when analyzing or forecasting results. Gross profit was CAD8 million for Q2, up 150% from the reported Q2 2020 gross profit of CAD3.2 million, driven by both our acquisitions and growth strategies. Our growth strategies include higher yield and higher margin revenue streams, such as direct sales and subscription. This coupled with the tuck-in acquisitions of Tabwire and Vedatus in Q2 resulted in continued progress in gross margin. The gross margin for Q2 was 21.6%, up from 16.7% pro forma in the same quarter last year. As we continue to execute on our growth strategies, there's 490 basis point improvement in gross margin in one year reveals a compound effect when considering the significant growth in revenue over the same periods. Operating expenses were CAD19.6 million in Q2, up substantially from CAD7.5 million for Q2 2020. This increases due to the acquisition of Omnia as well a significant non-cash expenses, including the CAD1.7 million of amortization, which relates largely to the initial recognition of intangible assets upon acquisitions and CAD4 million of stock-based compensation which relates to option and RSU awards granted in Q2 and in prior periods. I also wish to note we incurred costs related to the SEC registration, the NASDAQ listing, and the financing conducted in Q2. Professional fees were CAD1.2 million as compared to CAD600,000 in Q2 2020 with the increase attributable to these efforts. We expect these expenses to be reduced in periods of less corporate activity. Office and general expenses CAD2.2 million compared to CAD500,000 in Q2 2020. A significant portion of this increase is also related to the registration of the company with the SEC and the NASDAQ listing. Office and general includes items such as insurance and filing and listing fees. Many of these expenses such as the required insurance will continue for the foreseeable future. Net loss and comprehensive loss was CAD12.8 million, resulting in a net and comprehensive loss per share both basic and diluted of CAD0.11 in Q2. We continue to invest in our operations, expanding our technology and content capabilities, as well as our staffing levels throughout the first half of this year. We are proud to say that our full time staff as at June 30th, 2021 was 160 people, up from 90 people as of December 31st, 2020. Most of these hires are focused in three areas; direct sales, content, and product development, with Project GG being a notable area. These are important investments for the future of the company and these are driven people, passionate about what they do on a daily basis. I've noticed in the first half of this year, they have become acutely aware of the metrics which drive this business. Therefore, they are, in my judgment, our most valuable assets. I reiterate that we are investing in order to drive the capacity of the business, there is a tremendous opportunity ahead to monetize our audience and we are confident in our pursuit of this opportunity. We are, once again, more than ever have the opinion the results of operations and the financial condition of Enthusiast Gaming has never been stronger. In June, we conducted a public offering of common shares issuing 8.6 million shares for gross proceeds of approximately $50 million or CAD60 million. In Q2, we also completed the acquisitions of both Tabwire and the Vedatus bringing the profit of the properties of Tabstats and Icy Veins into our portfolio. And of course, worthy of another mention. In April, the company became an SEC registrants and on April 21st, the company commenced trading on the NASDAQ global select market. To all the stakeholders joining us today as a result of that list and I want to once again, express our appreciation for your time and support and welcome to the Enthusiast family. Certainly, it was a busy quarter. As I reflect on the quarter in the past year, as we approached the anniversary of the acquisition of Omnia, I'm proud of the consistent progress we've made towards our growth strategies and the unwavering dedication the company shows towards its stated objectives. We maintain our original proposal that the direct sales model is a compelling investment thesis in and of itself. As a comScore Top 100 internet property in the United States with a growing portfolio of notable clients, we are as confident as ever in the direct sales model. However, we have always been of the belief and have said in the past, that there will come a day when Enthusiast Gaming which as well known for selling advertisements as Amazon is for selling books. In Q2, we have continued to advance our data capabilities, both internally and through the acquisition of Tabwire. Our subscription offerings are being significantly expanded, most notably through Project GG. And in early 2022, we will bring to the public a social network made by gamers for the nearly 3 billion gamers in the world. This will also represent a significant step into the mobile space, unlocking a completely new market for Enthusiast Gaming. For these reasons, we've never been more excited about the short and long-term future of the company. I'd like to welcome the two analysts who initiated coverage since the beginning of Q2, being Scott Buck with H.C. Wainwright and of course, the one and only Jeff Ban with Scotia Capital. To all our analysts, thank you, for the work you do on Enthusiast Gaming. And to our shareholders, we don't stop working hard for you. Thank you for your continued trust in us as custodians of your business of our business. And of course, ladies and gentlemen, our business is the business of gaming. Operator, I kindly turn it back to you.
Operator: Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question today comes from Robert Young from Canaccord Genuity. Please go ahead with your question.
Rob Young: Hi. In the press release, you highlighted that you expected margin improvements, I think, sequentially through the year, is that gross margins, operating margins? What type of margins would that be? I'm assuming gross.
Adrian Montgomery: Gross. Yes, that's right, Rob.
Rob Young: Okay. And then I was hoping that you could talk about the direct advertising bookings. And you've given us a bit of a flavor around the pipeline and the bookings around that business. Maybe we can talk about how they paced from Q4 to Q1 into Q2? And as a part of that, I was hoping you could talk a little bit about the -- if there's any way to parse between new and existing customers, it sounds like you've added a lot of logos this quarter. But I want to see if these customers are coming back after it's proven and upping their engagement and use of your direct sales model?
Adrian Montgomery: Sure. So, I think as it pertains to the pipeline, and as we've seen, it evolved from Q4 to Q1, and now we're in Q3. We've been really pleased with how the pipeline has developed. And I think, certainly, if you look at the number of RFPs that we're getting, that number has grown substantially, we're getting on average, 13 RFPs a week, I think. If we were to remember back to the beginning of Q4, just a little while ago would be two or three a week and we built out a customer success department that knows how to churn and burn these RFPs really quickly, which has given us a leg up. But seeing the growth in -- from three RFPs a week to 13, that has been, I think, encouraging sign. And seeing our pipeline develop has been an encouraging sign. And I can say that we were -- that that 4.4 million, that doubling of direct sales in Q2 over Q1 certainly exceeded our expectations. But as we sit here today and as we look at the pipe and we look at what we're executing, and we look at back-to-school coming up, we expect to see growth beyond that in Q3. And then, of course, Q4 is its own animal, it's what we live for in a business like ours, we have American Thanksgiving and Black Friday and Cyber Monday and the holiday season and people spending budgets and we are extremely well-positioned to capitalize on that. In terms of the repeat business that we're seeing, again, we started this journey as a direct sales operation in Q1 of 2020; candidly, went down to Madison Avenue, went down to Los Angeles and no one knew who we were. And so it took a lot effort and a lot of success winning business. And again, the customer base at the time was not fully sold on gaming and eSports, they were testing, they were dipping toes in the water. And that has changed massively to the point that you're seeing big companies and name brands investing heavily in this space because they realize what the guys of Enthusiast and others have been saying is true. If I need to get in front of Gen Zs and more importantly, if I want a shot at them paying attention to me, I better have a gaming strategy and I better have an eSports strategy. We're very encouraged and excited by our renewal of our G Fuel deal. That's the most iconic drink brand in the space. We went from a one year deal to an 18-month deal. The size of that deal has grown substantially. We've done repeat business with HBO Max, we've done repeat business with Disney Plus, we've done repeat business with Procter & Gamble, and Gillette, and Activision. And so we're starting to develop a recurring model. We're at the front end of that. But people are really excited by our customer offering and by the fact that we are really the only ones in the space who can deliver media, who can deliver video media, web media, talent activations, and eSports sponsorship. And our ability to be a one-stop shop is a winning formula and it's starting to manifest itself in significant repeat business at higher and higher spending levels.
Rob Young: Okay. So, is it fair to say that a lot of the direct sales revenue today is very experimental. And then we're -- where you're seeing the customers come back, they're upping the size of deals.
Adrian Montgomery: Not as we sit here today. As we sit here today, and we think about the campaigns we're doing for State Farm, for the United States Navy, for G Fuel, for DoorDash, these are significant campaigns with a lot of moving parts. And we are officially as an industry and officially as a company beyond the experimentation phase, up to an including a bit of Q1 this year. Certainly, people were experimenting, but we're beyond that, as an industry and as a company as we sit here today.
Rob Young: Okay. Thanks a lot. I'll pass the line.
Adrian Montgomery: Thank you.
Operator: Our next question comes from Jeff Fan from Scotiabank. Please go with your question.
Jeff Fan: Thanks. Good afternoon, guys, and thanks for the kind words. I've got a couple of questions, maybe a follow-up on some of the sales activities here. Can you talk about the capacity that you have within this current -- the current staff that you have to grow productivity further? And maybe also talk about how much you want to add sales staff in the coming months or quarters based on the activities you're getting on the RFPs? And that also on these RFPs, how far these advertisers planning ahead? Are they are they looking to execute these campaigns within modern six months? Can you elaborate a little bit on that?
Adrian Montgomery: So, I'll let -- Jeff, I'll let Thamba, our COO expand upon on those questions. Go ahead, Thamba.
Thamba Tharmalingam: Hey, Jeff. Just to answer the first part of your question on our sales team and the growth of the team. If you look at where we are right now, as I -- as we discussed before, productive sales rep for us takes anywhere from three to six months to meet, just to get to their optimal capacity. So we're still in the early stages with some of our reps. We're continuing to hire. We've opened up offices in Chicago and Detroit. We've opened up offices in London, U.K. So, we're continuing to expand our direct sales team. I don't think we're at maturity yet. So, I would expect significant growth, even as we go into 2022. As we see a huge opportunity for us to work with a number of different brands, with the asset that we've got, the first part of the question. The second part of the question, Jeff, if you can maybe clarify, and then I'll add color,
Jeff Fan: Just on some of these RFPs and campaigns that advertisers are considering, are they planning for -- are they planning ahead is really the question and we talked about this fall or within six months?
Thamba Tharmalingam: Sure. The good news is, we're definitely seeing a turnaround in the economy, especially in the U.S. We're theatrical. For example, these companies plan, six to nine months in advance, and we're seeing big Hollywood Studios starting to plant -- plan -- put together their marketing plans for movies that are releasing six to nine months out. And we're in those RFP. So, there is some advanced planning on in some verticals. But then there are some verticals that have sort of, held back on spending throughout the most part of this year. But now are spending as fast as they can, such as, travel and tourism is a good example of that industry that just all of a sudden showed up, and they're starting to spend. So it varies, but it is a very good healthy sign to see that, there is advanced planning going on in the marketing departments, and those RFPs are starting to come in.
Jeff Fan: Right. That's good to hear. And maybe just a couple of quick ones on Project GG, you talked about releasing a limited alpha in September. Can you just talk about what you're hoping to learn from that? It's coming up pretty soon. I know, it's you probably don't want to give away all your secrets. But just curious what you're hoping to learn from that release? And on the -- more of the financial side, this part for Alex, regarding tech support costs, how do you how should we think about this spend as you go through no product launch and further development on the tech support side?
Adrian Montgomery: Sure. I'll take the GG one, and then I'll pass to Alex for the tech support. So on the alpha release, Jeff, the thinking really is, to bring in our first 1,000 to 2,000 testers, and the evangelists, the enthusiasts that we have within our community, and to get as much user feedback as possible. As you know, we've highlighted that, we built -- we're building this because we're seeing the need for gamers and the missed opportunity. And we want to get as much user feedback as possible. So we can incorporate that into our feature set into our roadmap. That's essentially what we're going to try to do with the first cohort of testers that will let in. And then as we -- start to advance, our roadmap will slowly add different parts different groups of audiences to bring in that represents the wider enthusiast community. So, you'll hear us sort of give you more, more guidance and information around what we're learning from the initial test, and which cohorts are we bringing in. But that's the objective behind the first alpha release and the cohort that we're looking to bring in.
Alex Macdonald: Hey, Jeff, it's Alex here. The areas you want to watch, of course, are tech web developments and content that expense line and salaries and wages. Those would be, the areas that's going to relate to GG. I'd say that, a lot of the costs for GG are kind of already incurred in running, a lot of the increases you can see in tech and content, as well as salaries and wages are in support of that this year that and related initiatives such as data, such as fulfillment, and subscription and whatnot. So, I would expect though continued modest increases in both of those areas. But not quite to the level we've seen in the first half of this year. GG is reasonably stacked up, it's working internal product. And from here on out, I think that most of the hires will be more specialty roles and not necessarily bulk hires. There will be some tech investments associated with the public launch. But I wouldn't think that, those would necessarily move the needle given the size of our existing tech portfolio already. It's of course, some additional servers and whatnot. So, that's how I look at the cost for GG.
Jeff Fan: Great. Thanks, guys.
Operator: Our next question comes from Brian Kinstlinger from Alliance Global Partners. Please go ahead with your question.
Brian Kinstlinger: Great, thanks. One follow-up on the direct sales force. Obviously, with the success you're having it sounds like you're going to invest in more people. Can you talk about how many people you started the year with? How many people you ended 2Q with? And where do you hope to get to in the next six months to 12 months?
Adrian Montgomery: We started the year with about five direct sales people. And now we would have, well, well over 13 that's when plus customer success.
Alex Macdonald: Yes. So if I could add Adrian.
Adrian Montgomery: Yes.
Alex Macdonald: So we started the year out with about five, direct sales. We're at about 13 to 15 right now with the producing headcounts. We're also building remember, where as we become sophisticated, we're also segmenting our sales team into direct sales, inside sales and building out a full-fledged customer Success function. So, net-net, we're about a 35 people organization combined as a sales and inside sales organization at this point.
Brian Kinstlinger: And we're really about five different team right now on the actual non-support people the ones going after the business, right?
Adrian Montgomery: Correct.
Brian Kinstlinger: And where do you hope to get that fit? I mean, you're having so much success. And I assume the more people you add, the more you can reach out and touch brands. So, is do you expect that especially this is the busy season, four months ahead of you expect that to end the year 2020 much faster? Is it hard to find people right now, just maybe take me through the plans on the hiring side?
Adrian Montgomery: Yes. So for us, we think that a really good sales executive, sales professional within our flywheel can generate a million dollars. And so, again, what I would -- what I don't want anyone not hearing on this call is there has been a sea change in corporate America and the corporate worlds understanding of the importance of gaming in a Gen Z strategy. And so, we're past the experimentation phase to Rob's point, Chief Marketing Officers, middle aged people who didn't quite get it before COVID have seen firsthand in their homes, just exactly what their kids are doing. And that has resulted in companies like Coca Cola, Anheuser-Busch, building out esports and gaming departments to evaluate opportunities, et cetera. And so we're beneficiaries of that. And, we think that great quality sales people, the metric we think about is give them a quarter and a half, to two quarters to ramp up. And the good ones should be doing a million bucks, or if not more. And so for us, we evaluate, not on the basis of the size of the headcount. But plugging in people with those expectations, to satisfy those opportunities are not slowing down. And in fact, they're growing in quite an exciting fashion. In terms of our people hard to find, look, managing sales people is an art. It's not -- it's an art. Thankfully, some, but I have a lot of experience in that area. But the other advantage that we have, and I think Alex might have mentioned this, since January, this company, in addition to raising money and listing on the NASDAQ and buying two other businesses and executing against our strategy, this company is also onboarded 70 people. And so the benefit, though, that we have is we're like Willy Wonka's chocolate factory for a lot of young people who love video games. And so we're kind of a cool company to work for. We're an interesting company to work for. We have what 10,000, 11,000 followers on our LinkedIn account. So we have an ability to get talent and to get talent who want to work for us. So that's a tremendous advantage that Enthusiast has on the HR front.
Brian Kinstlinger: Right. My follow-up question is, you're growing subscriptions nicely, the amount of paid subscribers, can you just from a high level talk about, is the majority still coming from Sims or I know you started some other subscriptions, maybe provide some detail on where that growth is coming from?
Thamba Tharmalingam: Sure. I -- it's Thamba here. I can add color on that one. So we continue to grow across most of our properties. And Sims was -- Sims definitely had the early mover advantage on subscriptions, and we're seeing really good growth there that we're very pleased with that. We are starting to get good traction on some of our other properties such as Escapist and Icy Veins. So, definitely seeing good momentum there. And I think to the earlier point that, Adrian made in his opening remarks is that what we're super excited about is the pan-Enthusiast subscription offering that is going to combine all the other properties that we've got an offered through GG. We think that is the big game changer for us in subscriptions, but we're very pleased with the current trajectory of the industry properties themselves.
Brian Kinstlinger: Sorry. And lastly, that subscription, you hope, if I think I read the MD&A, right, it's the first quarter is the hope? Or is the second quarter of 2022, where there's a hard launch? Or did I read that incorrectly?
Thamba Tharmalingam: I think the comment -- the exact comment was early 2020. And as I think as we alluded to earlier in the call, we'll bring in the alpha users that in September, and then based on that, we'll bring in more beta testers, and then we're hoping to be out in the public in early 2022.
Brian Kinstlinger: Great. Thanks so much for answering my questions.
Thamba Tharmalingam: Thank you.
Operator: Our next question comes from Mike Crawford from B. Riley. Please go ahead with your question.
Mike Crawford : Thanks. So you’re number one performer on the Twitch platform. What about overall, if you would cross platforms, including Facebook, Twitter, or Snapchat, TikTok, whatever? Do you have any data on that?
Adrian Montgomery : I mean, hey, Mike. I mean, we don't have exact data readily available. But we're number one on Twitch. I was specifically talking about Luminosity. But we're a Tier 1 org, there's at a small class of esports organizations. And I think that Twitch is probably the most relevant for that that niche area of the gaming industry. I think that's the most relevant stat for an org at least. Thamba?
Thamba Tharmalingam: Sure. I mean, if I understood the question correctly, it was about our status across the platforms, and especially on Twitch, is that it?
Mike Crawford : Right, Beyond Twitch.
Thamba Tharmalingam: Right. Beyond Twitch, okay. So if you look at, I think, we published our ComScore results, we're top 100 in our property in North America. We command the number one gaming audience in a number of markets. If you look at US alone, we are number two next to Twitch. But within Twitch, Luminosity streamers hold the number one spot. So we're well-positioned from a gaming audience perspective. But even if you look at outside of North America, we hold number one spot to our properties in a number of different markets, which is one of the reasons why we're building aggressively in the UK. We hold the number one spot for gaming audience there. But our properties are really -- Tier 1 properties that resonate really well with our gaming audience. And we continue to capitalize on that.
Mike Crawford : Okay. Just to mention Luminosity streamers, so what tends to happen for these influencers own viewership levels once they join Luminosity? And also, I guess, related to that, as well as a typical revenue share look like?
Adrian Montgomery : For what was the last part of that? What is the share, sorry?
Mike Crawford : Of revenue look like for someone who signed on like xQc?
Adrian Montgomery : Yes. So look, I think that -- go ahead. Sorry, Mike.
Mike Crawford : Yes, yes. I mean, I could name like 10 others, but there's these people that are affiliated with Luminosity?
Adrian Montgomery : Yes. Look, we have, I mean, one of the reasons we've had the success we've had at Luminosity is we have a pretty strong track record of building helping content creators build followings. And it goes back to ninja. If you look at Sommerset and her growth. If you look at Tori Pareno and her incredible growth. RockyNoHands, Fresh, who has completely blown up since he's joined Luminosity and Nick Eh 30. I think you have a number of examples where we've grown alongside and help nurture this talent. And it's not independent and happening just on Twitch. I think. it's a direct result also of the Enthusiast Gaming flywheel, putting Fresh and giving him an opportunity to DJ to a massive audience and work with Coldplay. Giving him an opportunity to do merchandise drop with Lil Tecca. And then you think about GGT and the viewers, the 10 million viewers a GGT pulled in and you think about all the Luminosity talent that we invited to serve as judges, including Muselk. There's a halo effect here of the proprietary properties and content we're creating, inviting our Luminosity talent to participate. We created a whole content piece around Darius Slay, Slay versus on Twitch and have grown his following. So I think we have a pretty strong and track record to be proud of in terms of helping our creators build their audiences. And again, we can't take a lot of credit for xQc. He's a supernova and a superstar all to himself, but it's no coincidence that his girlfriend adept, wanted to join Luminosity, and wanted us to help with her career. And so those are the touch points. And look, the Twitch revenue stream is basically exclusive to the creator. We don't touch it. So we help them grow. They make more money. And presumably, they're happy with the involvement with Luminosity.
Mike Crawford: Okay, great. And then just final question, just coming back out to a bigger picture, if there's any update on where you envision long-term business model, margins to be or Enthusiast in terms of like gross or EBITDA or when we might get there or what needs to take place before any all that happens?
Adrian Montgomery: Sure. I would say, there's no real change in that long-term vision. We have been -- I actually love that about us. We've been very dedicated to our growth strategy. And it's coming -- it's been coming true everything we said a year ago, has been coming through. But -- and here we are today, we're pulling forward certain aspects of the growth strategy that we originally thought would be farther out, such as the social network. So therefore, today at the terminal state, I don't see any difference. I've always kind of compared it to traditional media companies. And the P&L profile that they enjoyed and at the peak of that industry, which were margins well over 50% and very healthy operating margins, I could easily see again to 25% or 30% on a terminal basis. And if anything has changed, I think that we are -- we have a clearer vision of those outer growth strategies, which I think may pull them forward a couple of years. It's still though -- it's still of course, those profiles are still our long-term plan. As you can see, the incremental gains we're getting, we're getting 50, 100, 200 basis points a quarter. And that's just fine. That's what we want. You can imagine a long-term basis, which a lot of people would define is five years, that adds up significantly and changes the profile of this business. So that's how I view the income statement profile.
Adrian Montgomery: And I also think just as one contributing data point to that. We talk internally and have always talked internally about in a few years' time doing CAD100 million of direct sales. And that might have sounded fanciful when we had two employees. But we want to move 10% of our inventory to being directly sold. And I think the trajectory that we're on the success that we're having the repeat business that we're winning and the not -- the type of companies that we're doing business with, we are confident that we're executing in a manner that supports those kinds of performances.
Mike Crawford: Excellent. Thank you, Adrian.
Adrian Montgomery: Thanks, Mike.
Operator: Our next question comes from Kevin Mackey . Please go ahead with your question.
Unidentified Analyst: My question has to do with expenses. In the Q4 conference call, you guys talked about how CAD50 million in expenses annually was a good run rate to look at and model things, but these past two quarters have been substantially higher than that. So just curious, if that's from a one-time investment and that's going to relax a little bit or for looking at a higher run rate looking forward?
Adrian Montgomery: Hey. Thank you. So I don't think it's too much higher than that to be honest, but it certainly is higher. But where that higher -- where the portion that is higher is a lot of is because we've seen the ROI, I think direct sales is performing as well as we could have expected though I will tie it to the fact that we're setting in the first quarter next year Q2, direct sales is going to be 12% of our overall revenue. In the same period, that revenue has grown well over 30%. So we've seen that ROI we've accelerated. The other things that we've accelerated are of course, the social network and the data capabilities, which as you know even six months ago, we're farther down our growth path, we've accelerated those being a bit of opportunities to be honest, as well, we saw the opportunity and we're seizing on it. So, I wouldn't say that we will go back, certainly not to a lower operating level. This -- we adjust this operating levels. Those were investments that were consciously made. Although I wouldn't expect the next few quarters to be same increase, we've seen in the first half of this year. But we're , I do want to point out too though, OpEx is up significantly, that would knock out some of the non-cash amortization stock base comp, it is up nearly 100% non-pro forma. But not pro forma the revenue was much, much more than that of course, but even the gross profit is up significantly more than that. So we're seeing some ROI and we keep doubling down and as long as we keep seeing that ROI, we're going to do that.
Alex Macdonald: Yes, look the opportunity has got bigger, quicker, and we are hell bent on capitalizing on them. And also, so direct sales, thanks to COVID, those budgets increased, we wanted to hire people. We wanted to pull forward our ability to exploit avoid in the marketplace to deliver on a subscription based social network. And at the same time, this is a company and again, it's not the similar to a lot of high growth companies. But we're executing building a direct sales, the building -- building out upcomer and in our spare time, we raised CAD120 million in the first six months of the year. We listed on NASDAQ. We bought two companies. And we put a CAD250 million base shelf in place. So these are corporate -- a lot of corporate actions that require spend. But we're confident that we're being really, really opportunistic, about seizing our moment in the sun here.
Unidentified Analyst: Thank you for sharing your mindset there. My other question has to do with the drama that has unfolded around Activision and corporate culture in work environment. And I just wanted to hear your thoughts on what you guys are doing to protect your company from experiencing that kind of stuff, how you're fostering a positive corporate culture that the and so forth?
Adrian Montgomery: Yes, no. Thank you for the question. Certainly, Vancouver Titans and Seattle Surge, which we have ownership stakes in issued statements time ago, supporting everyone taking a stand against discrimination and harassment in the workplace. And we believe as a business that everyone deserves the right to feel safe, valued and included in the workplace without fears of judgment or prejudice based on gender race or orientation. And that was a statement that was important for us to attach her name to. And it's a statement that we believe as a company. We just hired our new Head of People & Culture, Candice Levy, who starts next week. And we take these values seriously. We have an incredibly diverse group of people that work for Enthusiast. We do our best to make sure that their voices are heard and respected. And we're going to make the investments in People & Culture to walk the walk and talk the talk.
Unidentified Analyst: Great. Thank you. And my last one has to do with subscriptions. Just wanted to hear what your thoughts might be about how you're going to potentially convert existing subscribers, someone who might be just on the Sims and converting them over to this pan-Enthusiast offering that I assume will come at a higher price point?
Adrian Montgomery: Sure, I can take that one, just on the first point on the conversion. Remember, it isn't going to be a brand migration for the existing subscribers on any of our platforms. Really what this will do for anyone who's on whether it's on escapist or distracted or sensor resources, this will just make a single sign on access that allows them to access multiple different features, assets or networks apps in the wider enthusiast gaming asset mix. So it's not exactly a brand migration, that we will not go down that path, we would want the communities to remain within their communities. But we'll have access to the wider asset mix that Enthusiast gaming offers. As far as pricing of GG and how we think about it, I think it's too soon for us to comment on any of that. Again, our focus right now is heads down, let's get the product stabilized. Let's make sure that we're building the right social network AI into our platform. Let's get the first 1,500 testers and let's get the learnings out. And then let's prepare for a public launch in early 2022. That's our focus. And I think, as we develop more of a commercial sense on what the pricing structure would look like, we'll be more than happy to share that at that point.
Unidentified Analyst: Great. Thank you. You guys are at the tip of the spear and a lot of things that you're doing and I appreciate your efforts.
Adrian Montgomery: Thank you.
Alex Macdonald: Thank you.
Operator: And ladies and gentlemen, with that we'll conclude today's question-and-answer session and conference call. We thank you for attending today's presentation. You may now disconnect your lines.
